Category: Venture Capital

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35 Biggest Investing Lessons from 4 Seasons of Superclusters

piggy bank, investing, coin

The title says it all. I’m four seasons in and I’m fortunate to have learned from some of the best and most thoughtful individuals in the LP industry. I often joke with friends that Superclusters allows me to ask dumb questions to smart people. But there’s quite a bit of truth there as well. I look back in Season 1, and I’m proud to see the evolution of my questions as well.

There was a piece back in 2022 where Johns Hopkins’ Jeff Hooke said that “75% of funds insist they are in the top quartile.” To my anecdotal knowledge, that seems to hold. I might say 75% of angel investors starting their first funds say they’re top quartile. And 90% of Fund IIs say their Fund Is are top quartile. So the big looming question as an LP is how do you know which are and which aren’t.

And if we were all being honest with each other, the first five years of returns and IRRs really aren’t indicative of the fund’s actual performance. In fact, Stepstone had a recent piece that illustrated fewer than 50% of top-quartile funds at Year 5 stay there by Year 10. 30% fall to second quartile. 13% slip to third. 9% fall from grace to the bottom quartile. But only 3.7% of bottom-quartile funds make it to the top quartile after its 10-year run (on a net TVPI basis).

I’ve enjoyed every single podcast episode I’ve recorded to date. And all the offline conversations that I’ve had because of the podcast itself. Nevertheless, it’s always fascinating when I learn something for the first time on the podcast while we’re recording. Excluding the longer lessons some of our guests have shared (I’m looking at you Evan, Charlotte, and much much more), below are the many Twitter-worthy (not calling it X) soundbites that have come up in the podcast so far.

  1. “Entrepreneurship is like a gas. It’s hottest when it’s compressed.” — Chris Douvos
  2. “I’m looking for well-rounded holes that are made up of jagged pieces that fit together nicely.” — Chris Douvos
  3. “If you provide me exposure to the exact same pool of startups [as] another GP of mine, then unfortunately, you don’t have proprietary deal flow for me. You don’t enhance my network diversification.” — Jamie Rhode
  4. “Sell when you can, not when you have to.” — Howard Lindzon
  5. “When you think about investing in any fund, you’re really looking at three main components. It’s sourcing ability. Are you seeing the deals that fit within whatever business model you’re executing on? Do you have some acumen for picking? And then, the third is: what is your ability to win? Have you proven your ability to win, get into really interesting deals that might’ve been either oversubscribed or hard to get into? Were you able to do your pro rata into the next round because you added value? And we also look through the lens of: Does this person have some asymmetric edge on at least two of those three things?” — Samir Kaji
  6. “85% of returns flow to 5% of the funds, and that those 5% of the funds are very sticky. So we call that the ‘Champions League Effect.’” — Jaap Vriesendorp
  7. “The truth of the matter, when we look at the data, is that entry points matter much less than the exit points. Because venture is about outliers and outliers are created through IPOs, the exit window matters a lot. And to create a big enough exit window to let every vintage that we create in the fund of funds world to be a good vintage, we invest [in] pre-seed and seed funds – that invest in companies that need to go to the stock market maybe in 7-8 years. Then Series A and Series B equal ‘early stage.’ And everything later than that, we call ‘growth.’” — Jaap Vriesendorp
  8. “[When] you’re generally looking at four to five hundred distinct companies, 10% of those companies generally drive most of the returns. You want to make sure that the company that drives the returns you are invested in with the manager where you size it appropriately relative to your overall fund of funds. So when we double click on our funds, the top 10 portfolio companies – not the funds, but portfolio companies, return sometimes multiples of our fund of funds.” — Aram Verdiyan
  9. “If you’re overly concentrated, you better be damn good at your job ‘cause you just raised the bar too high.” — Beezer Clarkson
  10. “[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
  11. “Miller Motorcars doesn’t accept relative performance for least payments on your Lamborghini.” — Chris Douvos
  12. “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
  13. “In venture, we don’t look at IRR at all because manipulating IRR is far too easy with the timing of capital calls, credit lines, and various other levers that can be pulled by the GP.” — Evan Finkel
  14. “The average length of a VC fund is double that of a typical American marriage. So VC splits – divorce – is much more likely than getting hit by a bus.” — Raida Daouk
  15. “Historically, if you look at the last 10 years of data, it would suggest that multiple [of the premium of a late stage valuation to seed stage valuation] should cover around 20-25 times. […] In 2021, that number hit 42 times. […] Last year, that number was around eight.” — Rick Zullo (circa 2024)
  16. “The job and the role that goes most unseen by LPs and everybody outside of the firm is the role of the culture keeper.” — Ben Choi
  17. “You can map out what your ideal process is, but it’s actually the depth of discussion that the internal team has with one another. […] You have to define what your vision for the firm is years out, in order to make sure that you’re setting those people up for success and that they have a runway and a growth path and that they feel empowered and they feel like they’re learning and they’re contributing as part of the brand. And so much of what happens there, it does tie back to culture […] There’s this amazing, amazing commercial that Michael Phelps did, […] and the tagline behind it was ‘It’s what you do in the dark that puts you in the light.’” — Lisa Cawley
  18. “In venture, LPs are looking for GPs with loaded dice.” — Ben Choi
  19. “If I hire someone, I don’t really want to hire right out of school. I want to hire someone with a little bit of professional experience. And I want someone who’s been yelled at. […] I don’t want to have to triple check work. I want to be able to build trust. Going and getting that professional experience somewhere, even if it’s at a startup or venture firm. Having someone have oversight on you and [push] you to do excellent work and [help] you understand why it matters… High quality output can help you gain so much trust.” — Jaclyn Freeman Hester
  20. “LPs watch the movie, but don’t read the book.” — Ben Choi
  21. “If it’s not documented, it’s not done.” — Lisa Cawley
  22. “If somebody is so good that they can raise their own fund, that’s exactly who you want in your partnership. You want your partnership of equals that decide to get together, not just are so grateful to have a chance to be here, but they’re not that great.” — Ben Choi
  23. “When you bring people in as partners, being generous around compensating them from funds they did not build can help create alignment because they’re not sitting there getting rich off of something that started five years ago and exits in ten years. So they’re kind of on an island because everybody else is in a different economic position and that can be very isolating.” — Jaclyn Freeman Hester
  24. “Neutral references are worse than negative references.” — Kelli Fontaine
  25. “Everybody uses year benchmarking, but that’s not the appropriate way to measure. We have one fund manager that takes five years to commit the capital to do initial investments versus a manager that does it all in a year. You’re gonna look very, very different. Ten years from now, 15 years from now, then you can start benchmarking against each other from that vintage.” — Kelli Fontaine
  26. “We are not in the Monte Carlo simulation game at all; we’re basically an excel spreadsheet.” — Jeff Rinvelt
  27. “A lot of those skills [to be a fund manager] are already baked in. The one that wasn’t baked in for a lot of these firms was the exit manager – the ones that help you sell. […] If you don’t have it, there should be somebody that it’s their job to look at exits. ” — Jeff Rinvelt
  28. “Getting an LP is like pulling a weight with a string of thread. If you pull too hard, the string snaps. If you don’t pull hard enough, you don’t pull the weight at all. It’s this very careful balancing act of moving people along in a process.” — Dan Stolar
  29. “Going 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 don’t really get executed on till the first of April. So there’s 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 you’re raising money, two to three years of relationship-building with clients.” — David York
  30. “Many pension plans, especially in America, put blinders on. ‘Don’t tell me what I’m paying my external managers. I really want to focus and make sure we’re not overpaying our internal people.’ And so then it becomes, you can’t ignore the external fees because the internal costs and external fees are related. If you pay great people internally, you can push back on the external fees. If you don’t pay great people internally, then you’re a price taker.” — Ashby Monk
  31. “You need to realize that when the managers tell you that it’s only the net returns that matter. They’re really hoping you’ll just accept that as a logic that’s sound. What they’re hoping you don’t question them on is the difference between your gross return and your net return is an investment in their organization. And that is a capability that will compound in its value over time. And then they will wield that back against you and extract more fees from you, which is why the alternative investment industry in the world today is where most of the profits in the investment industry are captured and captured by GPs.” — Ashby Monk
  32. “I often tell pensions you should pay people at the 49th percentile. So, just a bit less than average. So that the people going and working there also share the mission. They love the mission ‘cause that actually is, in my experience, the magic of the culture in these organizations that you don’t want to lose.” — Ashby Monk
  33. “The 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.” — Nakul Mandan
  34. “I only put the regenerative part of a wealth pool into venture. […] That number – how much money you are putting into venture capital per year largely dictates which game you’re playing.” — Jay Rongjie Wang
  35. “When investing in funds, you are investing in a blind pool of human potential.” — Adam Marchick

Photo by Andre Taissin on Unsplash

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

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

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When is a Market too Small for VCs

small tea set, miniature

I was reading Chris Neumann’s latest post earlier this week, “Fundraising Sucks. Get Over It.” True to its name, it does. In all the ways possible. Especially if you’re an outsider. In it, there is a truism, among many others:

“If investors are repeatedly telling you that the market is too small or the opportunity isn’t big enough, what they might be saying is, ‘the market is too small for VCs,’ not that it’s a bad idea.”

Which reminded me of a post I wrote late last year. To which, I thought I’d elaborate on. As a founder, how do you know if a market is too small for a VC?

Or when a VC tells you, your market is too small, what do they mean?

Spoiler alert: What’s small for one may not be small for another. Let me elaborate.

If a fund has reserves — in other words, they write follow-on checks —, assume 50-60% dilution between entry to exit ownership. If they don’t, expect 75-80% dilution on their ownership. Of course, these may be on the higher end. Sometimes, there’s less dilution. You, the founder, need fewer rounds to get to profitability, or better yet, an exit.

Tactically, what that means is if a first-check only seed investor wants to invest in your company for 10%, by exit, they’ll have around 2%. Say they’re a $50M fund. Investors are always looking for fund returners, knowing that most of their investments will strike out and they’re really better on each company’s potential to be that one great, truly transformative company. And so… to return the fund or break even on the fund, you need to be at least a $2.5B company. In other words, 2% of $2.5B is $50M.

Of course, seed stage funds are usually underwritten to a 4-5X net. Roughly 5-6X gross return. Usually 50-70% of the returns come from one investment. So, to have a 5X gross on a $50M seed fund, they need to have a portfolio whose enterprise value is $12.5B. A single investment should exit between $6 and $9B, roughly.

So… if a VC cannot seeing you exiting for that amount, they’ll tell you your market is too small. Maybe it’s due to historical exits in your industry. Maybe it’s due to a lack of strategic acquirers who’d buy you at that price. Or maybe it’s that you’re too cash intensive that you need to raise more rounds to get to an exit that is meaningful. And in the process of which, take on a hefty preference stack. Fancy schmancy term for all those investors who collectively include a larger than 1X liquidation preference in their term sheet. Aka downside protection.

That said, let’s take another example. $50M seed fund, concentrated portfolio fund. They like to come in for 20% and will invest in at least 1-2 rounds after. By exit, they might dilute down to 10%. To return the fund, they only need a $500M exit. To 5X gross the fund, they’ll need only $2.5B of enterprise value. Half of which will come from a single company. Meaning instead of needing to be almost a decacorn at exit to impress the VC, you only need to be a unicorn. Still impressive, but let’s be real. Unicorn exits are easier to achieve than decacorn exits.

Next time, you’re about to have a VC pitch meeting, do your homework. And try not to spend too much time with investors who may give you the feedback of “your market is too small.”

Photo by Gabriella Clare Marino on Unsplash

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

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

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Good Misses and Bad Hits

basketball shot, swoosh

The espresso shot:

  • What are the essential elements of a “good” VC fund strategy vs. “lucky”?
  • What elements can you control and what can you not?
  • How long does it take to develop “skill” and can you speed it up w/ (intentional) practice?

Anyone can shoot a three-pointer every once in a while.

Steph Curry is undeniably one of the best shooters of our time. If not, of all time. Even if you don’t watch ball, one can’t help but appreciate what a marksman Steph is. In case you haven’t, just look at the clip below of his shots during the 2024 Olympics.

From the 2024 Olympics

As the Under Armour commercial with Michael Phelps once put it, “it’s what you do in the dark that puts you in the light.” For Steph, it’s the metaphoric 10,000 hours taking, making, and missing shots. For the uninitiated, what might be most fascinating is that not all shots are created equal, specifically… not all misses are created equal.

There was a piece back in 2021 by Mark Medina where he wrote, “If the ball failed to drop through the middle of the rim, Curry and Payne simply counted that attempt as a missed shot.” Even if he missed, the difference between missing by a wide margin versus hitting the rim mattered. The difference between hitting the front of the rim versus the backboard or the back rim mattered. The former meant you were more likely to make the shot after the a bounce than the other. Not all misses are created equal.

Anyone can shoot a 3-pointer. With enough tries. But not everyone can shoot them as consistently as Steph can.

The same holds for investing. Many people, by sheer luck, can find themselves invested in a unicorn. But not everyone can do it repeatedly across vintages. It’s the difference between a single outperforming fund and an enduring firm.

The former isn’t bad. Quite good actually. But it also takes awareness and discipline to know that it may be a once-in-a-lifetime thing. The latter takes work. Lots of it. And the ability to compound excellence.

When one is off, how much are you off? What are the variables that led you to miss? What variables are within your control? And what aren’t? Of those that are, how consistent can you maintain control over those variables?

As such, let me break down a few things that you can control as a GP.

Deal Flow

Are you seeing enough deals? Are you seeing enough GREAT deals? Do you find yourself struggling in certain quarters to find great deals or do you find yourself struggling to choose among the surplus of amazing deals that are already in your inbox? Simply, are you struggling against starvation or indigestion? It’s important to be intellectually honest here, at least to yourself. I know there’s the game of smokes and mirrors that GPs play with LPs when fundraising, but as the Richard Feynman line goes, “The first principle is that you must not fool yourself—and you are the easiest person to fool.”

Value Add

Whereas deal flow is about what companies you see, value add is more about how you win deals. Why and how do you attract the world’s best entrepreneurs to work with you? In a world where the job of a VC is to sell money – in other words, is my dollar greener or is another VC’s dollar greener – you need to answer a simple question: Why does another VC fund need to exist?

What can you provide a founder that no other, or at least, very few other, investors can

While there are many investors out there who say “founders just like me” or “founders share their most vulnerable moments with me”, it’s extremely hard for an LP to underwrite. And what an LP cannot grasp their head around means you’ll disappear into obscurity. The file that sits in the back of the cabinet. You’ll exist, and an LP may even like you, but never enough for them to get to conviction. And to a founder, especially when they’ve previously “made it”, already, you will fall into obsolescence because your value-add will be a commodity at scale. Note the term “at scale.” Yes, you’ll still be able to win deals on personality with your immediate network, and opportunistically with founders that you occasionally click with. But can you do it for the three best deals that come to your desk every quarter for at least the next four years? If you’re building an institutional firm, for the next 20+ years. Even harder to do, when you’re considering thousands of firms are coming out of the woodwork every year. Also, an institutional LP sees at least a few hundred per year.

For starters, I recommend checking out Dave’s piece on what it means to help a company and how it impacts your brand and perception.

Portfolio Size

Deal flow is all about is your aperture wide enough. Are you capturing enough light? Portfolio size is all about how grainy the footage is. With the resolution you opt for, are you capturing enough of the details that could produce a high definition portfolio? In venture, a portfolio of five is on the smaller side. And unless you’re a proven picker, and are able to help your companies meaningfully or you’re in private equity, as a Fund I, you might want to consider a larger portfolio. It’s not uncommon to see portfolios at 30-40 in Fund I that scale down in subsequent funds once the GPs are able to recognize good from great from amazing.

I will also note, with too big of a portfolio, you end up under optimizing returns. As Jay Rongjie Wang once said, ““The reason why we diversify is to improve return per unit of risk taken.” At the same time, “bear in mind, every fund that you add to your portfolio, you’re reducing your upside as well. And that is something a lot of people don’t keep in mind.”

Moonfire Ventures did a study in 2023 and found that “the probability of returning less than 1x the fund decreases as the size of your portfolio grows, and gets close to zero when your portfolio exceeds 200 companies.” That said, “it’s almost impossible to 10x a fund with more than 110 companies in your portfolio.”

While there’s no one right answer in the never-ending diversified versus concentrated debate, nevertheless, it’s worth doing the work on how size and the number of winners in your portfolio impact returns.

Valuations and marks

First off, how are you measuring your marks? Marc Andreessen explains the concept of marks far better than I can. So not to do the point injustice, I’m just going to link his piece here.

Separately, the earliest proxies of portfolio success happens to revolve around valuations and markups, but to make it more granular, “valuation” really comes down to two things:

  1. Graduation rates
  2. Pro rata / follow-on investments

Graduation rates

When your graduation rates between stages fall below 30%, do you know why? What kinds of founders in your portfolio fail to raise their following round? What kinds of founders graduate to the next stage but not the one after that? Are you deeply familiar with the top reasons founders in your portfolio close up shop or are unable to raise their next round? What are the greatest hesitations downstream investors have when they say no? Is it the same between the seed to Series A and the A to B?

Pro rata / follow-on investments

Of your greatest winners, are you owning enough that an exit here will be deeply meaningful for your portfolio returns. As downstream investors come in, naturally dilution occurs. But owning 5% of a unicorn on exit is 5X better than owning 1% of a unicorn. For a $10M fund, it’s the difference for a single investment 1X-ing your fund and 5X-ing it.

When you lose out on your follow-on investment opportunities, what are the most common reasons you didn’t capitalize? Capital constraints? Conviction or said uglier, buyer’s remorse? Overemphasis on metrics? Lack of information rights?

Then when your winners become more obvious in the late stages and pre-IPO stages, it’s helpful to revisit some of these earlier decisions to help you course-correct in the future.

I will note with the current market, not only are the deal sizes larger (i.e. single round unicorns, in other words, a unicorn is minted after just one round of financing), there are also more opportunities to exit the portfolio than ever before. While M&A is restricted by antitrust laws, and IPOs are limited by overall investor sentiment, there have been a lot of secondary options for early stage investors as well. But that’s likely a blogpost for another day.

In closing

To sum it all up… when you miss, how far do you miss?

Obviously, it’s impossible to control all the variables. You cannot control market dynamics. As Lord Toranaga says in the show Shogun when asked “How does it feel to shape the wind to your will?”, he says “I don’t control the wind. I only study it.” You can’t control the wind, but you can choose which sails to raise, when you raise them, and which direction they point to. Similarly, you also can’t completely control which portfolio companies hit their milestones and raise follow-on capital. For that matter, you also can’t control cofounder splits, founders losing motivation, companies running out of runway, lawsuits from competitors, and so on.

But there are a select few things that you can control and that will change the destiny of your fund. To extend the basketball analogy from the beginning a bit further, you can’t change how tall you are. But you can improve your shooting. You can choose to be a shooter or a passer. You can choose the types of shots you take — 3-pointers, mid-range, and/or dunks. In the venture world, it’s the same.

The choice. Or, things you can change easily:

  1. Industry vertical
  2. Stage
  3. Valuation
  4. Portfolio size
  5. Check size
  6. Follow-on investments

The drills. Or, things you can improve with practice:

  1. Deal flow – both quantity and quality
  2. The kinds of deals you pick
  3. Value add – Does your value-add improve over time? As you grow your network? As you have more shots on goal?
  4. The deals you win – Can you convey your value-add efficiently?

And then, the game itself. The things that are much harder to influence:

  1. Graduation rates
  2. Downstream dilution
  3. Exit outcomes
  4. The market and black swan events themselves

Venture is a game where the feedback cycles are long. To get better at a game, you need reps. And you need fast feedback loops. It’s foolhardy to wait till fund term and DPI to then evaluate your skill. It’s for that reason many investors fail. They fail slowly. While not as fast of a feedback loop as basketball and sports, where success is measured in minutes, if not seconds – where the small details matter – you don’t have to wait a decade to realize if you’re good at the game or not in venture. You have years. Two to three  What kinds of companies resonate with the market? What kinds of founders and companies hit $10M ARR? In addition, what are the most common areas that founders need help with? And what kinds of companies are interesting to follow-on capital?

Do note there will always be outliers. StepStone recently came out with a report. Less than 50% of top quartile funds at Year 5 stay there by Year 10. And only 3.7% of bottom-quartile funds make it to the top over a decade. Early success is not always indicative of long-term success. But as a VC, even though we make bets on outliers, as a fund manager, do not bet that you will be the outlier. Stay consistent, especially if you’re looking to build an institutional firm.

One of my favorite Steph Curry clips is when he finds a dead spot on the court. He has such ball control mastery that he knows exactly when his technique fails and when there are forces beyond his control that fail him.

Source: ESPN

Cover photo by Martí Sierra on Unsplash

Huge thanks to Dave McClure for inspiring the topic of this post and also for the revisions.

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

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

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Referencing Excellence

magnifying glass, excellence

Recently, I’ve had a lot of conversations with LPs and GPs on excellence. Can someone who has never seen and experienced excellence capable of recognizing it? The context here is that we’re seeing a lot of emerging managers come out of the woodwork. Many of which don’t come from the same classically celebrated institutions that the world is used to seeing. And even if they were, they were in a much later vintage. For instance, a Google employee who joined in 2024 is very different from a Google employee in 2003.

And there seem to be two schools of thought:

  1. No. Only someone who is fortunate enough to be around excellent people in an excellent environment can recognize excellence in others. Because they know just how much one needs to do to get there. Excellence recognizes excellence. So there’s this defaulting to logos and brands that are known concentrations of excellence. Unicorns. Top institutions. Olympians. Delta Force. Green Beret. Three Michelin-starred restaurants.
  2. Yes. But someone must constantly stretch their own definition of excellence and reset their standards each time they experience something more than their most excellent. The rose growing in concrete. The rate of iteration and growth matters for more. Or as Aram Verdiyan once put it to me, “distance travelled.”

Quite possibly, a chicken and egg problem. Do excellent environments come first or people who are born excellent and subsequently create the environment around themselves?

It’s a question many investors try to answer. The lowest hanging fruit is the outsourcing of excellence recognition to know excellent institutions and known excellent investors. The ex-Sequoia spinout. Ex-KKR. Ex-Palantir. First engineer at Uber. Or hell, they’re backed by Benchmark. Or anchored by PRINCO.

It’s lazy thinking. The same is true for VC investors and LP investors. As emerging manager LPs (and pre-seed investors), we’re paid to do the work. Not paid to have others do the work for us. We’re paid to understand the first principles of excellent environments. To dig where no others are willing to dig.

To use an extreme example, a basketball court can make Kobe Bryant an A-player, but Thomas Keller look like a C-player. Similarly, a kitchen will make Thomas Keller an A-player, but Ariana Huffington a C-player. Environments matter.

When assessing environments and doing references, that’s something that you need to be aware of. What does the underlying environment need to have to make the person you’re diligencing an A-player? Is the game they have willingly chosen to play and knowledgeable enough to play have the optimal environment that will allow them to be an A-player? Is the institution they’re building themselves conducive to elicit the A out of the individual?

Ideally, is there evidence prior to the founding of their own firm that has allowed this player to shine? Why or why not?

Did they have a manager that pushed them to excel? Was there a culture that allowed them to shine? Were they given the trust and resources to thrive?

References

And so, that leads us to references. I want to preface with two comments first.

One, as an investor, you will NEVER get to 100% conviction on an investment. It’s one of the few superlatives I ever use. Yes, you will never. Unless you are the person themselves, you will never understand 100% about a person. And naturally, you will never get to 100% conviction because there will always be an asymmetry of information.

Two, so… your goal should not be to get to total symmetry of information, nor 100% conviction. Instead, your goal is to understand enough about an opportunity so that you can sufficiently de-risk the portfolio. What that means is that when you meet a fund manager (or a founder, for that matter) across 1-2 meetings, you write down all the risk factors you can think of about the investment. You can call it elephants in the room, or red or yellow flags. Tomato. Tomahto.

Then, rank them all. Yes, every single one. From most important to least important. Then, somewhere on that list — and yes, this is deeply subjective — you draw a line. A line that defines your comfort level with an investment. The minimum number of risks you can tolerate before making an investment decision. For some, say those investing in early stage venture or in Fund I or II managers, that minimum number will be pretty high. For others, those whose job is to stay rich, not get rich, that minimum tolerance will be quite low. And that’s okay.

There’s a great line my partner once told me. You like, because; you love, despite. In many ways, the art of investing in a risky asset class is understanding your tolerance. What are you willing to love, despite?

The purpose of diligence, thereinafter, is to de-risk as many of your outstanding questions till you are ready to pull the trigger.

In regards to references, before you go further in this blogpost, I would highly recommend Graham Duncan’s essay “What’s going on here, with this human?” My buddy, Sam, also a brilliant investor, was the person who first shared it with me. And I’m a firm believer that this essay should be in everyone’s reference starter pack. Whether you’re an LP diligencing GPs. Or a VC doing references on founders. Or a hiring manager looking to hire your next team member.

Okay, let’s get numbers out of the way. Depending on the volume of investments you have to make, the numbers will vary. The general consensus is that one or two is too little, especially if it’s a senior hire or a major investment. Kelli Fontaine’s 40 reference calls may also be on the more extreme side of things. Anecdotally, it seems most investors I know make between five and ten reference calls. Again, not a hard nor fast rule.

That said, there is often no incentive for someone to tell a stranger bad things about someone who supported them for a long time. It’s why most LPs fail to get honest references because they haven’t established rapport and trust with a founder over time. Oftentimes, even in the moment. So, the general rule of thumb is that you need to keep making reference calls until you get a dissenting opinion. Sometimes, that’s the third call. Other times, is the 23rd call. If you’ve done all the reference calls, and you still haven’t heard from others why you shouldn’t invest, then you haven’t done enough (or done it right).

A self-proclaimed coffee snob once told me the best coffee shops are rated three out of five stars. “Barely any 2-4 stars. But a lot of 5-stars and a lot of 1-stars. The latter complaining about the baristas or owner being mean.” I’m not sure it’s the best analogy, but the way I think about references is I’m trying to get to the ultimate 3-star review. One that can highlight all the things that make that person great, but also understand the risks, the in’s and out’s, of working with said person.

For me, great references require trust and delivery.

  1. Establishing trust and rapport. What you share with me will never find its way back to the person I am calling about.
  2. Is the reference themselves legit? Is this person the best in the world at what they do?
  3. How well does this reference know said person? Have they seen this person at both their highs and lows? At their best and at their worst.
  4. The finer details, the possible risks, and how have they mitigated them in the past.

I will also note that off-list references are usually much more powerful than on-list references. Especially if they don’t know you’re doing diligence on the person you’re doing diligence on. But on-list references are useful to understand who the GP keeps around themselves. After all, you are the average of the people you hang out with most. As the one doing the reference checks, I try to get to a quick answer of whether I think the reference themselves is world-class or not.

While I don’t necessarily have a template or a default list of questions I ask every reference, I do have a few that I love revisiting to set the stage.

Also, the paradox of sharing the questions I ask is simply that I may never be able to use these questions again in the future. That said, references are defined by the follow-up questions. Rarely, if ever, on the initial question. There’s only so much you can glean from the pre-rehearsed version.

So, in good faith, here are a few:

Does the reference know them well?

  • If I told you this person was [X], how surprised would you be? Now there are two scenarios with what I say in [X]. The first is I pick a career that is the obvious “next step” if I were to only look at the resume. Oftentimes, if a person’s been an engineer their entire life, the next step would be being an engineering executive, rather than starting a fund. So, I often discount those who wouldn’t find it surprising. Those that say it is surprising, I ask why. The second scenario is where I pick a job that based on what I know about the GP in conversations is one I think best suits their skillset (that’s not running their own fund), and see how people react. The rationale as to why it’s surprising or not, again, is what’s interesting, not the initial “surprising/not surprising” answer itself.
  • If you were invited to this person’s wedding, which table do you think you’d be sitting at?
  • Have you ever met their spouse? How would you describe their spouse?

Understanding their strengths and weaknesses

  • Who’s the best person in the world at X? Pick a strength that you think the person you’re doing a reference on has. See what the reference says. Ask why the person they thought of first is the best person in the world at it. If the reference doesn’t mention the GP I’m diligencing, then I stop to consider why.
  • What are three adjectives you would use to describe your sibling? I’ve written about my rationale for this question before, so I won’t elaborate too much here. Simply, that when most people describe someone else, they describe the other person comparatively to themselves. If I say Sarah is smart, I believe Sarah is smarter than I am. Or… if I say Billy is curious, I believe Billy is more curious than I am.
  • If I said that this person joined a new company, knowing nothing about this new company, what would your first reaction be?
    • Congratulate this person on joining!
    • Do a quick Google or LinkedIn search about the company.
    • As an angel, consider investing in the company (again, knowing nothing else)
  • How would you rate this person with regards to X, out of 10? What would get this person to a 10? Out of curiosity, who’s a 10 in your mind?
  • If you were to hire someone under this person, what qualities would you look for?
  • If you were to reach out to this person, what do you typically reach out about?
  • I hate surprises. Is there something I should know now about this person so that I won’t be surprised later?

    Photo by Shane Aldendorff on Unsplash

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

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

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    Request for LPs (2025)

    question, request, ask, raising hand

    A capital allocator is someone who balances the humility that they are not the world’s best at something (or might never be) with the deep belief in the long-term potential of an asset class (even if that means they will play a less active role in the future of that asset class).

    As always, the last holiday period was a time for introspection and reflection. Many of the conversations I had were around request for startups (RFS) with VCs and request for funds (RFF) with LPs. Many of the latter focused on spaces and problems that individuals and family offices personally care a lot about.

    In the essence of putting my vote for all the below, I’m going to phrase them as questions and pontifications rather than statements. Since I don’t have the capital to invest in such organizations, but also it is highly likely that these organizations need no external sources of capital. In fact, a number of the family offices I’ve conversed with have enough capital where they no longer use external bank providers for lending, but borrow and invest only within the families.

    Is there a world where the LP is the sourcing engine for the GPs in their portfolio?

    Like Deep Checks, but catalyzed by a single institution with large brand appeal. The problem is two-fold:

    1. Most LPs are not good at identifying great deals at the pre-seed and seed stage.
    2. Many LPs love co-investment opportunities. They’ve historically invested in brand-name funds expecting such opportunities, but largely evidenced in the 2020 to early 2022 hype cycle, most got no calls from their VCs at all. So, they’ve moved towards emerging managers who don’t have reserves to cash in on their top deal flow.

    If an LP is willing to be a sourcing engine which complements their portfolio funds’ deal flow, that LP will have a chance to build (a) conviction earlier, and (b) build relationships with founders earlier. And in the sourcing/picking/winning framework, outsource the picking element to people who have more refined tastes built upon years of being boots on the ground.

    Of course, said LP cannot enforce that GP invests in a certain type of company in which its sourcing engine brings in. That’ll defeat the purpose of investing in GPs in the first place, as well as diversifying risk.

    Is there a world where a deeply networked LP leverages their network to support the underlying startup portfolio?

    There are a number of fund-of-funds in the world who offer their geographical connections to help a portfolio fund’s startup grow in their respective market, but I’ve seen comparatively few, if any, LPs who offer their deep networks as advisors/mentors to portfolio founders.

    For the most part, a VC is likely to better connected to tech talent, executives and founders. But quite a few family offices and endowments have their own deeply entrenched networks. Endowments have alumni networks. Family offices, depending on their source of wealth, are well-connected in the industry that created their wealth. Luxury brands. Oil and gas, as well as renewable energy. Infrastructure. CPG. Pharmaceutical drugs. Transportation. And the list goes on.

    In other words, the LP would help a VC win deals based on their expansive combined networks. And sometimes the best advice a founder can get is not from another founder or VC, but someone tangential to the ecosystem who has seen the world from a birds eye view.

    I’ve written before that there are three kinds of mentors: peer, tactical, and strategic. And you need all three.

    1. Peer: Someone with similar level of experience as you do
    2. Tactical: Someone who’s 2-5 years out and who can check your blind side
    3. Strategic: Someone who’s attained success in a particular field and is often 10+ years out from where you are. They offer the macro and big-picture perspective, and help you define long-term goals.

    Founders often have their peers already. And if not that, there are a number of communities, forums, and groups out there where founders can exchange notes with each other. Many VCs often bring their founders together to co-mingle as well in annual or quarterly get-togethers.

    VCs themselves often act as tactical mentors, and given how their portfolios grow also have access to a plethora of tactical mentors for any given company.

    LPs with their large networks of people who run multi-billion dollar enterprises (often not tech), many of whom achieved financial success independently, have access to people who could be strategic mentors for founders in their fund-of-fund’s underlying portfolio.

    Request for Funds of Funds?

    This isn’t a particularly traditional fund model or fund-of-funds model, but nevertheless would be an interesting product for asset owners. Namely large institutions who are looking for product diversification and who have little to no short-term and medium-term liquidity needs. Large single family offices, pensions, and potentially some endowments and foundations.

    Is there a smaller product that focuses on vintage diversification from both an entry and exit perspective?

    Most investors focus on entry vintage diversification, not as much for exits. Some LPs do, to make sure they have liquidity in every vintage. While I’ve seen only a small, small number of funds and fund-of-funds do this, I wonder if this is something that is more interesting to a broader customer base of LPs.

    Of those I’ve seen so far:

    • Crypto funds that hold both token-based assets and equity-based assets. The token-based ones are expected to deliver DPI within years 4-8. The equity-based assets are expected to deliver DPI within years 8-12.
    • Funds-of-funds that hold multiple asset classes within a single LP entity. Secondaries for 3-6-year time horizons. Buyouts for 5-8-year time horizons. And venture capital for 8-12 year time horizons. Some also hold venture debt assets and cryptocurrency themselves.
    • Large multi-stage billion-dollar plus VC funds that have a suite of product offerings for LPs.

    There are many emerging LPs and LPs who see VC as an access class who can’t write massive checks, but need to hedge their bets when writing into a speculative asset class.

    While I’m still working to collect more data on this, I do wonder. In modern history, market cycles happen every 8-12 years. Venture funds exist on 10-12 year time horizons. Theoretically, that means if you’re investing in the least expensive entry windows, you’re also existing in the lowest revenue multiple windows. And if you’re investing in the most expensive vintages, you’re also existing in the great markets. Which effectively means, the delta between “buying low” and “selling high” are roughly the same no matter which markets your entry point is.

    The data seems to suggest that so far, but the publicly available datasets (i.e. Pitchbook) have heavy survivorship bias. There’s no incentive for funds that fizzle out midway or near the end to report their metrics. Carta is really interesting, but their datasets aren’t robust till after 2017.

    As an allocator, it just means you just need to be in every vintage. It makes me wonder if it really matters to be investing in down or up markets. Probably not. As the sages who have invested through multiple cycles tell me. Though I wonder if underwriting venture funds to 15 years changes anything on the DPI front across multiple vintages.

    Photo by Felicia Buitenwerf on Unsplash

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

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

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    Talent Networks are your Greatest Asset | Adam Marchick | Superclusters | S4E9

    adam marchick

    “When investing in funds, you are investing in a blind pool of human potential.” – Adam Marchick

    Over the past twenty years, Adam Marchick has had unique experiences as a founder, general partner (GP), and limited partner (LP). Most recently, Adam managed the venture capital portfolio at Emory’s endowment, a $2 billion portfolio within the $10 billion endowment. Prior to Emory, Adam spent ten years building two companies, the most recent being Alpine.AI, which was acquired by Headspace. Simultaneously, Adam was a Sequoia Scout and built an angel portfolio of over 25 companies. Adam was a direct investor at Menlo Ventures and Bain Capital Ventures, sourcing and supporting companies including Carbonite (IPO), Rent The Runway (IPO), Rapid7 (IPO), Archer (M&A), and AeroScout (M&A). He started his career in engineering and product roles at Facebook, Oracle, and startups.

    You can find Adam on his socials here:
    X / Twitter: https://x.com/adammStanford
    LinkedIn: https://www.linkedin.com/in/adammarchick/

    And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

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

    Brought to you by Alchemist Accelerator.

    OUTLINE:

    [00:00] Intro
    [03:14] Who is Kathy Ku?
    [06:20] Lesson from Sheryl Sandberg
    [06:39] Lesson from Justin Osofsky
    [07:46] How Facebook became the proving grounds for Adam
    [09:26] The cultural pillars of great organizations
    [10:40] When to push forward and when to slow down
    [12:39] Adam’s first investment: Dell
    [14:20] What did Adam do on Day 1 when he first became an LP
    [17:00] Emory’s co-investment criteria
    [20:02] Private equity co-invests vs venture co-invests
    [21:15] Teaser into Akkadian’s strategy
    [23:03] Underwriting blind pools of human potential
    [29:03] Why does Adam look at 10 antiportfolio companies when doing diligence?
    [32:11] What excites and scares Adam about VC
    [35:36] Engineering serendipity
    [37:52] Where is voice technology going?
    [39:45] How does Adam think about maintaining relationships?
    [43:20] Thank you to Alchemist Accelerator for sponsoring!
    [44:20] If you enjoyed this season finale, it would mean a lot if you could share it with 1 other person who you think would love it!

    SELECT LINKS FROM THIS EPISODE:

    SELECT QUOTES FROM THIS EPISODE:

    “What’s so freeing is when you can bring your personality to work. It’s so much less cognitive load when you can be yourself.” – Sheryl Sandberg’s advice to Adam Marchick

    “Take your work seriously, not yourself.” – Adam Marchick

    “Be really transparent, and even document and share your co-investment criteria.” – Mike Dauber, Sunil Dhaliwal’s advice to Adam Marchick

    “For an endowment doing co-invests, you should never squint.” – Adam Marchick

    “When investing in funds, you are investing in a blind pool of human potential.” – Adam Marchick

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

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

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

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    Stress and Ambition

    stress, founder stress

    “The 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.”

    It’s something Nakul Mandan from Audacious said in a Superclusters episode earlier in Season 4. And a line that’s been gnawing at me for the past few weeks. Particularly, “your job is to reduce the stress in that conversation.” So it got me thinking… Are the entrepreneurs I back stressed (enough)?

    I know what you’re thinking. But before you come at me with pitchforks and torches, here me out. If you get to the end of this essay and still feel as strongly, feel free to take a swing at me.

    First off, let me define some terms in the above question. An “entrepreneur” is someone who starts something that doesn’t exist in the world already. To me, that is a startup founder, a local restaurant, an emerging fund manager, and so on. I use this term pretty liberally. “Enough” is in moderation. A balance of feeling the pressure and urgency, but not enough to make one go insane. By definition, entrepreneurs — people who dare challenge the world and create something that hasn’t existed before — are ambitious. And ambitious, action-oriented doers are, to Nakul’s point, often hard on themselves. So everything in moderation. As a friend once told me, if you’re doing anything ambitious, a third of your days will be epic. A third will be okay. And a third will absolutely suck. As long as your days feel like that proportionally, you’re on the right track.

    So… are the entrepreneurs I back stressed (enough)?

    Let’s start with no. Are they the underdog still, pre-product-market fit, stagnating, losing market share, and/or in a crisis?

    If not, carry on. It’s okay to not be stressed all the time. In fact, it’s probably not helpful to be stressed all the time.

    If so — that they are the underdogs, stagnating or in a crisis — AND they’re not feeling stressed, I do wonder from time to time. And I’d be lying if some part of me didn’t feel buyer’s remorse. Because that means one of three things:

    1. They’ve lost their ability to care. About the product. The market. The team. Or simply, their own ambition. That’s the worst.
    2. Conversely, they don’t feel comfortable enough to be vulnerable with me. And that, in part, not to sugarcoat things, is because of me.
    3. They never cared enough or were ambitious enough in the first place. And that’s something I have to take back to the drawing board so that I learn the next time around.

    Nevertheless, regardless of which of the three, it warrants a conversation. A difficult one. One where I try to understand their current motivations, what’s changed. If their motivations still hold true, then I, in Danny Meyer’s words, add “constant, gentle pressure.” For those curious, Chapter 9 of his book. Nevertheless, my job is to give them the activation energy to hopefully get them back on track.

    If things change, great. I eventually go back to the first question. Are the entrepreneurs stressed? If not, then I let them on a few things:

    1. I’ll spend less time time with them to prioritize the rest of my portfolio.
    2. If they have any of the money left, they can keep the money. FYI, if it wasn’t my personal angel money, but someone else’s capital (of which I’m a fiduciary), depending on how much they have left, it may lead to a different conclusion. But in general, I view it as a write-off.
    3. Wish them the best of luck in their next chapter.
    4. If they feel the fire burning again (for good reason), they should let me know. And I’m happy to have another conversation.

    Now… what happens if the entrepreneurs are stressed. Then I try to figure out if it’s anxiety or stress. Let me define.

    Anxiety is caused by things you cannot control. For instance, the market. Other people you cannot control. Or black swan events. Stress, on the other hand, is caused by things you can control. Your own mistakes. Mistakes made by people you hired. Volume of work that needs to be done. Procrastination. Mistakes that can be actively mitigated. For instance, missing the deadline for a quarterly report. Missing payroll due to insufficient funds. Layoffs. Bad performance. Media, publicity, and perception. Something Danny Meyer calls, “writing a great last chapter.” As Danny Meyer puts it, “the worst mistake is not to figure out some way to end up in a better place after having made a mistake.”

    If it’s anxiety, my role is to calm the founders. Be the mental support they need. Help them see the bigger picture. Build contingency plans.

    If it’s stress, my role is to help them build an action plan. Help get key decision-makers and doers in the same room. Get the founders in front of advisors who can help them think through key considerations and check their blind side (assuming it’s not me. Most of the time it isn’t.). Of course, you need to timebox “thinking” time. There’s a great saying. “There are no right choices; only choices we make right.”

    And finally, help the entrepreneurs execute the plan. Sometimes, that requires getting my hands dirty. And that’s what I’m here for. To increase the metabolism of the organization. Or at the very minimum, leadership. Stress is often caused by indigestion of tasks that need to be done.

    Alas, the job of an investor, given we’re not in the driver’s seat, that we don’t always have complete information, is to reduce the stress of the founder when we have that conversation. More often than not, ambitious founders are hard enough on themselves.

    Photo by Francisco Moreno on Unsplash

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

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

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    The Dao of Investing in VC Funds | Jay Rongjie Wang | Superclusters | S4E8

    jay rongjie wang, jay wang

    “The first layer is setting up your own strategy. The second layer is portfolio construction. How do you do your portfolio construction based on the strategy you set out to do? And then manager selection comes last. Within the portfolio construction target, how do you pick managers that fit that ‘mandate?’” – Jay Rongjie Wang

    Jay Rongjie Wang is the founding Chief Investment Officer of Primitiva Global, where she runs a family-backed Multi-asset Strategy. She also works extensively with emerging VC managers, and sits on the Selection Committee of Bridge Funding Global.

    Jay’s background uniquely combines software engineering (at the world’s largest fintech platform) and institutional investing (at top funds including Fidelity and Sequoia), as well as general management (3x executive in tech startups). Jay has lived in 5 different countries across 9 major cities, giving her a global perspective.

    Jay obtained her B.A and M.Sci in Physics from Cambridge University and M.B.A from INSEAD. In 2023 she was listed as an Entrepreneurial Pioneer Under 35 by Hurun Wealth.

    You can find Jay on her socials here:
    LinkedIn: https://www.linkedin.com/in/wangrongjie/

    And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

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

    Brought to you by Alchemist Accelerator.

    OUTLINE:

    [00:00] Intro
    [04:12] Life atop a Daoist mountain
    [10:27] Qigong and tai chi
    [12:21] What is dao?
    [19:18] The weapon that Jay specializes in
    [21:08] Why did Jay leave the Daoist temple?
    [24:24] The motivations behind Jay’s career shifts
    [30:05] The difference between underwriting a VC fund and a fund-of-funds
    [33:08] How does Jay get to know a fund manager?
    [36:31] The 3-layer process for building an allocation strategy
    [38:01] Picking the initial asset class
    [45:29] How much Jay allocates to venture
    [48:43] What does “reasonably diversified” mean?
    [49:15] Figuring out the portfolio construction model
    [54:59] At what point do you stop maximizing for portfolio returns?
    [56:57] How Jay calculates a 200X target return on direct investments
    [57:53] Data on returns as a function of portfolio size
    [1:01:42] The biggest challenge once you’ve picked your strategy
    [1:04:40] Selecting the right fund managers
    [1:14:17] The difference between guqin and piano
    [1:18:42] Intuition versus discipline
    [1:24:08] Post-credit scene
    [1:27:47] Thank you to Alchemist Accelerator for sponsoring!
    [1:28:48] If you enjoyed this episode, it would mean a lot if you could share it with one friend who’d also get a kick out of this!

    SELECT LINKS FROM THIS EPISODE:

    SELECT QUOTES FROM THIS EPISODE:

    “If you have the deal flow and you have the energy and have the skills to construct your own portfolio, then funds-of-funds obviously are more complimentary than necessary.” – Jay Rongjie Wang

    “The first layer is setting up your own strategy. The second layer is portfolio construction. How do you do your portfolio construction based on the strategy you set out to do? And then manager selection comes last. Within the portfolio construction target, how do you pick managers that fit that ‘mandate?’” – Jay Rongjie Wang

    “The later the stage you go, […] capital becomes more anonymous, and […] the more you converge to public market returns.” – Jay Rongjie Wang

    “I only put the regenerative part of a wealth pool into venture. […] That number – how much money you are putting into venture capital per year largely dictates which game you’re playing.” – Jay Rongjie Wang

    “Your average median of a fund-of-funds is higher than a venture capital fund, and the variance, the standard deviation, is lower. So it is possible for a VC fund to have 40%, 50%, or higher IRR. It’s much, much less likely for a fund-of-funds to achieve that, but also the likelihood of losing money is much, much lower for a fund-of-funds.” – Jay Rongjie Wang

    “The reason why we diversify is to improve return per unit of risk taken.” – Jay Rongjie Wang

    “Bear in mind, every fund that you add to your portfolio, you’re reducing your upside as well. And that is something a lot of people don’t keep in mind.” – Jay Rongjie Wang

    “Once you have a strategy, the hardest thing for me is to stick to that strategy because you just meet those amazing managers, amazing funds all the time.” – Jay Rongjie Wang

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

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

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

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    VC as an Asset vs Access Class

    key, access

    There are LPs who see VC as an asset class. And there are those who see it as an access class. Most GPs spend time with the former. Most emerging GPs try to spend time with the latter, just ’cause the former are out of their reach for multiple reasons. Chief of which is probably that the “asset-class” LPs typically write large checks, have small teams, and have little to no appetite for the risk in this asset class. Also given how much the industry is a black box, it’s hard to underwrite anything that puts their career at risk.

    But most emerging GPs I talk to actually fail the latter, the “access-class” LPs, more often than not. Much of which is in understanding how to approach them.

    In the world of business, there are customers and there are buyers. Someone who makes a one-time purchase, and rarely again is a buyer. It could be due lack of demand. Lack of availability. Or simply, they were bamboozled. Fool me once, shame on you. Fool me twice, shame on me. Most emerging LPs, whether individuals or family offices or even corporate venture arms, buy a product once. And unfortunately, what they were sold and what they bought ended up being two different things.

    Relationships, in any industry, take time to nurture. It takes time to win trust. Those who trust easily can take trust away easily. Yet, most GPs talk to LPs for the first time when they start fundraising. With a fire under them. And a sense of urgency as the clock is ticking. And by function of that, attempt to force these LPs who see VC as an access class to make a transactional decision.

    To help visualize the difference, this is how I typically like to frame it:

    LPs who see VC as an…Asset classAccess class
    When pitching them, it’s similar to which business functionMarketing
    (Brand and outliers matter)    		Sales
    Turnover rate in portfolioLowHigh
    Involvement“Lean back”
    (Big picture)    		“Lean in”
    (In the trenches)
    StrategyStrategy not to lose
    (Play to stay rich)    		Strategy to win
    (Play to get rich)
    Depth vs BreadthBreadth > DepthDepth > Breadth
    Capital flows in the near futureSteady state
    (VC exists and will keep our allocation at a steady state / set percentage annually. Any additional significant DPI generated here is re-allocated to other assets.)    		Capital increase
    (VC is interesting and likely to increase allocation to it in the impending future.)

    For access-driven LPs, they typically transition to asset-driven after about 4 years. Subsequently churning from their “access” category, as they now have enough relationships and “experience” building a strategy around venture capital. Access-driven LPs typically churn through their portfolio quite frequently, with generational shifts and new regimes and interests.

    Moreover, with access-driven LPs, the pitching process is often collaborative and there’s room for terms negotiation. More often than not, they have curiosities they’d like to satiate. Asset-driven LPs have you pitch them. When challenged, they are more defensive than they are curious.

    Photo by Silas Köhler on Unsplash

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

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

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    The 4 P’s to Evaluate GPs | Charlotte Zhang | Superclusters | S4E6

    charlotte zhang

    “Executional excellence can get you to being great at something – let’s call that top quartile – but it really is passion that distinguishes the best from great – top decile.” – Charlotte Zhang

    As the director of investments, Charlotte Zhang oversees the selection of external investment managers at Inatai Foundation, conducts portfolio research, and helps to institutionalize processes, tools, and resources. Experienced in impact investing, she previously served as a senior associate at ICONIQ Capital and, before that, Medley Partners. Investing on behalf of foundations affiliated with family offices, her investments supported a variety of nonprofit work, from early childhood education to autism research. Charlotte was a founding partner of Seed Consulting Group, a California-based nonprofit that provides pro bono strategy consulting to environmental and public health organizations, and currently serves on the Women’s Association of Venture and Equity’s west coast steering committee and as a Project Pinklight panelist for Private Equity Women Investor Network. She is also on the advisory boards of MoDa Partners, a family office whose mission is to advance the economic and educational equity of women and girls, and 8090 Partners, a multifamily office consisting of families and entrepreneurs across diverse industries that is currently deploying an impact investment fund.

    Charlotte earned a BS with honors in business administration from the University of California, Berkley. When not working, you can find her globetrotting (18 countries and counting), writing a Yelp review about the best bite in town, or cuddling up with a book and her two adorable cats.

    You can find Charlotte on her LinkedIn here:
    LinkedIn: https://www.linkedin.com/in/charlotterzhang/

    And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

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

    Brought to you by Alchemist Accelerator.

    OUTLINE:

    [00:00] Intro
    [02:56] Charlotte’s humble beginnings
    [07:02] Lessons as a pianist
    [10:23] Lessons from swimming that piano didn’t teach
    [14:52] How Charlotte became an LP
    [17:44] Where are emerging managers looking for deal flow these days?
    [21:23] Reasons as to why Inatai may pass on a fund
    [24:35] The 4 P’s to Evaluate GPs
    [29:26] How small is too small of a track record?
    [34:42] How do you build a multi-billion dollar portfolio from scratch
    [39:43] The minimum viable back office for an LP
    [42:03] Underrated Bay Area restaurants
    [47:01] Thank you to Alchemist Accelerator for sponsoring!
    [48:02] If you learned something from this episode, it would mean a lot if you could share it with ONE friend!

    SELECT LINKS FROM THIS EPISODE:

    SELECT QUOTES FROM THIS EPISODE:

    “Executional excellence can get you to being great at something – let’s call that top quartile – but it really is passion that distinguishes the best from great – top decile.” – Charlotte Zhang

    “If you have enough capital chasing after an opportunity, alpha is just going to be degraded.” – Charlotte Zhang

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

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

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

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