I was grabbing lunch with my buddy Rahul the other day. And we were talking about how frickin’ tough it was for us to become proficient at our respective sport. Tennis for him. Swimming for me. On one hand, both of us wish it were easier. That he could pick up the racket for the first time, and win matches without breaking a sweat. That I could execute a perfect dive and a sub-20-second 50-sprint with just six months of practice. But the truth is neither of us could. We had select teammates who could though.
I remember one teammate who was two years older than I was. 14 to be exact. He swam with us for two months with no formal training prior, then went to his first competition. Broke 30 seconds for 50-yard freestyle in that very first race. A few months later, broke 25-seconds. In his first year, he never lost a sprint. It got to a point that while the rest of us were swimming six days a week. 2-4 hours a day. He swam with us twice, at best thrice a week. And he still won.
Was I envious? Hell ya. No doubt about it.
It wasn’t till later that year, where he was competing in meets a step above Junior Olympics — Far Western to be specific — that he lost his first race. Then at the next one again. Then again. And the guy broke. He took his anger out on the rest of us. Beat some folks up as well. Just, give or take, 18 months after he had started, he quit. I never saw him again.
Had he stuck with the sport, I’m confident he would have been one of the best. Some people do have the genetic disposition to do well in a certain craft. They won the genetic lottery. And I’m really happy for them. If you do have it, you should definitely lean into it. Why waste the free bingo tile you’ve been given?
Circling back from earlier… on the other hand, Rahul and I are both glad it took a shitload of effort to actually win for the first time. And even more the second time. Then the third. Which by the way, really fucking sucked. I once beat the shit out of a wall in my parents’ home with my bare knuckles ’cause I was so frustrated at plateauing. Much to my parents’ horror.
But it made us better people. We are the sum of all our mistakes. The sum of all our blood, sweat and tears.
The last few months I’ve been lucky to be a part of conversations about the intersection of AI and investing. So many funds we see have built out AI screening tools, automated email management, and memo creation. Some LPs too. The latter is few and far in between. And there were multiple discussions from senior LPs and GPs that they became the investor they were today because they did the work of putting together the memos and hunting down references and details. That they made mistakes, but learned quickly why certain mistakes were worse than others. Some miscalculations were more egregious than others. That they were scolded. Some fired. The younger generation may not have the same scrutiny. And with AI, they might not fully understand why they need to do certain things other than tell AI to put together a memo.
Similarly, so many companies are building things incredibly quickly. Vibe coded overnight. They’re getting to distribution faster than any other era of innovation. It’s not uncommon we’re seeing solid 7-figure revenues in year one of the company. Annual curiosity revenue from corporates is real. Likely temporary, but real. And it’s created a generation of puffed chests. Founders and investors, not prepared for the soon-to-come rude awakening.
As first-check investors, we bet on the human being. We bet on not only the individual’s vision, but all the baggage and wherewithal that comes with it. We bet on the individual’s ability to endure. Because unless we see a mass market of overnight acqui-hires for companies younger than three years, our returns are generated in years 9-15. The long term. And shit will hit the fan.
AI is amazing in so many ways. But it has made it harder to underwrite willpower.
I’m not a religious person. But a line I really like from my friends who are Christian in faith is, “Don’t pray for an easy life. Pray for the strength and courage to overcome a hard life.”
Years ago, a friend of mine told me that famous people live one of two lives. A life to envy. Or a life to respect. A life to envy is one where that individual gets things handed to them on a silver platter. They got everything in life they asked for. Rich kids with rich parents oftentimes. A lot of people would love to have lived that person’s life. A life to respect is one where the individual goes through trials by fire and eventually came out on top. They’re riddled with scars. And while many people would want to be in that person’s shoes today, they wouldn’t want to have lived the life that individual lived.
As investors, we bias towards people who have gone through the latter or is capable of going through the latter.
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 these sorts of things that are quite frankly boring, monotonous, tedious, unglamorous, or not sexy, they are the sorts of things that can make or break whether a fund is good or not. Because you can be a great investor, but if the experience of the LP is awful, it doesn’t matter how good the fund is.
“Ultimately, somebody’s got to deal with you. They’ve probably got people to report to themselves. If you’re giving them a headache because you can’t do the aspects of it, then that’s where you’re going to lose LP appetite. That can tell apart who sees themselves as an investor and who sees themselves as a fund manager.” – Nicky Sugarman
Nicky Sugarman is a highly sought after advisor to both family offices and venture investors. Prior, he was also a partner at Stanhope, a $40B multi family office, running their private equity and venture practices. Moreover he, along with Jonathan Hollis at Mountside Ventures, launched the program for the emerging manager to learn the institutional lens.
[00:00] Intro [02:36] Nicky and LEGOs [05:24] LEGOs or cars [05:59] What Nicky’s dad taught Nicky [06:45] Why does the world need another fund accelerator? [08:35] The curriculum at the fund accelerator [10:21] The difference between a fund manager and investor [12:04] Thoughtful examples to the previous question [14:12] Diligence vs stalking [16:29] Nicky’s most used app [17:28] Why are mega cap funds necessary? [21:21] Why VC becoming PE is inevitable [24:48] The best types of LPs for multi-asset portfolios [26:33] Why do LPs speak in IRR, not multiples? [29:06] Understanding a GP’s valuation policy [33:46] Communicating news from GPs to LPs [36:03] How does Nicky know if a GP is in for the long haul? [38:33] Nicky’s favorite answers to how a firm scales [39:48] First critical hires at a VC firm [40:45] Ideal traits of a VC COO [41:38] How much should a good COO get paid? [42:50] Should people get paid at the 50th percentile? [45:28] How much should GPs pay themselves? [48:30] The one what-if that keeps Nicky up at night
“All these sorts of things that are quite frankly boring, monotonous, tedious, unglamorous, or not sexy, they are the sorts of things that can make or break whether a fund is good or not. Because you can be a great investor, but if the experience of the LP is awful, it doesn’t matter how good the fund is. Ultimately, somebody’s got to deal with you. They’ve probably got people to report to themselves. If you’re giving them a headache because you can’t do the aspects of it, then that’s where you’re going to lose LP appetite. […] That can tell apart who sees themselves as an investor and who sees themselves as a fund manager.” – Nicky Sugarman
On GPs answering questions on operational excellence… “The best answer I could ask from a GP is for them to be super honest and say, ‘These are the people I’ve leaned on to help me understand what best practices look like.’” – Nicky Sugarman
As an LP… “If you’re hearing [your portfolio news] in the news first, that’s a bad sign.” – Nicky Sugarman
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.
One of my favorite things to do is collabing with friends on content. Especially on topics not covered well or ever publicly, but should. My buddy Ben is one of those rare souls I never hesitate to collab with. Be it through the podcast or our first joint piece together on underwriting the risks of investing in emerging managers below.
Ben and I were messaging in Whatsapp the other day debating the risks of investing in a particular early-stage venture fund. After going back and forth laying out our thinking we had the bright idea to create a short post laying out which ones were important to us and to give a chance for other allocators to weigh in. This post is the result of that idea plus about 300 more Whatsapp messages. We hope you enjoy it, and take the opportunity to debate with us.
As an allocator, risk is the one word you can never run away from. You have to define it, price it against the relevant upside and recognize that it is always there, lurking in every opportunity.
As we are not traditional allocators, and instead choose to back the riskiest sub section of the riskiest sub section of asset classes: early stage emerging venture capital managers, evaluating risk is probably the single most important part of our job.
All day, we talk with people who want to raise a venture fund, to go invest in companies changing the world, to fund innovators — to fund individuals and ideas that can’t be reduced to a single sentence, who will redefine life as we know it, and to many, will seem crazy. In short, we back people who can’t stand the fact that someone else might be able to make the world a better place better than them.
But, when you’re doing a job that is about mitigating risk, and you’re also trying to invest in world changing technology, by definition you’re taking a risk on approach. You have to have a pretty nuanced and thorough view on the topic.
So, as you might’ve guessed after we said the word “risk” 7 times before you found yourself here, this is our piece on how to define the risk of investing in venture capital emerging managers. Hopefully, you get to learn a little more about how we think:
Operational Risk:
This risk can be summarized as the things unrelated to investing, which can impact the ultimate DPI number.
Operating a fund is a distinctly different animal than other businesses. There are easy mistakes that drive the amount of investible capital down, liability up, and make DPI harder and harder to reach. Picking the right legal team (shout out to Sam at Pilsbury for setting the standard here), admin, bank account, and setting the right internal spending policies are all crucial.
The smaller the team, the more operationally inexperienced people are, the greater this risk. Do they know how to structure capital calls? Do they have an information and cybersecurity policy set up? If applicable, do they know how to warehouse their prior deals? How about QSBS structures? Do they know that SAFEs don’t kickstart the QSBS countdown and only priced rounds do?
If the GP(s) are planning to hire an associate or an operations person, do they know how to set that individual up for success? Or are they merely outsourcing what they don’t want to do? In fact, there are a surprising number of investors who spin out of their prior shop who realize the operational complexity for the first time. And without a good back office team, the investible capital can slowly be eaten away. As one of our mutual friends, Ashby Monk once said, “The difference between net and gross return is your investment in the organization.”
Vintage Risk:
This can be summarized as: in the next 2-4 years, can this person actually get into the best deals in their area?
We often see angel investing track records shown as a proxy for fund investing track record. However, these are two totally different functions/ . Returns from part time angel investing is a result of choosing the best deals where you have allocation. However, funds have fixed deployments and timelines. This means you HAVE to allocate, you can’t just wait until a deal you like is offered to you. It’s like switching from a gatherer mindset to a hunter mindset. You have to go out and find the very best deals, or else you’re going to go hungry.
Win-Rate Risk:
Most emerging GPs start in one of two areas:
Operator angel
Spinout/career VC
Yes, there are others, and you can cross-apply a similar framework for them, but for the purpose of this piece, we’ll focus on these two.
As an angel, everyone loves you. You’re a small check. Everyone else who’s participating wins their ownership targets. The lead. The 1-2 sub-anchors. And there’s often still room for others. But as you now have a fund, even a small one writing $100-250K checks, you will eventually want to invest in a round that has capacity constraints You are now asking a founder to make a choice: Do they want your check or are others more valuable than you are in the longer term?
Additionally, with how the markets are changing now, large multi-stage funds are taking as much ownership as they can to make their economic models work. There is an uncanny valley appearing, with everyone between the lead investor and really small, strategic angel checks getting squeezed out of the round. And as an emerging fund manager, you now have to not only win the favor of the founders but also not draw the ire of the lead.
As a spinout, the question looms: Was a GP successful because of the team/brand at her last firm? Or was the firm successful because of her? Here, deal attribution really matters. Not only who got the deal over the finish line, but also who was most valuable – customer introductions, talent, hiring needs, downstream capital introductions, syndicating valuable supporters on the cap table, etc. – post-investment. Even better, if it was pre-investment.
It’s also worth noting that win-rate risk exists both at the time of the initial check, as well as the pro-rata check. And as such, should be evaluated separate from each other. The initial check is what we talked about above. The follow-on check is a function of are you valuable even after the initial investment was made.
Yes, pro rata or right of first refusal is usually a legal right, but if you’ve been in venture long enough, you’ll know those rights aren’t enough. Large and/or downstream investors will almost always force you to give up your pro rata. And it’s the GP’s job to provide immense value, make sure the founders know and are willing to fight for you, and be able to prove to later-stage investors that you can still be valuable later.1
Team Risk:
This can be summarized as: is this the right GP(s) for the right strategy?
Do these GPs really get the space? Does their past make this thesis painfully obvious? We’re looking for deep specialized expertise and a strategy that actually fits. If they’re concentrating, can they actually get into the best deals? That means founders need to want them in the round. Beyond that, do they have the right skillset from sourcing to closing? Red flags pop up when a team is running concentrated without the ability to win allocation, doesn’t really understand why founders win, or just lacks the diligence ability.
The other dimension of this risk is whether the GP is solo or part of a team. While it’s easy to see the risk involved from the perspective of a solo GP (e.g. what if this person gets hit by a bus?), teams may introduce more risk. With each N increase in a team, you are introducing N2 amount of process before making an investment. You are also introducing interpersonal dynamics around investment decision making. Also, the key-person risk doesn’t necessarily go down either. What happens if a team of two that compliment each other breaks up? Did adding that second person really do anything to lower the risk? We have seen teams work, and Solo GPs work well. The key is to not rely on maxims here that one is better than the other.
Sector Risk
This can be summarized as: do we think this sector has enough high density talent to support a VC strategy?
Exceptional outcomes need exceptional people. It’s not enough for a sector to just be “hot.” We need to see high-density talent flocking to it. That means tracking where the very best minds are going – whether that’s looking at top colleges, prior professional successes, or other ways to measure talent. If the talent pool isn’t there, you simply won’t find the people capable of building the companies that drive fund returns.
Downstream Capital/Graduation Rate Risk:
Related to sector risk, but worth explicitly defining, is there immediate downstream capital for a fund’s portfolio companies? Many hard industries – for instance, life sciences, hardware, energy, just to name a few – don’t have obvious players who would immediately lead the next round. In these specific instances strategics tend to be the biggest players, but they are more opportunistic..
The GP needs to actively spend time helping larger, later-stage investors understand the value of their sector and their portfolio companies or inject enough capital in their portfolio companies until they become obvious for everyone else. In these cases, it helps to know that the GPs are actively strengthening relationships with larger pools of capital, and specific partners , as well as having decision makers involved either as individual LPs or via their fund of funds.
The loss ratio in venture is much higher than other asset classes2. It’s not surprising that 50% of the portfolio dies. But being able to graduate at least a third of your portfolio to the next stage is the bare minimum. We do want to caveat that this is the bare minimum. Anything north of 50% is great, excluding the 2020-early 2022 vintages, where everything was getting funded.
Market Size Risk
This can be summarized as: is the focus of the GP big enough to generate multiple billion dollar+ outcomes.
We’re looking for funds that can 5x. That means the company outcomes need to be massive. So, you need to be in a space with room to grow. Are there enough potential buyers to support huge valuations? Is there enough investor demand to keep fueling that growth? Think about it this way: you could be the best fax machine investor in the world, but even if every business had one, the market’s just too small to generate those billion-dollar exits needed for fund-level returns.
Decade Risk:
This can be summarized as: does this fund have the staying power to be an exceptional team a decade from now.
It all comes down to the “why.” Why are these GPs doing this? Do they see themselves building something generational? They don’t need to be the next Founders Fund, but what’s incentivizing them to stick around for the long haul and keep pushing for those top-tier returns?
Are they getting rich on fees or carry? Are they aware how fees can compound in the future? What will keep them going 2 years from now? 5 years from now? 10 years from now?
When they’re financially successful already, why bother? What has historically kept them motivated?
Financial Security Risk:
Will they struggle to put dinner on the dinner table with their current fund size? Does that mean they’ll be distracted from doing their absolute best on delivering the best returns for us, the LPs and supporting the best founders to win?
We never want someone distracted from doing their life’s work. If they’re all in, we want to make sure they can go all in. Now and into the future.
Similarly, is this a part-time hustle? Do they have a main gig? What is their current list of priorities?
In Conclusion
The goal here isn’t that every GP has to address every risk. There are some, where we as LPs can help mitigate. There are others that are outside of our control. The goal is to figure out what the risks3 are, how the GP is controlling for them and what the ultimate upside is, before we write a check.
This is one area where we use different heuristics: – David’s rough litmus test is that a GP who wants to grow their fund to a firm must be able to prove value to a portfolio company for at least 4 years after the initial check. – Ben’s take is looking at the super power, or one thing that GP can deliver to a founder better than anyone else in the near term.
All this to say, the real work begins after the investment. ↩︎
Loss ratio is a topic that is sensitive in venture. It matters more the later you go, and anything under like 90% can still lead to a tremendous seed fund. We decided to include it here as it is a risk, just take it with a grain of salt as you read the next few lines. ↩︎
And we’ve now said the word “risk” 30 times. Oops, 31. ↩︎
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!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“Buying junk at a discount is still junk.” – Abe Finkelstein
Abe Finkelstein, Managing Partner at Vintage, has been leading fund, secondary, and growth stage investments focused on fintech, gaming, and SMB software, among others, leading growth stage and secondary investments for Vintage in companies like Monday.com, Minute Media, Payoneer, MoonActive and Honeybook.
Prior to joining Vintage in 2003, Abe was an equity analyst with Goldman Sachs, covering Israel-based technology companies in a wide variety of sectors, including software, telecom equipment, networking, semiconductors, and satellite communications. While at Goldman Sachs, Abe, and the Israel team were highly ranked by both Thomson Extel and Institutional Investor. Prior to Goldman Sachs, Abe was Vice-President at U.S. Bancorp Piper Jaffray, where he helped launch and led the firm’s Israel technology shares institutional sales effort. Before joining Piper, he was an Associate at Brown Brothers Harriman, covering the enterprise software and internet sectors. Abe began his career at Josephthal, Lyon, and Ross, joining one of the first research teams focused exclusively on Israel-based companies.
Abe graduated Magna Cum Laude from the Wharton School at the University of Pennsylvania with a BS in Economics and a concentration in Finance.
Vintage Investment Partners is a global venture platform managing ~$4 billion across venture Fund of Funds, Secondary Funds, and Growth-Stage Funds focused on venture in the U.S., Europe, Israel, and Canada. Vintage is invested in many of the world’s leading venture funds and growth-stage tech startups striving to make a lasting impact on the world and has exposure directly and indirectly to over 6,000 technology companies.
[00:00] Intro [03:18] Abe’s first investment [06:19] The definition of quality secondaries in 2003 [09:37] How did Abe know there would be capital to follow? [15:45] Valuation methodology in the 2000s [22:28] Minimum meaningful ownership for secondaries [26:17] Why did founders take Vintage’s call in Fund I? [30:41] The old-school way of tracking deal memos [32:06] Our job is to play the optimist [32:31] The headwinds of raising Vintage Fund I [36:32] Moving Vintage’s physical books to the cloud [39:06] How does Abe assign discounts to secondaries? [42:23] Proactive outreach vs reactive deal flow [46:18] What does Vintage do to stay top of mind? [49:49] What’s changed in the secondaries market since 2000? [55:32] Founder paranoia [57:56] What does Abe want his legacy look like?
“Buying junk at a discount is still junk.” – Abe Finkelstein
“Everything that’s going on in the market today, I actually feel people are overreacting to it because there are these ups and downs. Hopefully this current situation doesn’t get people too freaked out because these are the times you want to be investing in. People just don’t think that way. They see the blood on the streets and they run from it first, instead of going in.” – Abe Finkelstein
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.
Two friends independently pinged me for my reaction to two recentsocial posts while I was on vacation, and I felt so strongly about the below that I had to:
Respond to both of my friends while I was out, and
Write this blogpost after.
Caveat: I don’t tend to write time-and-place ephemeral blogposts, usually evergreen ones, but I feel this topic has been the soup du jour for the last few months, and I need to get it off my chest. I still think a lot of what I write below will stand the test of time, but some parts may not age as well five years from now.
I agree with most of what’s said. 99% of people don’t truly understand venture. They see one of two polar extremes. Either it’s the thing that will make them rich and it’s all amazing or it’s overhyped and way too risky. They’re both right and wrong at the same time. In the context of those investing in VC funds, most individuals and new LPs see venture through rose-tinted lens.
That said, what the world needs isn’t ‘do this’ or ‘don’t do this,’ but why and how. That requires education. Not an oversimplification of ‘VC good’ or ‘VC bad.’ There’s a lack of unbiased education right now, but public discussions of such is step one. We need to put illiquidity into perspective. Yes, it’s 17+ years. That’s 4, going on 5, Summer Olympics. Or one and a half zodiacs. That’s another 2-4 American presidents. And that’s over 50 Marvel movies and 34+ Marvel TV series, assuming they stay on pace with what they’ve been putting out in the last 2 years. That’s a long frickin’ time. Time enough for you to have a baby AND send them off to college before you get all the money gained back.
Illiquidity is also at an all-time high. Lots of funds are long in the tooth. LP expectations used to be 10+2. Fancy lingo for 10-year funds with 2-year extensions, opportunistically. Now that companies are staying private for 10-12 years, instead of the old 7-8 years, funds are now 10+2+2. In other words, 10-year funds, with a 2-year extension by GP decision, and another 2 years by LP advisory committee majority vote. But really, it’s starting to become 10+2+2+1+… You can guess where the rest of the numbers come from.
Secondaries are only really popular among the marquee names. For instance, SpaceX, Anduril, Stripe, and so on as of now. Everything else is sold at a discount. Which, 30-50% seem normal. But if a company has raised their last round pre-2021, I’ve seen 60-80% discounts.
GPs are also now expected to actively understand and manage exits. Most GPs don’t know how to. And neither are exits in venture a classically-trained subject. Before it was primarily, IPOs and M&As. Now, this includes secondaries. Ask GPs about their exit strategies. It doesn’t have to be foolproof, but they better have thought of it. And compare what they say to what their best-in-class private equity counterparts say. If there’s a lack of intentionality in the former, things may get really tough in the future.
Venture, sure as hell, is opaque. 75% of VC managers will tell you their top quartile. Who’s right? Who’s wrong? Samir Kaji recently wrote something that rings increasingly true today: “People forget that quartile rankings in VC never account or adjust for valuation methodologies used by the Gps in the sample set.”
People forget that quartile rankings in VC never account or adjust for valuation methodologies used by the Gps in the sample set. I just ran into two GPs.
1) One was very aggressive in marks, even when the last round was a SAFE and years ago.
Some GPs are liberal with their marks. Marks that put them in the best light. Some even accounting SAFEs as markups, which is bad practice. Pretty sure illegal too, but many new first-time GPs aren’t even aware of it. All that to say, in the first first 5-6 years of a fund, when nothing is noticeably obvious yet, it’s easy to game numbers.
And even if a GP is in the top quartile, top quartile in VC sucks. Ok, it’s not THAT bad. Median definitely sucks in venture though. It’s really not worth putting money in an average VC. But you can put your money in the S&P 500 or the NASDAQ for the same vintage. Dollar-cost average in, once a year in the first four years. And hold it till Year 10. And in many vintages, your public indices will be between a 3X and 4X. Which is as good as most top quartile vintages. If not, it’ll only lag slightly, ever so slightly, behind. Which is a small price to pay for being a liquid asset. If you’re an LP in VC funds, out of thousands of funds, you need to be in the top 20 funds per vintage. Hands down. Not top quartile. And arguably top decile may not even cut it.
And the truth is, just by the numbers, most individuals and new LPs won’t have good access. When your mom, your cousin, that one drunk uncle from Thanksgiving, are all starting their own VC funds, we now and will continue to live in a world where knowing a VC will be as common as knowing someone who wants to start their own company. Whatever that may be. And to have a chance to be good at VC, the average VC must have both a non-redundant AND an economically important network AND knowledge advantage, to borrow a framework that Albert Azout recently said on my podcast. Most do not. Most will fail to compete with the super-scale firms. If you haven’t checked out Gib Dilner’s recent recording on kinds of firms in the ecosystem today, I highly recommend it.
What kinds of networks GPs need to be competitive in today’s market?
The truth is most large funds who will cannibalize smaller emerging managers don’t send their good deals to emerging managers. Although emerging managers do send their best deals to the large funds. Looks good for markups. Looks good at the annual meeting when they present to you. But clearly, this dynamic is unrequited. As such, it’s why I believe as an LP, you need to be in managers who go really, really early, where the large firms still cannot access or priced out of accessing. Managers who extend their thesis so that the net new checks coming out of their funds include seed and Series A (unless they can actively lead this and the next round):
Lose out on access above a $250K check. These days, even above a $100K check. Because large funds want the whole round. It’s how they can make their economics work.
Don’t have the war chest to provide the capital to founders so that they can weather the market. That said, a good friend of mine, Henry, created the Lean AI Leaderboard. It’s a great dashboard for companies who get to profitability with a lean team and often very little in external capital. And if they do, these companies are seed-strapped, meaning they raise a seed round with the goal of never raising another round again. For investors in these companies, the good news is that they retain most of their equity from entry. The bad news is that unless these companies have a clear exit path, your money as an LP doesn’t go anywhere. More so, most of the VCs investing invest on SAFE notes, with no maturity dates. On paper, revenue is up, but no markups and no exit path. After the $100M range, there are very few companies who would acquire any of these small players, especially after the AI craze. That said, it’s too early to tell. And I’m not sure I have the fortune cookie to tell you what happens next.
But also, as an FYI, if you’re investing in a large platform, don’t expect double-digit or even high single-digit returns, you’re likely going to get a solid 2.5-3X (optimistically), but it’s a stable machine. Still think if that’s the case though, you should be investing in buyout funds or private credit. If you don’t have access to those, just public equities.
Also, not every person needs to start a venture firm. Not every good investor needs to be a fund manager. Being a fund manager is tough. You need to worry about K-1s and reporting (yes, that’s chasing founders down for metrics even when you have information rights), fund admin, running a business, filing taxes, and knowing when and how to sell. It’s actually easier to be a great investor at another larger shop. It’s the same as not every smart person needs to start their own company.
All that said… I’m still bullish on venture. I think it truly is, one of the most promising asset classes we have available to us. And I mean venture in the raw, unfiltered first check, pre-seed play. Not the Series A+ play. At least for emerging managers. After the Series A, I can’t think of a sustainable way you won’t get outcompeted by the large ones. For true early stage exposure as first check, the large platforms often have no incentive to play. Given their large fund sizes, they’ve priced themselves out of that true first-check bucket.
Something that harkens back to a Chris Paik line. “Any company that is pure execution risk without any market risk is not a suitable venture investment.”
A few days later, another friend asked me if I saw this, and if I had any immediate thoughts. On LinkedIn, Pavel Prata had posted a reaction to Jared Friedman’s request for full-stack AI companies, saying that “80% of VC funds will be automated within 3 years.” To be fair, Pavel’s not wrong. Directionally, that is where the industry is heading. Having been to a few annual summits that VCs host so far this year already, every single — oh yes, I mean, EVERY SINGLE — one that I went to (I went to seven at the time of writing this post) talked about using AI to either or both source deals and/or qualify deals. Some also talked about supporting their portfolio using their digitally-twinned brain. Simply, AI is in.
That said, there were some things that Pavel suggested I disagreed with, or at least thought he was oversimplifying:
“Process 100X more deals.” While there are firms that make investment decisions algorithmically, and while I do see this working past-Series A (where we enter growth), in true early-stage investing fashion, the best investors invest prior to data. Prior to traction. Prior to anything obvious enough to track. And while you, as a firm, can probably see and filter 100X more deals. As a human GP with only 24 hours in a day, and building a portfolio of 30 investments across 3-4 years, I still go back to a piece of advice I received early on in my career. “You don’t have to invest in every great company, but every company you invest in must be great.”
“Maintain relationships with 1000+ founders.” I have my doubts here. Until I start seeing people build long-term friendships and happiness with AI, I’m still a strong believer that people trust people. And this rapid scaling of AI only further proves that. It’s hard to scale trust. To scale intimacy. There might be a world where this does happen one day. But I don’t think this is three years away. That said, I do think that you as a solo GP or a small team can support your portfolio as if you were a fully-staffed 20+ person team within three years though.
“Deploy capital 5X faster.” There are some things in life where faster isn’t necessarily better. Like performing a surgery. Or simply, music. No one needs to listen to My Heart will Go On on 5X speed. Venture is one of them. While it’s unclear whether Pavel means shorter deployment periods or faster decision-making, to address both, shorter deployment periods may indirectly lead to more companies getting funded. Or more capital going to the same companies. We don’t need either. An LP shouldn’t index venture, nor should more capital go into companies where the preference stack exceeds the valuation of the companies or making companies financially impossible to 3-5X any of the companies’ investors. Faster decision-making may make sense if it’s a competitive round, but true venture is betting on the non-obvious. Most non-obvious bets don’t need capital 5X faster.
To be fair, I do agree with the vast majority of where Pavel thinks the venture industry will go.
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 more you can create that context in the family owner’s manual, the more important it is and the more it is NOT the ‘in-case-of-emergency’ file. Because the in-case-of-emergency file is going to say I’m an LP in Fund VII from so-and-so and my withdrawal rights are such and such. Or here’s the document. You go figure out what my withdrawal rights are, if I have any.” The owner’s manual teaches future generations what to prioritize and why. – Josh Kanter
Josh Kanter is the family office principal at Josh Kanter Wealth Advisory Services. He is also the founder & CEO at leafplanner, a comprehensive solution on planning for the 100-year time horizon for a family office, birthed out of his own need with his own family of creating an everlasting institution.
After decades as a lawyer, he went on to focus on his family business where he also currently serves as President of Chicago Financial, Inc., a single family office overseeing a complex organization of trusts, investment and philanthropic entities for a multi-branch and multi-generational family.
[00:00] Intro [04:01] Art, sculptures and Jun Kaneko [12:30] The inception of Walnut Capital Corp [15:36] How Josh defines creativity [17:03] Creating the “freedom trust” [17:56] Where did the name leafplanner come from? [20:03] How did Josh get involved in the family venture business? [23:22] Top lessons from being startups’ legal advisor [25:48] Lessons as an investor and LP [27:57] Investing in America’s biggest fraud [30:01] The origin of leafplanner [38:15] How do you start a family owner’s manual [40:03] The importance of prioritization and context in the manual [45:35] How do you make a owner’s manual searchable? [49:50] The five kinds of capital (intellectual, human, social, financial, spiritual) [53:15] What is the role of luck in Josh’s life? [54:31] Josh’s primary vice when saying no [56:51] Post-credit scene
“You’ve got great founders. That doesn’t make them great CEOs.” – Josh Kanter
“I may not be the CEO of this company at some point. If I am not the person to take this forward, then let’s bring in the person who is. Success is more important than my ego.” – Josh Kanter
“The more you can create that context, the more important it is and the more it is not the ‘in-case-of-emergency’ file. Because the in-case-of-emergency file is going to say I’m an LP in Fund VII from so-and-so and my withdrawal rights are such and such. Or here’s the document. You go figure out what my withdrawal rights are, if I have any.” – Josh Kanter
On cloud storage providers like Box, Dropbox, Google Drive and so on: “Every one of those systems relies on the brain that built the architecture of how you organize them. So I use Box. I have 225,000 documents in Box. Those 225,000 documents are organized on how Josh’s brain works, so the folder structure [etc.].” – Josh Kanter
“Financial capital should be looked at merely as a tool to grow the other capitals: [Intellectual, human, and social].” – Josh Kanter
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 started this practice back in 2019, inspired by two legendary people, but also that vacation responders are so boring. Why? If I’m going to take time off to have fun, why not make my out of office response fun to read as well. And so I followed through. Every vacation responder I’ve had since has always been… different.
The more I did so, the quirkier they got. And I found it as a fun creative writing exercise too. I took it so far to the point that of the many different email addresses I’ve been lucky enough to have over the years, I almost got “fired” because of my vacation responder through that email address. “You don’t seem to take your job seriously.” I do. In fact more seriously than most I’m led to believe. And I love what I do. Every career choice I’ve made I’ve made with the intention of serving the people I do serve with the utmost respect. Customers. LPs. Investors. And so on. But doesn’t mean I can’t have fun. I don’t take myself seriously, but I do take my job.
Then recently, having just gotten back from a break, a friend asked why I don’t share my vacation responders publicly as potentially inspiration for others to write interesting vacation responders. And I thought, why not?
I don’t plan to start a movement here. This may just be me and my own weird sense of fun and what makes me giggle. But in case it might offer you a little giggle as well if you haven’t emailed me when I’ve been out, sharing my last three vacation responders below.
Pandora
The date is [date redacted]. I’ve just been told that I won the government lottery to be shot light years into space to find answers – to go to the largest moon of the planet Polyphemus, Pandora. Nervous, but ready, I’m jotting this in my diary before I go into cryo.
[NEW ENTRY]
The date is [date redacted]. I’ve just awoken from the best slumber I’ve had in a long time. Only to be interrupted by this rude guy called Miles Quaritch. Apparently, I’m only allowed to address him as Colonel. He looks like the person Colonel Sanders would be if he did P90X instead of fried chicken.
I’ll be updating this diary periodically before I one day return back to planet Earth.
[UPDATED NOTE]
Training is tough. Got the lights knocked out of myself a few times. Now sitting with a black eye as I’m recording this entry.
[UPDATE 2]
Food is odd but good. Still learning when to use utensils and when not to. Seems like the general answer is to not to.
[UPDATE 3]
Ahhhhhh, they found us-…
[UPDATE 4]
Hell has broken loose!!
[UPDATE 5]
All is quiet on the western front.
[UPDATE 6]
Ahhhhh-…!
[UPDATE 7]
I’m alive.
[END TRANSMISSION]
I know I’m supposed to say I won’t be able to respond until I get back on [date redacted], but the truth is I’ll be lying out of my ass. In always having my phone with me, I will more likely than not see a notification blip pop up on my phone lock screen, assuming I still have service on Pandora. And I know that from time to time, I will need to interrupt my vacation to answer something urgent.
That said, I promised myself I’d unplug and enjoy my life as one of the Sky People as best as I can. So, I’m going to run an experiment. I’m going to let you decide:
If your matter is really urgent, resend the email with your subject line preceded by [URGENT] and I’ll try to respond nimbly.
Otherwise, I’ll respond when I return to the beautiful SF.
Escaping into chaos,
David
Feudal Japan
So….. I just watched Shogun. A phenomenal show. 11/10 would recommend.
Loved it so much I created a time machine. You didn’t just scoff at me, did you? Who are you to say that I can’t invent one? We have robots, quantum chemistry, DNA cloning, generative AI. Of course I can make a time machine.
Not to reveal my hand too much here, since I’m not sure the world is ready to accept a time machine yet, but an EKG’s ability to monitor micro-pulses and a quantum computer that can perform quantum calculations based on limited historical datasets can do wonders.
Anyway, by [date redacted], I will have been whisked away into the historic lands of Japan. Unfortunately, I will have very little reception as Starlink will have yet to exist in 17th century Japan. I hope to come back well-versed in tea ceremonies, bladesmithing, and with the honor of being a shokunin in a craft. On the off chance I get caught in the feudal wars between rising warlords, I’ve designed a failsafe that will pull me back into the 21st century on December 2nd, hopefully with all my four limbs attached.
I know I’m supposed to say I won’t be able to respond until I get back on [date redacted], but the truth is I’ll be lying out of my ass. In always having my phone with me, I will more likely than not see a notification blip pop up on my phone lock screen, assuming I still have service in historic Japan, which is possible since I’m using the neuromodulator in the time machine as the connection point to connect to 2024’s technology. And I know that from time to time, I will need to interrupt my vacation to answer something urgent.
That said, I promised myself and my partner I’d unplug and enjoy my time off as best as I can. So, I’m going to run an experiment. I’m going to let you decide:
If your matter is really urgent, resend the email with your subject line preceded by [URGENT] and I’ll try to respond nimbly.
Otherwise, I’ll respond when I return to the beautiful SF.
Cheerios and orange juice,
David-san
Outie out
I am told by my outie that he will be going away for period of time. And as I have gone through the severance procedure, as your humble innie, I will be unable to get back to you within that time. Not because I don’t want to, but I just won’t be awake then.
My outie has been quite stressed, but in the wellness room, they tell me he is loved and he has friends, and for these next few weeks, he’s spending time with people who love him.
I know I’m supposed to say I won’t be able to respond until I get back on [date redacted], but the truth is I’ll be lying out of my ass. In my outie always having his phone with him, our only mutual access point from the outside, he will more likely than not see a notification blip pop up on his phone lock screen, assuming we find a way to reconnect our innies on the outside, which should be possible as we have a master plan in place and an all-access card to make our innies’ voices heard. And I know that from time to time, I will need to interrupt my vacation to answer something urgent.
That said, I promised myself and my partner I’d unplug and enjoy my time off as best as I can. So, I’m going to run an experiment. I’m going to let you decide:
If your matter is really urgent, resend the email with your subject line preceded by [URGENT] and I’ll try to respond nimbly.
Otherwise, I’ll respond when I return to the beautiful SF.
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 is one of the big issues of a bunch of data work on venture is insights from some periods don’t mean anything or are not translatable to present time. It’s really frustrating. So we go back to people, reputations, and experience.” – Narayan Chowdhury
Ritujoy Narayan Chowdhury is the co-founder and Managing Director at Franklin Park, where he focuses on private equity investment opportunities, monitoring clients’ portfolios and conducting industry research. He also plays a key role in the development and implementation of Franklin Park’s technology platform, and regularly interacts with clients on investment and portfolio matters.
Prior to Franklin Park, Narayan worked with Hamilton Lane and Public Financial Management. He is a CFA Charterholder and a member of the CFA Institute. Narayan received a B.A. in Mathematics and Economics from Bucknell University.
[00:00] Intro [02:27] Why my parents moved to the US [03:43] Narayan’s dad [08:54] The friction that Narayan has with his team [11:59] Why current analyst training creates bad habits [15:00] What Narayan does when his family goes to bed [16:37] When did Narayan first start playing with code? [17:34] Narayan’s entrepreneurial origins and how much he got paid [19:54] “Never sit alone at lunch” [22:54] The Mike Maples story [25:48] When Narayan realized VC is very different from PE [30:05] The difference between underwriting VC and buyout [34:28] What do you do when you’ve pigeonholed yourself in one industry? [37:02] How do you know if a GP is a core part of an alumni network? [38:32] A 2025 micro trend of misleading operating metrics [43:40] How has VC changed in the past few decades? [53:58] What do most people underappreciate about hockey?
“Every moment that [my daughter] is here and I’m not with her is a moment we’ll never get back.” – Narayan Chowdhury
“Every action should not be a wasted action, should not be duplicative, should be the best use of a person’s time. So any tool that we build that is contrary to that should be reevaluated constantly.” – Narayan Chowdhury
“What do you do when you don’t know anything, you haven’t met anybody, you have no context, the human brain starts inventing rationale.” – Narayan Chowdhury
“Never sit alone at lunch.” – Alan Patricof
“Looking backwards on track records in venture can be very scary decisions. It could be that the prior funds were completely passive throw-ins on a cap table where they were following some social cues in a ZIRP environment and perhaps they got lucky. Whether they were part of a giant outcome [or not], it sort of meaningless for the future because neither the syndicate nor the founder really know who that person ever was. And so, the go-forward benefit of that investment decision is zero versus ‘We were the trusted investor for that founder.’ Not all prior track records are the same. We have to go back to why, going forward, are founders going to seek out or accept those dollars.” – Narayan Chowdhury *ZIRP: zero interest-rate policy
“I’d rather go bankrupt than lose this AI race.” – Larry Page
“The problem is that the barriers to entry on that strategy [to deploy a lot of capital] are pretty low. And you get killed – death by a thousand cuts – when you’re not the only one trying to flood the market with capital and outcompeting on price.” – Narayan Chowdhury
“This is one of the big issues of a bunch of data work on venture is insights from some periods don’t mean anything or are not translatable to present time. It’s really frustrating. So we go back to people, reputations, and experience.” – Narayan Chowdhury
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.
Mike Maples Jr. once said that 90% of Floodgate’s exit profits come from pivots. Hell, 50% of my angel investments have pivoted from the idea I first invested in. Pivoting is a constant norm of the entrepreneurial ecosystem. Many investors know it’ll happen. Great founders instinctually prepare for that possibility. Being married to the problem, not the solution is the direct reflection of what it means to prepare for pivots. By definition, Meriam Webster defines the word as:
pivot (n) – a usually marked change, especially an adjustment or modification made (as to a product, service, or strategy) in order to adapt or improve
As such, small feature improvements, changes and additions, even omissions rarely count as one. But a large product shift, where the core product is no longer the product you once sold, is one. In general, the common advice on the street is that you should embrace pivots, until you find product-market fit. But also knowing that you can always lose product-market fit, even after you obtain it. A pivot should either help you catch lightning in a bottle, or help you keep lightning in the bottle.
But that’s not the purpose of me writing this piece. It’s about the opposite. The quiet thing no one explicitly talks about when it comes to pivot. The TL;DR version is each time you pivot, you lose trust. You lose trust because you didn’t have conviction in your product. You lose trust because you didn’t have conviction on where the market will go. Hell, you lose trust because you didn’t do what you said you were going to do. You were not a person of your word. You lose trust because you made someone else lose trust. Because of you, they looked stupid. To their peers. To their bosses. Sometimes to their friends.
Once you lose trust, it’s really, really hard to get it back, if at all. In the age of information excess and product surplus, you won’t have the time or the attention from your customers to rebuild that trust. They’ll just move on to the next solution.
All of which are true. But many truly great companies, as we know them today, have gone through their pivots. The idea that put them on the billboard was not the idea that was first funded. Instagram. Google (not their initial business model). Slack. Twitch. Lyft. Shopify. The list goes on.
That said, if you want investors who haven’t funded you to fund you after the pivot, you need a damn good reason as to why you’re doing so. And why it makes sense.
If you’ve known these investors for a while, great! You already have the pre-requisite of trust. You need it. The age of AI wrappers getting thrown left and right and startups going through their 28th pivot destroys trust. How do I know this is the one? How can I believe you when you say this is the one? Why should I have faith when you say this is the last time? There’s a great recent Hiten Shah tweet on this I really like, albeit from the customer perspective, but the analogy holds.
I just got off the phone with a founder. It was an early Sunday morning call, and they were distraught.
The company had launched with a breakout AI feature. That one worked. It delivered. But every new release since then? Nothing’s sticking.
“Once belief slips, no amount of capability wins it back.
“What makes this worse is how often teams move on. A new demo. A new integration. A new pitch. But the scar tissue remains. Users carry it forward. They stop expecting the product to help them. And eventually, they stop expecting anything at all. This is the hidden cost of broken AI. Beyond failing to deliver, it inevitably also subtracts confidence. And that subtraction compounds.
“You’re shaping expectation, whether you know it or not. Every moment it works, belief grows. Every moment it doesn’t, belief drains out.
“That’s the real game.”
Just as with customers, it is with investors. Although investors can be more forgiving, knowing that this is part of the game. But no amount of faith is infinite, so choose how you voice your actions intentionally. Choose your interactions carefully. And if you do choose to interact, communicate proactively and deliberately. Notice how many withdrawals you’re taking from the bank of social capital, from your karmic bank account. And don’t forget to regularly deposit.
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 bigger you get, the more established you get, the more underwriting emphasis goes into how this team operates as a structure rather than is there a star?” – Matt Curtolo
Matt Curtolo, CAIA is a seasoned private markets investor and allocator with over two decades of experience at leading financial institutions. Throughout his career, he has been directly responsible for allocating more than $6 billion in commitments to private market investments and maintains relationships with hundreds of general partner relationships across the full spectrum of private capital strategies.
Most recently, as Head of Investments at Allocate, a venture-backed fintech startup. Matt built the investment capability from the ground up, broadening access to top-tier venture capital opportunities for the private wealth market. Prior to this, he served as a senior leader at MetLife, serving on the investment committee, co-managing their global alternatives portfolio and leading the firm’s US Buyout portfolio. Earlier in his career, Matt led all private equity activities as Head of Private Equity at Hirtle Callaghan, a large independent outsourced Chief Investment Officer (oCIO). Matt’s foundational experience was gained at Hamilton Lane during its early growth phase, before it became the world’s preeminent private markets allocator, in research, investment and client-facing roles. Matt currently holds several advisory positions that span start-ups, asset management firms and fund of funds. He also manages his own advice practice, providing GPs with strategic guidance on strategy, fundraising and investor relations.
[00:00] Intro [04:24] What town did Matt grow up in? [04:37] Why is that town significant from a sociological perspective? [08:43] Why is Matt fascinated with the Detroit Lions? [11:08] What is it like cheering for the underdog? [13:02] How does Matt break down deal attribution in partnerships? [18:04] GPs’ karmic bank account [21:29] What is the kindest thing anyone’s done for Matt? [23:24] How did tennis enter Matt’s life? [26:35] Historical examples of VC management/leadership structures [29:33] Underwriting track record between senior and junior investors [32:23] How Matt approaches diligence after reading the data room [39:30] How do you know when you’ve asked enough questions? [42:37] The three classes of questions for GPs that influence investment decisions [45:34] Remote culture [50:16] Cadence of in-person gatherings in remote teams [52:48] The two (and a half) types of conversations to always host in-person [58:37] The last great idea Matt had on a walk [1:02:05] The legacy Matt wants to leave behind [1:04:37] Post-credit scene
“Partnerships are incredibly hard to evaluate because not only are you evaluating each of the individual’s capabilities independently, but is it a one plus one equals three situation?” – Matt Curtolo
“The bigger you get, the more established you get, the more underwriting emphasis goes into how this team operates as a structure rather than is there a star?” – Matt Curtolo
“Data gives me questions, not answers.” – Matt Curtolo
“The dopamine you get from planning something versus the actual experience itself are wildly different.” – Matt Curtolo
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.
