“We’re going into a world where there will be an increase in inequality in terms of the have’s versus have-not’s. And so if you are invested in some of the have’s, I would actually bet on their acceleration of value aggregation in the later stages of scaling which is why I, personally, think a winning strategy is to hold onto them for as long as possible.” — Charlotte Zhang
Charlotte Zhang from Inatai Foundation is back! And if you’ve tuned into her first episode on Superclusters, you’ll know exactly why. Charlotte has been one of my favorite guests on the podcast, marrying both her profound ability for deep analysis with strong framework-oriented assessments. You might remember her 4 P’s to underwriting every manager from our prior episode.
Naturally I had to have her back for an El Pack episode 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.
99VC’s Lisa Yu asks about what LPs look for in Fund I’s beyond track record.
Escape Velocity’s Mahesh Ramakrishnan asks about recycling and what happens when you have 30% of your fund size as distributions in the first few years of the fund.
Founder Embassy’s Helena Gagern asks about investing in AI frontier labs where the first round of financing already puts the company at $400M+ in valuation. And also, how do you communicate to LPs that you have an “exceptionalism” bucket to invest out of?
As the director of investments at Inatai Foundation, Charlotte Zhang oversees the selection of external investment managers, conducts portfolio research, and helps to institutionalize processes, tools, and resources. She previously served as a senior associate at ICONIQ Capital and, before that, Medley Partners. 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/
Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.
OUTLINE:
(00:00) Intro
(01:04) What’s new in Charlotte’s life?
(04:06) LPs Charlotte would love to meet
(05:41) Who is Lisa and 99VC?
(09:31) What qualities does Charlotte look for beyond track record?
(14:55) How does a GP know if they have a differentiated strategy?
(15:49) Charlotte’s pet peeve
(17:29) The bottoms up exercise of building a fund strategy
(18:00) Consistency of execution
(20:05) The highest level of signal you can get from a founder reference
(22:18) The ask
(22:51) Who is better at bowling: Mahesh or David?
(24:44) Who is Mahesh and Escape Velocity?
(25:20) Why is Escape Velocity spelled as EV^3?
(27:10) What happens when you have 30% DPI in the first 2 years of your fund?
(30:19) Does early DPI matter more in Fund I than Fund III?
(33:26) Should you sell secondaries at the Series B as a pre-seed/seed GP?
(37:34) Venture is under siege for no DPI
(38:18) Would Charlotte rather have 4X in 10 years or 7X in 15 years?
(39:42) Have’s and have-not’s
(40:35) Who is Helena and Founder Embassy?
(44:45) What is Charlotte’s reaction when a pre-seed GP invests in a $400M post valuation?
(49:23) How do the best GPs communicate betting off-thesis?
(50:44) How many GPs have an “exceptionalism” bucket to invest out of?
(55:56) How much underwriting goes into a GP breaking the rules?
(58:10) “A-players are obvious” but what isn’t?
(1:00:38) Charlotte’s last piece of advice for LPs
(1:03:43) Charlotte’s last piece of advice for GPs
(1:07:18) Why you should talk about the anti-portfolio
(1:09:33) David’s favorite moment from Charlotte’s previous episode
SELECT LINKS FROM THIS EPISODE:
- Inatai Foundation
- “The 4 P’s to Evaluate GPs” with Charlotte Zhang on Superclusters
- Lisa Yu
- 99VC
- Microsoft
- Microsoft Research
- Jawbone
- Databricks
- OFFICEBOOK
- Tesla
- Keith Rabois
- Mahesh Ramakrishnan
- Escape Velocity
- Salvador Gala
- Brandon Leppke
- Charlie Munger
- Steve Jobs
- Helena Gagern
- Founder Embassy
- Pacific Heights
- HF0 Residency
- Pebblebed
- Wendy Li
- “Uncompensated Risks in VC” with Wendy Li on Superclusters
- JD Montgomery
- “Venture is a Who Business, Not a What Business” with JD Montgomery on Superclusters
SELECT QUOTES FROM THIS EPISODE:
“In venture capital, although the top quartile of emerging managers outperforms the established funds. On average, you would actually be better off investing in established funds than in an emerging manager because the dispersion of returns is so much wider in emerging managers.” — Charlotte Zhang
“Because incumbent brands create access flywheels, the most important thing for an emerging manager is having a clearly differentiated strategy. Otherwise, it’s fighting an unwinnable war.” — Charlotte Zhang
“Investment strategies are simply financial products serving the market of what founders and management teams in businesses need.” — Charlotte Zhang
“The best founders will know who the best VCs are.” — Charlotte Zhang
“It’s all about the density of the NPS you have amongst the best talent. Of course, if they have a good experience with you, they’re more likely to refer others they think highly of to you. And that’s the reason why it becomes a leading indicator and therefore, a self-fulfilling prophecy as to who rises to the top.” — Charlotte Zhang
“It’s actually a higher signal to me if it’s someone referring you that didn’t take money from you.” — Charlotte Zhang
“When we’re conducting diligence as an LP, you should be looking under the rocks where you are more likely to find disproving evidence.” — Charlotte Zhang
“If [venture] does not produce any realized returns, how will it be self-funding? And how can you continue pacing sustainably into this asset class?” — Charlotte Zhang
“We’re going into a world where there will be an increase in inequality in terms of the have’s versus have-not’s. And so if you are invested in some of the have’s, I would actually bet on their acceleration of value aggregation in the later stages of scaling which is why I, personally, think a winning strategy is to hold onto them for as long as possible.” — Charlotte Zhang