One of my recent favorite soundbites is Rich Paul‘s. For the uninitiated, he’s the agent behind LeBron James and Draymond Green. And in his recent Tim Ferriss episode, he said: “Some people define the business card and some people are defined by their business card, and so I don’t carry a business card.”
Some of the most exciting conversations I’ve been having as of late have been in the world of family offices. There’s this shift in generational wealth transfer, but often times without sufficient knowledge transfer. At the same time, there are many next gens leaning more into risk and philanthropy. Many want to increase their exposure to venture and private equity as an asset class, but are still learning how to underwrite such risk.
My conversations echo a lot of what Citi’s been seeing as well. Two in five family offices wanted to increase their exposure to illiquid asset classes, namely the PE and VC asset classes. And while many bucket VC and PE in the same asset class, the truth is the assets operate very differently. Even within venture, underwriting the risk and performance of a sub-$40M fund versus a $40-100M fund versus a $100-500M fund versus a $500M+ VC fund are completely different. Some LPs may disagree on the exact benchmarks (for instance, sub-$100M funds and everything else), but the reality of assessing an emerging manager and an established manager are different. But I digress.
The rest are either rebalancing or figuring out their re-up strategy. Yet, as I’m sure GPs are seeing today, that shift in strategy, requires time, research, and confidence before family offices can pull the trigger. Many are waiting to Q1 next year, but engaging in conversation today.
I’ve also written before about one of my favorite lines from Engineering Capital’s Ashmeet Sidana, “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.”
And I’m seeing a similar vein with family offices. The next gen don’t want to be defined by their predecessor’s goals and records. They want to define their own legacy.
There’s also the saying: If you know one family office, you only know one family office. So any broad-stroke generalizations are loosely correlated at best. That said, anecdotally, having talked with about a hundred or so family offices, here’s what I’ve come to notice.
My crudely drawn 1D scale of whether venture capital is an asset class or an access class
Smaller and/or emerging LPs see VC as an access class. Larger and more sophisticated and established LPs see VC as an asset class.
The Mendoza line — the line that separates the emerging LPs from the established ones —seems to be around 20-30 managers or over 6-7 years of venture data. For the latter, that means, you’ve seen Fund I’s and II’s graduate to Fund III’s and IV’s.
So the question for many of the next generation leading family offices has flipped from: Are you defined by your surname? To: Do you define your surname?
For those that pursue the latter, they’re a lot more proactive than previous generations. They participate in communities. Go to events. Seek education on the matter. Network with their existing managers to discover new ones. Some have also built covenants to co-invest in their manager’s breakout winners. Quite a few are building emerging manager programs or would like to. They’re hungry. Hungry to learn.
The problem I’m seeing with many managers is that they’re seeking transactional relationships. The urgency to get to their first or final close leads them to optimize for LPs who can close fast. And I get it, that’s been the game historically. But it’s leaving a massive opportunity in the market for those who have the time and are willing to educate their and prospective LPs. Who are willing to spend time building a relationship through giving first.
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.
This past weekend, I ended rewatching a classic and one of my favorite Eddie Murphy movies, A Thousand Words. Eddie, who plays Jack McCall, a literary agent, is someone who will say anything to get what he wants. And the plot of the movie effectively revolves around him trying to sign his next author and the after effects of doing so.
At one point, Dr. Sinja, the author he’s trying to sign, tells Jack, after he exclaims that he tells his wife he loves her “all the time”, “Words? More words, Jack. You tell her, like meaningless leaves that fly off a dying tree?
“Words.
“Can’t you show her that you love her? Make peace. Show them that you love them. And be truthful.”
One of my favorite people in the world, my friend who I met by way of mutual friend introduction, also happens to be one of the more well-traveled people I know. While it’s not my intention to embarrass her by writing this blogpost, she’s someone I’m deeply grateful for — my pen pal.
Every time we text, we send these long passages to each other. Paragraphs long. It doesn’t happen super often, every 2-3 months or so. And at times, we go six months without texting each other. But what makes her awesome aren’t our virtual letters, while I do really enjoy writing and reading them. What makes her awesome is that every time we meet in-person, she brings me gifts from abroad.
And she did so, ever since the day we first met, and I, in a passing remark, mentioned I didn’t travel often. And because of my work, my school, the need for me to be close to take care of family, I’ve stayed in the cocoon of the Bay Area my whole life. As such, I really do enjoy when friends tell me in detail of their travels beyond the horizons. But she took it a step further, where she would:
Buy gifts, snacks and souvenirs from abroad to bring back
Mail me postcards from every trip, sharing the smells, sights, sounds, and feels of her surroundings as she writes them
And of course, bring me back tales from her adventures when we meet in person.
They’re small things. But despite being small, they mean a lot to me.
I’m luckier now to be able to travel more. And just like my pen pal brings back treasures when she travels, I do so for her now too.
And of course, this extends beyond friendships. The fundamentals for any relationship (friendship, romantic, customer, investor, or some other business relationship) are fulfilling promises. Too often, I meet folks, who like Jack McCall say more than they can deliver. Most times unintentionally. A large part due to society’s expectations to be nice.
I’ll give an example. How often do we hear “How can I help?” at the end of a conversation? If you’re anyone who has something that others want — connections, capital, or advice — the ones on the receiving end probably wish to pay you back in some way. But most people ask that, and when they get an answer back, they take it in like the passing wind. Personally, I’d rather people who can’t deliver on that not ask that question than ask and not deliver (if there is something the other could use help on).
To go beyond just a normal relationship means you need to deliver the unexpected — beyond the initial promise. That requires you to actually spend time caring. And when you do, actions will naturally follow words or perform independent of words.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
My friend told me recently, that in the hallowed halls of Zappos, there’s a line by the great Tony Hsieh:
“Just because you can’t measure the ROI of something doesn’t mean you shouldn’t do it. What’s the ROI of hugging your mom?”
Too often we measure by the business incentives and not our own intentions. Humans are social creatures. We enjoy the company of others. No matter how much or how little. No matter if you’re an extrovert or introvert. There’s a line in my buddy Lloyed‘s new book, From Grassroots to Greatness, that I absolutely adore — a lesson he picked up from surviving the Gulf War.
“Life’s not about the destination, nor the journey. It’s your companions who matter the most. The people traveling down the road with you.”
I hosted a 20-person dinner on Wednesday. The theme was simple. Good people, good vibes. The room was 100% investors — LPs and GPs. And at any other venue, with the concentration of minds we had, the conversation would also be 100% cerebral. Markets. Political dynamics. Investment opportunities. Tactics. And so on. Ok, maybe only 90-95% cerebral, but my point still stands.
So the question is how can I, as the host, diffuse the tension in the room, where people use their amygdala, more than their pre-frontal cortex. Or in less cerebral terms, how do I get people to just have fun?
And not to get too technical (unless it is of interest, then let me know), it was setting the stage and arming people with the ammunition to not regress to their normal habits. The former lent itself to explicit statements of good vibes. The latter was executed by an order of custom fortune cookies, with all the fortunes inside containing a fun fact from someone else who was present that day.
The result was a casual night of laughs and hugs underneath the canopy of the San Franciscan sunset.
A friend asked me the next day, “What did I get out of it?”
To which I simply replied, “There’s no ROI on a good time.”
Pennies and quarters
I came across this reel while doom-scrolling on Instagram. I’ll try to find it, but at the moment forgetting the attribution. But the influencer posed the question: What’s the difference between 100 pennies and 4 quarters?
Weight.
The sum of each set equates to a dollar. But if you were to put 100 pennies in your left pocket and 4 quarters in your right, you’ll feel the weight on your left side. And in this analogy, they’re worth the same, and that there are some people who have value but are not worth the weight. Not everyone who has weight is worth carrying.
So, what?
In the age of social media (which in fairness has very much gone off thesis from its original intentions), the number of friends one has or followers or subscribers seem to matter a lot more than the quality of those relationships. Similarly, in the metropolitan world, the number of cards your Rolodex can unfurl seem to take priority over true friendship. In fact, there’s a whole phenomenon called the strength of weak ties.
I don’t think that’s right. Is there ‘value’ in knowing a lot of people? Sure. But life isn’t about numbers and stats — how much you make, or how big the deal you just struck was. In fact, the only numbers that’ll be on your gravestone will be the day you were born and the day you died. That’s it.
The sad truth is more and more people in modern society feel lonelier and lonelier. Hell, there’s plenty of literature on how many of the world’s top celebrities — in other words, some of the most followed / subscribed-to people in the world — feel incredibly lonely. And frankly it’s on overoptimization of what can be measured, and forgetting about what makes us happy, joyful, content. And spoiler alert, for all the economists and statisticians, it’s not utility points.
In closing
And so when my friend shared his adventures at the Zappos office with me, which I’ve never been to, now I really want to.
So, until the next, be kind, stay awesome, go tell someone who’s made an impact on your life, thank you, and give that person a hug. You don’t have to wait till Thanksgiving to do so.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
The other day, I had a super insightful conversation with one of my awesome teammates here at Alchemist Accelerator about access and exposure. The difference between accelerators and emerging early-stage managers.
I’ll preface that for investors, particularly emerging managers, the three things you need to win are sourcing, picking, winning. And to be a GP, you need at least two of the above three. But for the purpose of this blogpost, I’m only focusing on sourcing.
I’ll also preface with the fact that I may be biased. I started in venture at SkyDeck, an accelerator. Additionally, I advise at a bunch of studios, incubators and accelerators. Moreover, I worked at On Deck when we launched our accelerator. And now, I’m here at Alchemist Accelerator.
I truly love early-stage programs. The earlier the better.
Instacart’s recent IPO is a clear example of venture returns compared to the public market equivalent as a function of stage. The earlier you invest, the more alpha you generate to your most liquid comparable.
It’s the difference between a market maker and a market taker. A price maker and a price taker.
Though admittedly, one day, this too may become saturated, just like how venture capital went from 50-60 funds in ’07 and ’08 to now over 4000 in 2023. Do fact check me on exact numbers, but I believe I’m directionally accurate.
Let me give a more concrete example. Harvard is a phenomenal institution. And there’s a Wikipedia page full of breakout Harvard alums. But as an LP, if 50% of your managers, despite having different theses, all have half their portfolio as Harvard alums, then you as the LP are overexposed to the same underlying asset. The same is true for Stanford. Or seed or Series A funds investing in YC founders. All great institutions, but you’re not getting your buck’s worth of diversification.
The only caveat here is if you’re not looking for diversification. After all, the best performing fund would be the fund that invested a 100% of their fund in Google at the seed round. AND holding it till today. Realistically, they will have had to distribute on IPO.
The question is are you a fisher? Or are you a digger? One requires a fishing rod; the other a shovel. The latter requires more work, but you’re more likely to be the first to gold. Like Eniac was for mobile. Or Lux to deep tech.
So how do you know you’re fishing in someone else’s pond?
Easy. Your deal flow includes someone’s else’s brand. Whether that’s Sequoia or YC or SBIR. It’s not your own. You don’t own that pipeline. A lot of people have access to it. It’s no longer about proprietary deal flow, but about proprietary access to deals to borrow a framing from the amazing Beezer.
If your deal flow pipeline looks something like the graph below, you probably don’t have a sourcing advantage.
Now that’s not to say there aren’t a lot of nonobvious companies coming out of YC or these startup accelerators. Airbnb, Sendbird, Twitch (the last of which Ravi who I work with here at Alchemist happened to be one of the first institutional investor for, so have heard some of these stories), and more were all non-obvious coming out of YC. And have also seen the same for companies coming out of Techstars, 500, and Alchemist, where I call home now. But that’s a picking advantage, not a sourcing one.
The flip side is, how do you know you’re excavating your own pond?
I’ll preface by saying having your own Slack or Discord “community” is not enough. Or having your own podcast.
I put community in quotes simply because having XXX members in a large group chat isn’t indicative that their presence is really there. Is their seat warm or cold?
I love using a stadium analogy. Imagine you sold a couple thousand season tickets to a team. You can name whatever sport it is. Football (yes, the rough American kind). Soccer. Basketball. Baseball. You name it. But despite all the tickets you sell, a solid percentage of your seats each game is empty. Can you really say that your team has fans? All you did was sell a couple of cold seats.
You can make the same analogy with likes or comments on Instagram. Which seems to be a problem these days, when an influencer with a couple thousand likes per post starts hosting their fan meetups, only to realize they rented out an empty hall. In case, you’re wondering for the IG example, it’s due to bots.
All that said, I like to think about excavation in the lens of competition for attention. Everyone only has 24 hours in a day. 7 days in a week. 365 days in a year. And as someone who is expecting any level of engagement from others, you are fighting for attention with every other product, person, and habit out there.
Perks of being a consumer investor, I think about this a lot. But in the same way, having an unfair sourcing advantage is the same.
Is the greatest source of your deals tuning into you at least four of the seven calendar days in a week? Or if you have a professional audience (i.e. only product people, or only execs), are they engaging at least 3 workdays per week or 8 workdays per month? Are they spending more time reading/listening/engaging with you than with their best friend?
If you have a community, do you have solid product-market fit? Is your daily active to monthly active over 50%? You don’t need a massive audience, but for the people who are primary sources of your deal flow, are you top of mind? As Andrew Chensays, at that point, “it’s part of a daily habit.”
Is it easy for them to share your content, what you’re doing, who you are with others? Does sharing you or your content generate dopamine and social capital for them? Do you embody something aspirational? Is your viral coefficient greater than 0.5? Even better if it’s 1, then you’re ready to go viral.
And do people stick around? Do the seats stay warm? Is your community self-propagating? Is your content evergreen? Or do you produce content at a voracious pace that it doesn’t have to be? Do you live rent free in people’s brain?
And once you do invest, are you the weapon in the arsenal of choice? For instance, 65% of Signalfire’s portfolio use their platform weekly to learn and get advice. But more on the winning side in a future essay.
In closing
To truly have a sourcing advantage, you need to be building your own platform that is impressionable and regularly take mind space from the founder audience. But if you don’t, that’s okay. You just need to be really good at picking and winning.
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.
All cards on the table, I love conferences. It’s a great exchange of ideas. And every once in a while, you meet some really cool people. In fact, I’ve met quite a few of my now-great friends via large events. And hell, I love swag! Like, frickin’ love them! Arguably too much so.
I also love events, and have deep respect for not only the magnitude, the effort, but also the creativity that goes into making great events great. And if you’re a regular fan of this humble piece of internet real estate, you’ve seen me write about it. If not, would recommend searching up “social experiment”, “community”, or “events” in the righthand side bar. But I digress.
So, all of this transpired, when a founder asked me publicly in a Slack community, “Is TechCrunch Disrupt worth going to, to meet investors?”
I love TC, and all it stands for! But if you’re looking to raise and meet VCs who’ll be interested in listening to you pitch, your bang for buck is better elsewhere. Not saying it’s not possible, but if you’re not on stage, it’s just a lot of wasted effort. Why?
VCs who are there are not looking there for deal flow, at least the good ones who have great pipelines.
‘Cause most people who are there are looking for investors as well. You’re not getting as much facetime with the right people as you would like. The ones you wanna get in front of are always the most popular ones.
On the flip side…
Why I think TC (or similar) is worth attending?
Conversion. Conferences should not be top of funnel for you. ‘Cause if it is, you’re one step too late. Maybe two steps. Use it as a conversion tool. Set up Zooms with investors prior. Then use IRL time to convert them into fans or reinforce why you’re awesome. I mean, have you ever been to a networking event where strangers intro themselves to you and you forget their name within 5 seconds? The same is true for most investors unless you have a story that’ll make you go viral. If that’s the case, then you really don’t need conferences anyway. (Unless you’re on stage.)
Hosting your own event/happy hour/fireside chat. Better to be a host of even a small intimate 6-8 person dinner than to be a participant. Participants are for the most part, forgettable. As a host, you’ll be able to live rent-free in someone’s mind for at least a few weeks.
Or purely for fun. Then yes, go have fun. Everything else is a cherry on top. Did I mention conference swag is usually really awesome?
In closing
Do I personally go to conferences?
No. Usually. This doesn’t have any bearing to a conference’s quality. In fact, I think events like Saastr’s, Upfront’s, All-In, just to name a few are very well-organized.
I’m just too busy.
I enjoy intimate conversations more. I’m an introvert, what can I say.
I like letting my creativity run wild by hosting my own.
So if you’re a founder fundraising, hopefully the above might be some helpful context when you are next at a crossroads in relation to event attendance. And yes, I find the above to be true if you’re an emerging manager fundraising as well.
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.
It’s fundraising season again. For founders. And for investors.
It may have been a product of the content I’ve been writing and the events I’ve been hosting. It could also be a product of my job title. But in the last few months, I’ve met a great deal of fund managers — from Fund I to Fund XIII. With a strong skew to the right. In other words, vastly Fund I through III.
And given the current market, there is the same pressing question from all: How should I pitch my fund?
And subsequent to that, who should I talk to? Or can you intro me to any LPs?
And in all these conversations, I’m reminded of a great piece Jason Lemkin once wrote on hiring the right VP of Marketing. I won’t go too much into depth since I’ve written about it here. But if you have a spare five minutes, I highly recommend the read. As such, the framework I share with fund managers is:
Fund I and II, it’s all about lead generation.
Fund III and IV, it’s about product marketing. The product is the fund. The product is the partners’ decision making.
Fund V and onwards, it’s all about brand marketing.
I’ll elaborate.
Now I’ll preface with most emerging funds won’t have the capacity to bring on an investor relations person, so the onus lies with the founding partners themselves.
Lead generation
Barely anyone knows you exist. You need to be out there. You’re pre-product-market fit. And you need to sell why you are the best sub-$50 million fund to return three times your LPs’ money back. Five times if you’re pre-seed or seed. LPs are looking for GP-thesis fit. But more importantly for you, this looks very much like a sales game, not a marketing game.
Generating demand where there is none is key. How do you best tell a story no one’s heard of?
You have to break an arm and a leg to close LPs outside of your initial friends and family. You have to show you care. Or as Mark Suster recently said (quoting Zig Ziglar), “People don’t care how much you know until they know how much you care.”
You’re going to events. Trade-show equivalents. You’re hosting your own. Your asking co-investors to be your LPs. You’re asking for LP intros to largely high net-worth individuals, who’ll be your beachhead “customers” before you prove the promise you’re selling capital allocators. And just as much as they’re looking for the right people to marry for the next 10 years or 20 years (latter if you’re working together for at least three funds), you need to qualify them as well. And while yes, it’s important to keep your funnel wide, you need to have a strong idea of who’s a good fit and who isn’t from the very beginning. If it helps, here are some of my favorite pre-qualifying questions.
You’ve now gotten to a stage where your strategy is known. Founders and LPs self-select themselves into investing in you or not. For instance, if you know you can win on a diversified strategy betting with portfolio sizes north of 50, all the LPs that look for concentrated portfolios or strong reserve strategies will turn the cheek.
You’ve built a strategy off of the scare tissue from Fund I. Now you’re selling that strategy. Are you fishing in ponds that other GPs are not? In other words, is it differentiated? And how?
It’s an interesting exercise but it’s usually not the first thing you think of, but the third. When you really dig into your fund’s soul. Why do founders come for you? Why will they choose you over all the other 4000 VC fund options out there? Equally as helpful to do a “Why did you choose me” survey with your founders.
The big question for LPs now is: Is this repeatable?
Why? Your initial LPs for Fund I, maybe II, are smaller checkwriters, given the size of most Fund I’s and II’s. A lot of them know, even innately, that as you scale in assets under management, you will eventually graduate from their check size. But starting from Fund III, and maybe even Fund II, you’re targeting sophisticated and larger LPs, who are looking to build that 20+ year relationship. And for them repeatability and consistency is important.
Brand marketing
When you’ve finally settled into your quartile, which usually takes at least 6-7 years of track record, you’re now focused on largely selling the returns on your previous fund. Your product works. For some funds, they diversify into other product offerings, or bring on new partners to manage new verticals and initiatives.
Just like a Super Bowl ad needs to be played at least seven times or in the marketing world the 7-11-4 strategy (you need at least seven hours of interaction, 11 touchpoints, and in four separate locations) before one remembers and hopefully buys your product, you’re trying to help LPs keep you top of mind. Again not hard and fast rules, but a useful reference point of just how much work it takes to stay top of mind.
That could mean a focus on content — a newsletter, podcast, great/frequent LP updates, social media and so on. Or great AGMs (annual general meetings). And hosting events. Or being that awesome co-investor that pops up other emerging managers’ pitch decks. Strong communication is key — either directly or indirectly — so that when you raise your next fund, your LPs are ready and have pre-allocated to re-up in your fund.
In closing
Now the purpose of all this segmentation isn’t to just be snotty about it, but that the focus for pitching and closing LPs varies per the number of your fund. Don’t try to do everything at the same time. It’s not worth it, and neither do you have the resources, time or bandwidth. Stick to one strategy and get really good at it.
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’ve had multiple conversations with emerging managers currently fundraising over the past few weeks, and the common theme, outside of the usual no’s, seems to be that larger LPs are saying, “If you were raising a larger fund, we would invest.”
And so there’s this catch 22 in the market right now. In one Fund I GP’s words, “either raise a larger fund and be told by the large checks that they don’t do Fund I’s. Or do a smaller fund, and be told by the high quality LPs that they’re too small.”
As a note, for the uninitiated, most large, seasoned LPs usually don’t want their check to be more than 10% of the fund. Why? Too much exposure in a single asset. And the need to diversify. Every year, there are really 20 great companies that are made. Or on the higher end, as Allocate’s Samir Kajirecently wrote, “30-50 companies drive the majority of returns.” Your goal as an LP, is to get as much exposure to those as possible. And they rarely all come out of just 1-2 funds.
If LPs are open to taking up more than 10% of the fund, they usually come with rather aggressive terms. For instance, investing into the GP stake, as opposed the to the LP. That’s a conversation for another day though.
As such, I’ve seen many a manager play both angles. They call it the “toggle.” If we raise a target of $10M fund, we’ll only do pre-seed. We’ll also have no reserves. If we raise a $25M fund, we’ll have 20% reserves and more seed checks. But if we’re able to close a $50M fund, we’ll have 33% reserves and do 50% pre-seed and 50% seed. The deltas between some fund managers’ targets and caps have grown as wide as the Grand Canyon. I was chatting with a Fund I GP yesterday who had a $10M target with $40M cap. Still relatively reasonable. Another GP raising their Fund I two weeks ago told me he had a $15M target and $70M cap. Far less reasonable. In fact, I might even say, a $15M fund and a $70M fund are two completely different strategies.
So begs the question, as a Fund I or II GP, is it worth raising a larger fund to possibly close large LPs or staying disciplined in your pre-product-market fit fund?
Spoiler alert… I don’t have the silver bullet. So if you’re looking for one, this blogpost isn’t worth your time.
But if you’re not, here’s how I’ve been thinking about it.
The short answer is really, whoever’s willing to give you money. Not the most sophisticated answer, but if you know large LPs well and they’re willing to invest in you, go bigger. Otherwise, you need to consider a more grassroots approach.
If you have a strong, portable, relevant track record that’s either returned good distributions already OR that has persisted for at least 6-7 years, larger LPs may be more open to investing in you. If not, you may need to play the numbers game with smaller LPs, that are liquidity-constrained as of now. And for that, you either take smaller checks, or prove you are the best option for their $250K LP check, that it somehow outcompetes the S&P, 3-year treasury bonds (because of interest rates), real estate and so on.
Also, remember that LPs are always nice in meeting #1. I’ve heard of very few instances where they’re not. A lot are just in exploratory mode. No pressure to commit. You will also need a great barometer of what nice looks like and what kindness looks like. Otherwise, you will waste a lot of time.
What does that mean? It is easier for a large LP to tell you “I will invest if your fund was bigger” than to tell you “No.” It’s the equivalent of VCs telling founders, “You’re too early for me.” And the same as recruiters and hiring managers telling job candidates “We have a highly competitive pool, and while we loved meeting you and you’re great…” There might be some truth to it, but a lot of smokes and mirrors, and a fear to offend people. I get it. We’re all people.
Just don’t lie to yourself.
Taking the hard road, which will be true for the vast majority of managers raising now, is to keep the fund size small and disciplined. Aim for a minimum viable fund. And deploy.
The minimum viable fund
Simply put, what is the minimum you need to execute your strategy? To set yourself up to raise a larger fund 1-2 funds from now?
What assumptions are you trying to prove?
What does your ideal Fund III look like? And What does fund-market fit look like to you? Be as detailed as you can. It could be that you’re getting four high quality deals per quarter. And that you have $30-40M to deploy per senior partner. That you’re leading rounds for target post-money valuations between $10-20M. That you have early DPI from Fund I by then. And so on.
Then work backwards. If that’s what Fund III looks like, what does Fund II look like? What does Fund I look like? As you’re backcasting, to borrow a Mike Maples Jr. term, each fund when you work backwards in time is focused on testing 1-2 key assumptions that you and LPs need to get conviction on. Assumptions that require data.
I’ll give an example of one kind of assumption. Your ability to win allocation.
If Fund III is where you lead pre-seed and seed rounds and have strong ownership targets, then Fund II is where you have to test if founders and other downstream investors will let you take pro rata for more than one round. And, if you can win or negotiate for that pro rata. It all comes down to, will a founder pick you over another awesome, possibly brand-name VC? And if so, why?
Some LPs prefer co-investment opportunities. And while it is helpful for them to go direct, part of the reason for it, is even if your fund can’t execute on the pro rata, just the ability to negotiate that is powerful for the day you need to lead. And if that’s Fund II, Fund I may be, can you win allocation in hot rounds and/or can you discover non-obvious companies before they become obvious?
Let’s say your Fund I is focused on the latter. You’re probably investing on $5-10M post-money valuations, and you’re going to try to maintain 5% ownership till the A-round. That’s $250-500K checks. $250K would be your base check, trying to get at least 30 shots on goal. That’s a $9-10M minimum viable fund, hoping for more than a 2% outlier rate in the generalist market, or north of a 10% outlier rate in bio, hard sciences, healthcare, or deep tech space.
Any less than 30 companies, you’re going for the hyper-concentrated portfolio and it’s a lot more about ownership and the greater the pressure, you need to pick well. But the goal is to get to a 3x net minimum for your fund by the time you get to a Fund III.
I heard from LPs with more miles on their odometer that once upon a time, it was normal for GPs to give undeployed capital back to their LPs. Circa 2002-2005 vintage funds. Where GPs don’t execute on 50% of their capital calls. But we don’t live in that era anymore. For better or worse.
Some LPs don’t even want their capital back early because then they need to pay taxes AND find another asset that compounds at the same or better rate your fund currently is. Say 25% IRR or CAGR. That’s hard. Because minus the inflated marks of the last 5 years, 25% is a hard benchmark to hit for the vast majority of funds.
So sometimes to be the best fiduciary, that means raising a small fund today (easier to return too) to set you best up for tomorrow.
The questions to ask
If you are in the midst of conversation and trying to court a large LP, do ask the following:
Have you invested in an emerging manager in the last two years? — If not, you’re unlikely to be their first. If you’re not seeing demonstrable progress from intro to partnership meeting to diligence within three meetings, move on. If they did so, 20 years ago, doesn’t count. That means investing in emerging managers is not top of mind for them.
What is your minimum check size? And how often, if ever do you deviate from it? If so, why was the last time you did so? — Multiply this number by 10. If it’s greater than your fund size, you might find more success elsewhere.
What is the typical process look like? — Find out what their process is and see if you’re progressing forward. If not, very clear they may not be interested.
(If the person you are talking to does seem to really like you) What are the questions you’re being asking in your investment committee? — Figure out the bottlenecks as soon as you can. And determine if that’s something you can solve for in the near future or not. If it’s track record, you realistically can’t.
What is the thing you hated most in the last few years? — Understand their red flags early on in the process. And cross your fingers, it’s not something that’s relevant to you or your fund. If it is, move on.
Of course, the above, while useful pre-qualifying questions, are mentioned in broad strokes. Your mileage may vary. Have there been examples of large LPs betting on small funds? Yes. But far and few in between. But don’t expect you will change many minds.
In closing
Fundraising is all about momentum and time you’re in market. You can theoretically spend six months trying to close one large LP, but your time might be better spent closing smaller checks in the beginning from people who believe in you and strong referenceable names. And if you so choose, come back to the large LP in the second half of your fundraise.
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.
The most provocative part was when she posed the question: If you need an app to make friends, is that a negative signal?
The solution, in her words, “the long term winner here is likely to be… interest-graph social networks.” Furthermore, “platforms that give people an ‘excuse’ to gather, either IRL or digitally” are immensely powerful. Where friendship is a byproduct of usage but not the main or sole purpose of being on these platforms.
I agree that dual-purposed social networks and platforms are a wonderful solution, but, and I may be biased, I don’t think it’s the only solution.
As a former power user of networking or friend apps like Shapr and Lunchclub (yes, I used an app to make friends), I’ve made some great friends via both of those platforms. But at the same time, I was an early user for both. Both had yet to be widely adopted at the time.
For Lunchclub, I was using it at a time when everything was in-person, and you only had the option to meet people on Fridays at 2PM or 5PM at either Sightglass Coffee on 7th Street or Caffe Centro in South Park in SF. The latter unfortunately closed recently. And that was it. There were no other options. I had often joked with friends that as you were meeting your friend match that week at Sightglass, you would be sitting next to the person you would match with next week AND the person sitting five feet over would be who you matched with last week. It was a tight community, even if it was an unintentionally designed community. A group of hackers, early adopters, investors, and people just doing cool things.
Then, as Lunchclub pursued scale, quality declined. And as Olivia shares in her thread above, bad actors ruined the experience altogether. The same was true for Shapr. For Clubhouse. Just to name a few.
But dating apps nailed it. They’ve reached widespread adoption. Olivia postulates it’s because they offer data points and filters that you can’t find anywhere else. For instance, who’s single. She’s right. But there’s another reason. These apps promote interest in others. Or amplifying inherent motivation to be on said apps.
Let me elaborate.
Be interesting and interested
I’ve written about the above line before. Here. And here. And likely a few other places that’s escaping my memory at the time of writing this piece.
The thing is most platforms promote being interesting. The heavy profile customizations. The ability to share your own thoughts. Platforms that incentivize you to go from a consumer to a creator. A lot of it is about me. Look at me. Look at how cool I am. How cool my life is. The strive for perfection.
How can I ever be like the person I’m following? My life is nowhere near as awesome as her/his is. Most social platforms prop users up as a point of comparison.
All that to say, there are a lot of apps that help you be interesting, but not enough that help you be interested. The latter takes work. There’s a line that Mark Susterrecently shared on a podcast, and I love it! Citing the late Zig Ziglar (which by the way, is an awesome name), Mark shared, “People don’t care how much you know until they know how much you care.”
I want to underscore that line one more time.
“People don’t care how much you know until they know how much you care.”
It’s why I love my buddy Rishi’s recent piece on how to build and maintain meaningful relationships.
In Rishi’s essay, he shares that there are three levels to doing your homework — each deeper than the last — and show that you care:
Level 1 – The Basics: LinkedIn, Common Connections, Google, and Company Website
Level 2 – Digging in: Social Media
Level 3 – Going Deep: Podcasts, Writing, YouTube et. al
The purpose isn’t to be all-encompassing, but to show that you care for the human sitting across from you. It’s the intention that matters.
The late David Rockefellerbuilt prolific Rolodexes to show that he cared. In fact, it’s cited that his handwritten notes on others stood five feet tall and accounted for 100,000 people. Alan Fleischmannonce wrote in reference to David Rockefeller that, “If you were so fortunate to be a fly on the wall for any of his countless meetings and interactions, you would hear him inquire about the smallest details of his guest’s life, from a child’s ballet recital to a parent’s recent health concern. Rockefeller’s interactions were said to be ‘transformational, never transactional.'”
And it’s also the small things that matter.
In closing
The reason why I think Lunchclub was so popular in the beginning is in two parts:
The platform reduced the friction — the back-and-forths — of scheduling. They gave you two times, and you either made it or you didn’t.
The platform’s early users were innately curious individuals. When I was invited on the platform, my friend pitched it as, “I’ve learned so much from the people I met.” And my friend was and is already one of the foremost subject-matter experts in her field. The same was true when I began using the platform. People spent more time asking questions than talking about themselves. In fact, in many conversations, it’d be a battle of who can delay talking about themselves more than the other.
People were simply interested. There was no agenda. And no agenda was the best agenda. No one was trying to peddle anything to you. No one was trying to ask you for money or intros. People were the ends in and of themselves, and not a means to an end.
All in all, while there are incredible platforms that help you build friendships through interest and hobby alignment, I do believe there is room for a friend app for the curious. Or at least to help you be a really good friend.
So if you’re building something there, ring me up. That said, no matter how great technology is, with AI and all, every great relationship still needs that human touch. AI and platforms and apps might be able to get you 90% of the way there. But if you don’t complete that last 10% trek, 90% is still incomplete. For those of you reading who are American football fans, running the ball 90 yards from one endzone is still an incomplete. It’s still not a touchdown. You need to run the full 100.
If there’s anything to take away from this blogpost, it’s to be both interesting AND interested. Emphasis on the latter.
And in case you’re curious as to how I approach caring, these might be helpful starting points:
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.
In one of the recent All-In podcast episodes, Bill Gurley shared that both VCs and LPs aren’t marking down their portfolios. For GPs, inflated numbers helps you raise the next fund. For LPs, they’re given their “bonus on paper marks. So, they don’t have an incentive to dial around to their GPs and say, ‘Get their marks right.’ ‘Cause it’s actually going to reflect poorly on them if they were to roll those up.”
The last few years, enterprise value has been largely based on multiple expansion. The truth is we’re not going to see much of it in the incoming years. Even AI that’s exploding right now will see a contraction of their multiples in due time.
Companies that should not be in business today will see their ultimatum too in the next few years. Hunter Walk recently wrote “they’re 2017-2021’s normal failures clustered into current times.”
So, while some GPs do pre-emptively mark down their portfolio by 25-30% — we’re seeing this behavior more so in pre-seed and seed funds — the only people in this whole dance that are incented to mark down portfolios are new LPs trying to figure out if they want to commit to a new fund.
And while the advice applies to newer VCs, the same is true for experienced investors. Of course, most investors aim to be in the upper right-hand corner, but that’s really, really hard. In truth, most notable investors fall in two cohorts: marketers and tastemakers.
Marketers:
Share a high volume of deal flow,
Lower quality opportunities,
Have relatively low conviction on each deal compared to their counterparts, the tastemakers,
Have comparatively diversified portfolios,
And could have adverse effects on branding and positioning in the market.
Tastemakers, on the other hand:
Share a lower volume of deals,
Usually higher quality opportunities,
Higher conviction per deal,
Have comparatively more concentrated portfolios.
And the downside may simply be the fact that their volume may not warrant raising a fund around, and might be better off as an opportunistic investor.
And speaking of concentrated versus diversified, the interesting thing, as Samir Kaji shared on his recent podcast episode, is that “at 85 companies [in the portfolio], you had over 90% chance of getting a 2X. But a very low chance at getting anything above a 3X. And with smaller portfolio sizes [between 15-25 companies], there was much higher variance — both on the top and bottom. Higher chance that you perform worse than the median. But a much higher chance of being in the top quartile and even beyond that, in the top decile.”
It’s also so hard to tell what high quality companies look like before the liquidation event. Naturally, high quality funds are even harder to tell before the fund term. It’s ’cause of that that a few LPs and I wrote the post last week on early DPI. But I digress. At the end of the day, many, for better or worse, use valuation and markups as a proxy for quality.
But really, the last week’s valuation in this week’s market environment. Rather than chasing an arbitrary number, a lot more LPs when evaluating net new fund investments, and GPs making net new startup investments, care about the quality of the businesses they invest in. It’s not about the unicorns; it’s about the centaurs. The $100M annualized revenue businesses.
Samir Kaji’s words in 2022 ring true then as they do today. “Mark-downs of prior vintages are starting to occur but will take some time given valuation and reporting lags.” We’re still seeing many who have yet to go back to market. As many say, the flat round is the new up round. But until folks go back to market, there are many who won’t jump the gun in writing down their portfolio. But they are cautioning themselves, so that hopefully they won’t make the same mistakes again. The goalposts have changed.
I’m reminded of Henry McCance’s words channeled through Chris Douvos. “When an asset class works well, capital is expensive and time is cheap. What we saw in the bubble was that capital got cheap and time got expensive.”
We’re now back at a time when capital is expensive and time is cheap.
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.
Some of you reading here are busy, so we’ll keep this top part brief, as an abstract sharing our top three observations of leading fund managers.
Generally speaking, don’t sell your fast growing winners early.
Except when…
Selling on your way up may not be a crazy idea.
You might sell when you want to lock in DPI. Don’t sell more than 20% of your fund’s positions unless you are locking in meaningful DPI for your fund. For instance, at each point in time, something that’s greater than 0.5X, 1X, 2X, or 3X of your fund size.
You might consider selling when you’ve lost conviction. Consider selling a position when you feel the market has over-priced the actual value, or even up to 100% if you’ve lost conviction.
You might consider selling when one is growing slower than your target IRR. If companies are growing slower and even only as fast as your target IRR, consider selling if not at too much of a discount (Note: there may be some political and/or signaling issues to consider here as well. But will save the topic of signaling for another blog post).
Do note that the above are not hard and fast rules. Every decision should be made in context to other moving variables. And that the numbers below are tailored to early-stage funds.
Net TVPI Benchmarks from Years 5-15Net DPI Benchmarks from Years 5-15
Let’s go deeper…
On a cloudless Friday morning, basking in the morning glory of Los Altos, between lattes and croissants, between two nerds (or one of whom might identify as a geek more than a nerd), we pondered one question:
Everyone seems to have a financial model for when and how to invest, but part of being a fiduciary of capital is also knowing when to distribute – when to sell. When RVPI turns into DPI. And we haven’t seen many models for selling yet. At least none have surfaced publicly or privately for us. The best thought piece we’ve seen in the space has been Fred Wilson’s Taking Money “Off the Table”. At USV, they “typically seek to liquidate somewhere between 10% and 30% of our position in these pre-IPO liquidity transactions. Doing so allows us to hold onto the balance while de-risking the entire investment.”
As such, it gave birth to a thought… What if selling was more of a science?
What would that look like?
Between two Daves, it was not the Dave with sneakers and a baseball cap and with the profound disregard to healthy diets, given the fat slab of bacon in his croissan’wich, who had the answer there.
“To start off, in a concentrated portfolio of 30 investments, a fund returner is a 30x investment. For a 50-investment fund, it’s 50x. And while hitting the 0.5x DPI milestone by years 5-8, and a 2x DPI milestone by years 8-12, is the sign of a great fund, you shouldn’t think about selling much of your TVPI for DPI unless or until your TVPI is starting to exceed 2-3x.” Which seems to corroborate quite well with Chamath Palihapitiya’s findings that funds between 2010 and 2020 convert have, on average, converted about 25% of their TVPI to DPI.
“Moreover, usually you shouldn’t be selling more than 20% of the portfolio at one time (unless you’re locking in / have already locked in 3X or more DPI). You should be dollar-cost averaging – ensuring time diversity – on the way out as well. AND usually only if a company that’s UNDER-growing or OVER-valued compared to the rest of your portfolio. Say your portfolio is growing at 30% year-over-year, but an individual asset is growing slower at only 10-20% OR you believe it is overvalued, that’s when you think about taking cash off the table. Sell part (or even all) of your stake, if selling returns a meaningful DPI for the fund, and if you’re not capping too upside in exchange for locking in a floor.”
Meaningful DPI, admittedly, does mean different benchmarks for different kinds of LPs. For some, that may mean 0.25X. For others that may mean north of 0.5X or 1X.
“On the other hand, if a company is outperforming / outgrowing the rest of the portfolio, generally hold on to it and don’t sell more than 10-20% (again, unless you’re locking in meaningful DPI, or perhaps if it’s so large that it has become a concentration risk).”
I will caveat that there is great merit in its counterpart as well. Selling early is by definition capping your upside. If you believe an asset is reaching its terminal value, that’s fine, but do be aware of signaling risk as well. The latter may end up being an unintended, but self-fulfilling prophecy.
So, it begged the question: Under the assumption that funds are 15-year funds, what is meaningful DPI? TVPI? At the 5-year mark? 7.5 years in? 10 years? And 12.5 years?
The truth is the only opportunities to sell come from the best companies in your portfolio. And probably the companies, if anything, you should be holding on to. By selling early, you are capping your downside, but at the same time capping your upside on the entire portfolio. When the opportunity arises to lock in some DPI, it’s worth considering the top 3-5 positions in your fund. For instance, if your #2 company is growing quickly, you may not be capping the upside as much.
Do keep in mind that sometimes it’s hard to fully conceptualize the value of compounding. As one of my favorite LPs reminded me, if an asset is growing 35% year-over-year, the last 20% of the time produces 56% of the return. Or if an asset is growing 25% YoY, if you sell 20% earlier (assuming 12 year time horizons), you’re missing out on 45% of the upside.
As a GP, you need to figure out if you’re IRR or multiple focused. Locking in early DPI means your IRR will look great, but your overall fund multiple may suffer.
As an LP, that also means if the gains are taxable (meaning they don’t qualify for QSBS or are sold before QSBS kick in), you need to pay taxes AND find another asset that’s compounding at a similar or better rate. As Howard Marks puts it, you need to find another investment with “superior risk-adjusted prospective returns.”
And so began the search for not just moolah in da coolah, but how much moolah in da coolah is good moolah in da coolah? And how much is great?
Net TVPI Benchmarks from Years 5-15Net DPI Benchmarks from Years 5-15
Some caveats
Of course, if you’ve been around the block for a minute, you know that no numbers can be held in isolation to others. No facts, no data points alienated from the rest.
Some reasons why early DPI may not hold as much weight:
Early acqui-hires. Usually not a meaningful DPI and a small, small fraction of the fund.
There’s a possibility this may be the case for some 2020-2021 vintages, as a meaningful proportion of their portfolio companies exit small but early.
In other words, DPI is constructed of small, but many exits, rather than a meaningful few exits.
TVPI is less than 2-3x of DPI, only a few years into the fund. In other words, their overall portfolio may not be doing too hot. Obviously, the later the fund is to its term, the more TVPI and DPI are alike.
As a believer in the power law, if on average it takes an outlier 8 years to emerge AND the small percentage of winners in the portfolio drive your return, your DPI will look dramatically different in year 5 versus 10. For pre-seed and seed funds, it’s fair to assume half (or more) companies go to zero within the first 3-5 years. And in 10 years, more than 80% of your portfolio value comes from less than 20% of your companies. Hell, it might even be 90% of your portfolio value comes from 10% of your companies. In other words, the power law.
GPs invested in good quality businesses. Some businesses may not receive markups, but may be profitable already, or growing consistently year-over-year that they don’t need to raise another round any time soon.
Additionally, if you haven’t been in the investing game for long, persistence of track record, duration, and TVPI may matter more in your pitch. If you’ve been around the block, IRR and DPI will matter more.
As the great Charlie Munger once said, “selling for market-timing purposes actually gives an investor two ways to be wrong: the decline may or may not occur, and if it does, you’ll have to figure out when the time is right to go back in.” For private market investors, unless you can buy secondaries, you’ll never have a time to go back in until the public offering. As such, it is a one-way door decision.
Some LPs are going to boast better portfolios, and we do admit there will be a few with portfolios better than the above “benchmarks.” And if so, that’s a reason to be proud. In terms of weighting, as a proponent of the power law, there is a high likelihood that we’ve underestimated the percent of crap and meh investments, and overestimated the percent of great investments in an LP’s portfolio. That said, that does leave room for epic fund investments that are outliers by definition.
We do admit that, really, any attempt to create a reference point for fund data before results speak for themselves is going to be met with disagreement. But we also understand that it is in the discourse, will we find ourselves inching closer to something that will help us sleep better at night.
One more caveat for angels… The truth is as an angel, none of the above really matter all that much. You’re not a fiduciary of anyone else’s capital. And your time horizons most likely look different than a fund’s. It’s all yours. So it’s not about capping your downside, but more so about capping your regret. In other words, a regret minimization framework (aka, “spouse regret/yelling minimization insurance”).
That will be so unique to you that there is no amount of cajoling that we could do here to tell you otherwise. And that your liquidity timelines are only really constrained by your own liquidity demands.. For instance, buying a new home, sending kids to college, or taking care of your parents (or YOU!) in their old age.
But I do think the above is a useful exercise to think through selling if you had a fund. You would probably break it down more from a bottoms up perspective. What is your average check size? Do you plan to have a concentrated portfolio of sub-30 investments? Or more? Do you plan to follow on? How much if so? And that is your fund size.
In closing
Returning above a 3x DPI is tough. Don’t take our words for it. Even looking at the data, only 12.5% of funds return over a 3x DPI. And only 2.5% return three times their capital back on more than 2 separate funds.
In the power law game we play, as Michael Mauboussin once said, “A lesson inherent in any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters.” Most will return zero, or as Jake Kupperman points out: More than 50%.
But it’s in the outliers that return meaningful DPI, not the rest. Not the acqui-hire nor really that liquidation preference on that small acquisition.
At the end of the day, the goal isn’t for any of the above to be anyone’s Bible, but that it’d start a conversation about how people look at early returns. If there is any new data points that are brought up as a result of this blogpost, I’ll do my best to update this thread post-publication.
Big thank you to Dave McClure for inspiring and collaborating on this piece, and to Eric Woo and all our LP friends who’ve helped with the many revisions, sharing data, edits, language and more. Note: Many of our LP friends chose to stay anonymous but have been super helpful in putting this together.
Footnotes
For the purpose of this piece, we know that “good” and “great”, in fact all of the superlative adjectives, are amorphous goalposts. And those words may mean different things to different people. This blogpost isn’t meant to establish a universal truth, but rather serve as a useful reference point for both LPs, looking for “benchmarking” data, and GPs to know where they stand. For the latter, if your metrics do fall in the “good” to “great” range, they’re definitely worth bragging about.
And so with that long preamble, in the piece above, we defined “good” as top quartile, and “great” as top decile. “Good” as a number on its own, enough for an LP to engage in a conversation with you. And “great” as a number that’ll make LPs running to your doorstep. Or at least to the best of our portfolios, leveraging both publicly reported and polled numbers as well as our own.
Our numbers above are also our best attempt in predicting steady state returns, divorcing ourselves from the bull rush of the last 3-5 vintage years. As such, we understand there are some LPs that prefer to do vintage benchmarking, as opposed to steady state benchmarking. And this blogpost, while it has touched on it, did not focus on the former’s numbers.
EDIT (Aug 18, 2023): Have gotten a few questions about where’s the data coming from. The above numbers in the Net DPI and Net TVPI charts are benchmarks the LPs and I agreed on after looking into our own anecdotal portfolios (some spanning 20+ years of data), as well as referencing Cambridge data. These numbers are not the end-all-be-all, and your mileage as an LP may very much vary depending on your portfolio construction. But rather than be the Bible of DPI/TVPI metrics, the purpose of the above is give rough reference points (in reference to our own portfolios + public data) for those who don’t have any reference points.
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.
