Adam Marchick from Akkadian Ventures joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on 3 GPs at VC funds to ask 3 different questions.
Cocoa VC’s Carmen Alfonso Rico asks what belief Adam held firmly for years but changed his mind recently on.
Good Trouble Ventures’ AJ Thomas asks about how GPs can better communicate risk to first-time LPs.
1517 Fund’s Danielle Strachman asks about the world view Adam has that shapes his investing thesis.
Over the past twenty years, Adam Marchick has had unique experiences as a founder, general partner (GP), and limited partner (LP). Most recently, Adam managed the venture capital portfolio at Emory’s endowment, a $2 billion portfolio within the $10 billion endowment. Prior to Emory, Adam spent ten years building two companies, the most recent being Alpine.AI, which was acquired by Headspace. Simultaneously, Adam was a Sequoia Scout and built an angel portfolio of over 25 companies. Adam was a direct investor at Menlo Ventures and Bain Capital Ventures, sourcing and supporting companies including Carbonite (IPO), Rent The Runway (IPO), Rapid7 (IPO), Archer (M&A), and AeroScout (M&A). He started his career in engineering and product roles at Facebook, Oracle, and startups.
[00:00] Intro [01:22] The anatomy of a good story [02:26] The job of an annual summit [05:35] How often does VC change? [07:25] Narratives LPs are looking for at GPs’ AGMs [08:25] “20% overall revenue growth in the portfolio is NOT exciting” [09:01] What founders talk about at an AGM [14:01] How does Adam spend time at an AGM [17:48] Enter Carmen and Cocoa VC [19:35] What did Adam change his mind about [21:09] How does an LP assess GP NPS? [22:16] Picking on-sheet references [24:33] The origin of Cocoa VC [26:08] What is Carmen’s superpower? [27:09] What does Carmen want from her LPs? [29:09] The best answers to “what do you want from your LPs?” [31:29] Controversial decisions for the LPAC [33:39] Enter AJ and Good Trouble Ventures [34:25] Communicating risk to your LPs [35:58] What about to first-time LPs? [38:06] Where do first-time LPs come from? [39:50] What inspired AJ’s question? [42:14] Is the convo different if LPs reach out vs you reach out? [43:45] The timing of LP conversations: most frequent vs most important [45:59] The trust equation [47:45] How to scale trust with LPs [51:35] How has GPs built trust with Adam? [53:29] How often does Adam keep in touch with his GPs? [56:06] Enter Danielle and 1517 Fund [58:38] What is Adam’s mental model? [1:01:43] How does Adam define low entry prices? [1:03:25] Tracking trends as an LP [1:06:55] 80-20 portfolio construction [1:10:37] Would 1517’s thesis 15 years ago count as market risk? [1:14:12] Adam’s last piece of advice [1:15:46] Akkadian Ventures and RAISE Global [1:17:06] David’s favorite moment from Adam’s earlier episode
“Venture is made on the exception, so if each company is growing at 20%, it’s not an exciting portfolio. If 3 companies are growing at 300%, that’s an exciting portfolio.” — Adam Marchick
“I always go back to tenets of venture. It’s backing great people, tackling large markets at low entry prices.” — Adam Marchick
“Similar to a founder, their job is to communicate upside potential. At worst, you can lose 1X. At most, the returns can be inspiring. I think your job is to talk about what can go right and what are the inputs required to make it go right.” — Adam Marchick
“The bulk of your conversations with an LP happen negative 6 months to time of investment. The most important conversations you have with an LP are Year 2 through 6 of your investment.” — Adam Marchick
“Trust equals credibility, reliability, and intimacy and the dividing factor of building that trust is whether or not you feel that self-orientation is only geared for the other person’s agenda or actually something that you’re co-creating together.” — AJ Thomas
“When something is getting really heated, it’s a great time to learn because so many people are working on something.” — Bryne Hobart
“When there is hype, you have to look at metrics that can’t be hyped.” — Adam Marchick
On portfolio construction… “80% should be on-thesis, and 20% should be ‘you couldn’t sleep at night if you didn’t do it.” — Adam Marchick
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.
“There are a thousand ways to put lipstick on the pig and there are a thousand skeletons [in the closet]. I’ve only seen five or six because I’ve only seen three startup experiences. And so you need to deputize as many people as you possibly can to essentially triangulate.” — Anurag Chandra
Anurag Chandra has spent over two decades in Silicon Valley as an investor, operator, and allocator. He has helped lead four venture capital funds, managing over $2.0B in aggregate AUM. Anurag has also been a senior executive in three enterprise technology startups, two of which were sold successfully to public companies. He is currently the CIO of a single-family office with an attached venture studio and a Trustee for the $4.5B San Jose Federated City Employees Retirement Fund, serving as Vice Chair of the Board, and Chair of its Investment and Joint Personnel Committees.
[00:00] Intro [02:10] Why is what Anurag is wearing a walking contradiction? [06:08] The man without a home, but comfortable in everyone’s home [10:17] The Stanford Review [12:55] The four assh*les of America [20:13] How did Anurag schedule regular coffee with Mark Stevens? [25:31] Mark Stevens’ advice to Anurag about staying top of mind [26:42] How often should you email someone to stay in touch? [30:33] Why should you be an asymmetric information junkie? [34:21] Where should you find asymmetric information in VC? [36:02] The ‘Oh Shit’ board meeting [40:09] How San Jose Pension Plan views GPs [43:55] Defining the ‘venture business’ [49:09] Process drives repeatability [54:06] How San Jose Pension Plan built their investment process from scratch [58:43] What is a risk budget? [1:01:52] What did San Jose Pension Plan do about their risk budget? [1:05:05] The people who changed Anurag [1:11:10] Post-credit scene
“You seem like a good guy. I’d love to find ways to work with you, but I’m going to forget you in two or three weeks. And you got to make sure that you stay in the front of my mind when I’m in a board meeting and there’s a company that could use your money. The best for you to do that is to shoot me an email from time to time and let me know what you’re working on. But do not make them long. I don’t need dissertations.” — Mark Stevens’ advice to Anurag
“There are a thousand ways to put lipstick on the pig and there are a thousand skeletons [in the closet]. I’ve only seen five or six because I’ve only seen three startup experiences. And so you need to deputize as many people as you possibly can to essentially triangulate.” — Anurag Chandra
“You can do two weeks or two years of due diligence on a company, in particular if you’re a mid-stage or later-stage investor. And it’s after the first board meeting—I have a friend who affectionately refers to it as the ‘Oh Shit!’ board meeting where you show up, and now you’re on the inside and you learn all the bad stuff about the company that was hidden from you. Now is that to suggest you should just invest after two weeks because even after two years you’re still going to end up with skeletons you were unable to uncover? No. I still think process matters.” — Anurag Chandra
“Look for GPs who are magnets, as opposed to looking for a needle in a haystack.” — Noah Lichtenstein
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
“You need to make space for weird types of conversations to happen on the fringes that really inform you what’s going on at the frontier.” — Thorsten Claus
Thorsten Claus is a venture investor and builder with more than 15 years of private equity and venture capital experience. He has raised nine funds, managed over $4.8B across global platforms, and led or overseen more than 120 direct investments, generating returns of 3x–7x net to investors.
His current work focuses on dual-use technologies at the intersection of defense, security, and national resilience. Guided by the discipline of Howard Marks, the systems-level thinking of the Consilience Project, and a commitment to internalizing externalities, he invests in teams and technologies that strengthen sovereign capability and long-term societal stability.
Beyond capital, Thorsten is a hands-on builder. He machines defense-critical and space components, restores historic race engines, and writes on production systems and resilience at blog.thinkstorm.com. This grounding in physical production complements his investment practice, keeping judgment tied to real-world constraints.
[00:00] Intro [02:31] Downhill skateboarding [05:58] How do you see behind a corner when downhill skateboarding? [07:42] Hill hunting [10:15] How long does it take to go down the Sierras? [11:41] The most important part of the body for downhill skateboarding [16:02] David’s dumb question of the day [17:25] The accident that pivoted Thor’s life [19:34] The first race car Thor bought [20:51] Why Thor is a terrible race car driver? [23:52] How did Thor come to use the race oil that Porsche Racing uses? [24:59] The 3 things you need to welcome fringe conversations [27:07] Just another David misattribution [27:34] Truth is difficult these days [29:20] How do you prioritize which advice to take? [30:33] Thor’s weird definition of risk [31:59] How do you know if someone is giving you authentic advice? [34:40] How does Thor understand someone’s past without asking about it? [39:42] Lessons from fictional storytelling in diligencing GPs [43:22] Questions and responses that reveal a GP’s past [46:10] Books that Thor read to ask better questions [49:18] What is the USMC Christmas Tree? [53:40] The Christmas Tree in an investor’s portfolio [57:49] Can beggars be choosers? [1:00:41] The difference between capital formation and fundraising [1:03:00] Production vs product for a GP [1:06:54] Thor and cardistry [1:10:21] What are moments that reminds Thor we’re still in the good old days? [1:13:50] The post-credit scene
“You need to make space for weird types of conversations to happen on the fringes that really inform you what’s going on at the frontier.” — Thorsten Claus
“Risk is the probability of a fatal outcome within given resources.” — Thorsten Claus
“Is it really out of conviction that they’re acting on [the advice] or is it just a belief? You know, I believe in many things, but do I act accordingly? That’s the difference between belief and conviction.” — Thorsten Claus
“The self audit of our actions, behaviors, processes, and decisions is so important.” — Thorsten Claus
“What I find more interesting than the question about ‘what’s the one thing you don’t want me to know about you’ is what it reveals about what you think about me. So, a social interaction is always with me with others, or you with me as well, and a group with others. If I’m worried that you know something about me, that reveals something more about what you fear my attitude is or how this is seen or how you would think I would act. And that is super insightful.” — Thorsten Claus
“If you want to find out something about the why and the what, you ask open-ended questions. If you confirm bad news, you voice it for them.” — Thorsten Claus
“There are no bad teams, only bad leaders.” — Jocko Willink
“There was a whole time when I grew up here in America where everything was great. […] Everyone gets a participation prize. I hated that because it really devalues people who are truly great. And the fact is that there are only very few truly great people.” — Thorsten Claus
“Capital formation is a design principle. Fundraising is a sales process. Without true design around a customer base and a product, you will fail eventually.” — Thorsten Claus
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
I’m fortunate enough I get to work with some of the most interesting and stellar GPs out there. It’s never been a business I’m actively trying to grow. Outside of me backing managers myself, every so often I’ll get a friend who refers their friend to me and asks me to help them out with thinking through fundraising. It’s always been opportunistic. And even when I work with folks, it’s not primarily about intros. In fact, in all my working relationships, I never offer intros as part of the agreement. But more so working with them to understand how the GPs can better tell their story and run a more institutional fundraising process. Occasionally, I would get asked to advise when a firm should bring in an investor relations professional. But that last part, a piece for the future. So, all that to say:
I’m not an expert in everything, but I do try to actively learn best practices in the market. If I don’t know something, I will find it out for you and/or put you in touch with the best practitioner on it.
I’m now overcapacity. I don’t have the bandwidth to work with every manager that comes my way. I have other things I want to do and am working on.
My primary job is still to support the GPs I back myself.
So, I’m just going to share below exactly what I do when I work with a GP, so that you don’t have to come find me for help. Because we do effectively the below. This approach has also evolved over time. And this is my current approach, circa September 2025. My job is also to help GPs better understand LPs and where they come from. So, while the saying goes as “If you know one LP, you only know one LP,” my job (and personal fascination) is to define and delineate the nuance. The only things I cannot help with if you’re only reading the below are:
Be your accountability partner. Part of my role with GPs is also making sure GPs stick to their promises. Discipline. It’s easy to plan. Hard to execute.
Debrief on LP conversations and pipeline management.
And figure out your LP-GP fit, or your ideal LP archetype as a function of your fund size, your strategy, your experience level and your story.
This might also be one of the few pieces I write that some pre-reading may help contextualize what I will write below.
Most of the time I work with folks who are mid-raise. Not always, but most of the times. So I’m stepping in where there’s already some infrastructure, but not a lot, usually bootstrapped and duct taped together. Not a bad thing. As long as it works, I don’t touch much during the raise itself. Then we work on things and cleaning up systems post-raise or in-between raises. The best time to strategize and plan for a raise is at least six months in advance. But that’s neither here nor there. So what do I do?
I ask the GP(s) to pitch me the fund. We simulate email exchanges, first meeting, second meeting, and due diligence as if I were the target LP persona. I offer no commentary. I am purely the observer. You can do this with most people who do not know your strategy well. Friendly LPs. Other GPs. But I find it most helpful if you can to do this with people who have a great attention to detail, specifically in the literary sense: lawyers, authors, therapists, podcasters, professors, editors, scriptwriters, showrunners, and so on.
Then, I share all the risks of investing in said manager that I can think of. What are the elephants in the room? What parts of the GP, the GP’s story, the strategy, the track record, and the complexity of the story would make it really hard to pass the investment committee (IC)? What might be moments of hesitation? No matter how big or small. There’s a saying that a friend once told me, “When your spouse complains about you not washing the dishes, it’s not about the dishes.”
Label and categorize each risk as a flaw, limitation, or restriction.
Flaws: Traits you need to overcome within 1-2 fundraising cycles (~2-5 years). The faster, the more measurable, the better. You can’t just say you’re going to overcome these flaws. You need to have KPIs against each of these.
Limitations: Risks that the world or that particular LP believes is true. Like being a Fund I. Or being a solo GP.
Restrictions: What you prevent yourself from doing. Think Batman’s no killing code. In GP land, it’s only investing in a particular demographic or vertical. It’s only investing in the Bay Area. And so on.
Stack rank all of them. Depending on the LP you’re pitching, figure out the minimum viable risk list that LP may be willing to accept. It’s not always obvious.
You should always address limitations as early on in the conversation. My preference is in the email exchange or at the very minimum, in the first two slides of the deck. In other words, “here are the primary reasons you shouldn’t invest in me if you don’t like…” Think of it like the elephant in the room. Make it explicit. Don’t wait for LPs to have private investment committee (IC) conversations without you in the room. Or worse, they implicitly, whether consciously or subconsciously, think of the limitations in their head. Having been in multiple LP conversations and a fly on the wall in IC meetings, sometimes an LP can’t fully describe why they’re passing, just that they are.
Next, figure out for each LP in your existing and future pipeline when are flaws also limitations. When are restrictions also limitations?
When a restriction is a limitation, there isn’t an LP-GP fit. So, you need to go find LPs, who don’t see your restrictions as limitations. Another reason you should address elephants in the room as early as possible.
When a flaw is a limitation, you need to fire yourself before the LP fires you. You need to say “No” before an LP does. Be respectful of their time, but maintain that relationship for the future. Reaching back out every 1-2 quarters to catch up is something I highly recommend. Any longer, LPs will forget about you. And no, that does not mean, “Can I add you to my monthly/quarterly LP update?” No LP will say no, but almost always will your updates die in their inbox. If you don’t care about your relationship with them, why should they?
Are you ready for an institutional fundraise? How much of the institutional data room (use this as a reference if you don’t know what that means) do you have ready? And for each flaw and restriction, do you have something in the data room (even if it’s in the FAQ/DDQ) that helps hedge against it?
All that said, you also need to figure out what your superpower is. And you usually only need just one, but you have to be god-tier in that one superpower. There cannot be a close second. Oftentimes, it’s less obvious than you think it is. With all the hedging of risks above, you also need to give an LP to be your champion. You must spike in something that impresses the LP and despite all your flaws and restrictions, that you’ll still go far. And the more closely your superpower is aligned with at least 2-3 of the five (sourcing, picking, winning, supporting, exiting), the better. And you must make sure that it is made explicit to the LP as early in your conversations as possible.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Two years ago, Dave and I sat down less than five blocks away from where we were sitting when those words escaped the clutches of Dave’s mindscape. That piece has since been cited a number of times from fund managers I’ve come across. And sometimes, even LPs. While each part of that piece was written to be evergreen knowledge, what we want to do is to add nuance to that framework, along with examples of how we might see the internal conflict of early distributions and long-term thinking manifest.
In effect, and the premise for this blogpost, you’re in Year 7 of the fund. You’re now raising Fund III. What do you need to do?
The urgency to sell at Year 7 is relatively low. Although booking some amount of DPI may motivate LPs to re-up or invest in Fund III. The urgency to sell at Year 12 is much higher. So, what happens between Years 7 and 12? If you do sell, do you sell to the market or to yourself via a continuation vehicle?
For starters:
Knowing when to sell WHEN you have the chance to sell is crucial. The window of opportunity only lasts so long.
Consider selling some percentage of your winners on the way up to diversify, but be careful not to sacrifice too much potential future DPI. Yes, this is something we’ll elaborate more on with examples of what exactly we mean.
Optimize selling price efficiency
At the moment the next round is being put together, you have no discount to the current round price. The longer you wait to transact, the more doubt settles in from outsiders, the deeper the discount as time goes on. And so, if you have the chance to sell, sell into the (oversubscribed) primary rounds in order to optimize for price efficiency. Unless maybe, you’re selling SpaceX, OpenAI, Anthropic, Anduril, Ramp, just to name a few. There is a BIG tradeoff in TVPI (versus future DPI) when selling a fast-growing asset early (assuming it keeps its pace of growth). There is also a BIG risk to holding on to a large unrealized gain if the company stumbles or the market crashes.
We live in a world now that multi-stage venture funds have become asset management shops. Their primary goal will be to own as much of an outlier company as possible to maximize their potential for returns. As such, they will choose, at times, to buy out earlier shareholders’ equity.
To sell your secondaries, you have a very small window of opportunity to sell. Realistically, you have one to two quarters to sell where you can probably get a fair market value of 90 cents to the dollar of the last round valuation. Ideally, you sell into the next round at the price the next round values the company. As Hunter Walk once wrote, “optimally the secondary sales will always occur with the support/blessing of the founders; to favored investors already on the cap table (or whom the founders want on the cap table); without setting a price (higher or lower than last mark) which would be inconsistent with the company’s own fundraising strategy; and a partially exited investor should still provide support to the company ongoing.” If you wait a year, some people start questioning the data. If you wait 2 years, you’re looking at a much steeper discount. And if it’s not a “Mag 10” of the private markets—for instance, Stripe, SpaceX, Anduril, just to name a few, where there is no discount—you’re likely looking at 30-60% discounts. As Hunter Walk, in the same piece, quotes a friend, “‘I think friendly secondaries are easy, everything else feels new.’” As such, Dave and I are here to talk through what feels “new.”
So, how do you know how much to sell?
First of all, lemons ripen early. In Years 1-5, you’re going to see slow IRR growth. Most of that will be impacted by businesses that fall by the wayside in the early years. In Years 5-10, IRR accelerates, assuming you have winners in your portfolio. And in the latter years, Years 10 onward, IRR once again slows.
Before we get too deep, let’s address some elephants in the room.
Why are we starting the dialogue around secondaries at Year 5? Five things. Year 5, 5 things. Get it? Hah. I’m going to see myself out later.
One, most investment recycling periods are in the first four years of the fund. So, any non-meaningful DPI is recycled back into the fund to make new investments. While this may not always happen, it usually is a term that sits in the limited partner agreement (LPA).
Two, most investments have not had time to mature. Imagine if you invested in a company in Year 1 of the fund. Five years in, this company is likely to have gone through two rounds of additional funding. If you come in at the pre-seed, the company is now at either a Series A or about to raise a Series B, assuming most companies raise every 18-24 months. If you were to sell now, before the company has had a chance to really grow, you’re losing out on the vast majority of your venture returns. And especially so, if you’ve invested in a company in Year 3 of the fund, you really didn’t give the company time to mature.
Three, by Year 5, but really Year 7, venture’s older sibling, private equity, should have had distribution opportunities. And even if we’re different asset classes by a long margin, allocators will, even subconsciously, begin to look towards their venture portfolio expecting some element of realized returns.
Four, QSBS grants you full tax benefits at Year 5. And yes, you do get some benefits with new regulation sooner by Year 3. But if you’re investing in venture and hoping to get to liquidity by Year 3, you’re in the wrong asset class.
Five, you will likely need to show (some) DPI in Fund I, in order to raise Fund III or IV. It’ll show that you’re not only a great investor, but also a great fund manager.
Outside of our general rule of thumb in our writeup two years ago, let’s break down a few scenarios. The obvious. The non-obvious. And the painful.
The obvious. Your fund is doing well. You’re north of 5X between Years 7 and 10. You have a clear outlier. Maybe a few.
The non-obvious. Your fund is doing okay. This is the middle of the road case. You’re at 3-5X in Years 7-10.
Then, the painful. You’re not doing well. Even in Year 7, you haven’t crested 3X. And really, you might have a 1.5-2X fund, if you’re lucky. 1X or less if you aren’t. But your job as a fund manager isn’t over. You are still a professional money manager.
In each of the three scenarios, what do you do?
It’s helpful to frame the above scenarios through four questions:
How much do you sell?
When do you sell it?
What is the pricing efficiency of those assets?
And what is the ultimate upside tradeoff?
The obvious (5X+ TVPI)
Here, it’s almost always worth booking in some distributions to make your LPs whole again. Potentially, and then some. At the end of the day, our job as investors is to—to borrow a line from Jerry Colonna’s Reboot—“buy low, sell high.” Not “buy lowest, sell highest.” As such, you should sell some percentage of your big winners to lock in some meaningful DPI. Selling at least 0.5X DPI at Year 7 is meaningful. Selling 1-2X DPI at Year 10 is meaningful. As you might notice, the function of time impacts what “meaningful” means. The biggest question you may have when you have solid fund performance is: How much should you sell knowing that in doing so, it might meaningfully cap your upside? Or if you should even sell at all?
Screendoor’s Jamie Rhode once said, “If you’re compounding at 25% for 12 years, that turns into a 14.9X. If you’re compounding at 14%, that’s a 5. And the public market which is 11% gets you a 3.5X. […] If the asset is compounding at a venture-like CAGR, don’t sell out early because you’re missing out on a huge part of that ultimate multiple. For us, we’re taxable investors. I have to go pay taxes on that asset you sold out of early and go find another asset compounding at 25%.” Taking it a step further, assuming 12-year fund cycles, and 25% IRR, “the last 20% of time produces 46% of that return.” She’s right. That’s the math. And that’s your trade off.
But for a second, we want you to consider selling some. Not all, just some. A couple other assumptions to consider before we get math-y:
20% of your portfolio are home runs. And by Year 5 of your fund, they’re growing 30% year-over-year (YoY). And because they are great companies, growth doesn’t dip below 20%, even by Year 15.
For home runs, we’re also assuming you sell into the upcoming fundraising round. In other words, perfect selling price efficiency. Obviously, your mileage, in practice, may vary.
30% of your portfolio are doubles, growing at 15% YoY. And growth doesn’t fall below 10%, even by Year 15.
For doubles, just because they’re less well-known companies, we’re assuming you’re selling on a 50% discount to the last round valuation (LRV).
20% of your portfolio are singles, growing at 7% YoY. Growth flatlines.
For singles, even less desirable, we’re assuming you’re selling on an 80% discount to LRV.
The rest (30%) are donuts. Tax writeoffs.
For every home run and double, their growth decays by 5% every year.
We’re assuming 15-year fund terms.
Example 1: Say you have a $25M fund, and at Year 10, you choose to sell 50% of the initial fund size ($12.5M). If you didn’t sell at Year 10, by Year 15, you’d have a 5.7X fund. But if you did sell at Year 10, you’d have a 3.8X fund. To most LPs, still not a bad fund.
The next few examples are testing the limits of outperformance and early distributions. Purely for the curious soul. For those, looking for what to do in the non-obvious case, you can jump to this section.
Example 2: Now, let’s say, in an optimistic case, your home runs—still 20% of your portfolio—are growing at 50% YoY in Year 5. All else equal. If you didn’t sell at Year 10, by Year 15, you’d have a 11.6X fund. If you did sell at Year 10, by Year 15, you’d have a 9.3X. In both cases, and even when you do sell $12.5M of your portfolio at Year 10, you still have an incredible fund. And not a single LP will fault you for selling early.
Example 3: Now, let’s assume your home runs are still growing at 50% YoY at Year 5, but only 10% of your portfolio are home runs and 40% are strikeouts. All else equal. If you sell $12.5M at Year 10, at the end of your fund’s lifetime, you’re at 4.8X. Versus, if you didn’t, 6.6X.
Hell, let’s say you’re not sure at Year 10, so you only sell a quarter of your initial fund size ($6.25M). All else equal to the third example. If you did sell, 5.6X. If you didn’t, 7.4X.
Example 4: Now let’s stretch the model a little. And play make believe. Let’s take all the assumptions in Example 1, but the only difference is your home runs are growing at 100% YoY by Year 5.
If you sell at Year 10, by fund term, you’re at 108.8X. If you don’t sell at Year 10, you have 110.7X.
And as we play with the model some more, we start to see that assuming the above circumstances and decisions, selling anything at most 1X your initial fund size at Year 10, at Year 15, you lose somewhere between 2X and 3X DPI.
If you sell three times your fund size, assuming you can by Year 10, you lose at most around 5X of your ultimate DPI at Year 15. If you sell five times your initial fund size (again, assuming the odds are in your favor), you lose at most 7X of your final DPI by Year 15.
Now, we’d like to point out that Examples 2, 3, and 4 are merely intellectual exercises. As we mentioned in our first blogpost on this topic, if your best assets are compounding at a rate higher than your target IRR (say for venture, that’s 25%), you should be holding. Even a company growing 50% YoY at Year 5, assuming 5% decay in growth per year, will still be growing at 39% in Year 10, which is greater than 25%. That said, if a single asset accounts for 50-80% of your portfolio’s value, do consider concentration risk. And selling 20-30% of that individual asset may make sense to book in distributions, even if the terms may not look the best (i.e. on a discount greater than feels right).
Remember what we said earlier? To re-underscore that point, it’s worth saying it again. There is a BIG tradeoff in TVPI (versus future DPI) when selling a fast-growing asset early (assuming it keeps its pace of growth). There is also a BIG risk to holding on to a large unrealized gain if the company stumbles or the market crashes.
If you’d like to simulate your own secondary sales, we’ll include the model at the very bottom of this post.
The non-obvious (3-5X TVPI)
This is tricky territory. Because by Year 7-10, and if you’re here, you don’t have any clear outliers (where it might make more sense to hold as the assets are compounding faster than your projected IRR), but you don’t have a bad fund. In fact, many LPs might even call yours a win, depending on the vintage and public market equivalents. So the question becomes how much DPI is worth selling before fund term to make your LPs whole, and how much should you be capping your upside. How much of your TVPI should you be selling for your DPI knowing that you can only sell on a discount?
We’re back in Example 1 that we brought up earlier, especially if you have a single asset that accounts for 50-80% of the overall portfolio value. Here if the companies are collectively growing faster than your target IRR—say 25% on a revenue growth perspective, hold your positions. If your companies are growing slower than your target IRR and are valued greater than 1.5X public market comparables, you should consider selling 20-30% of your positions to book meaningful distributions.
The painful (1-3X TVPI)
You’ve got a dud. No two ways about it. You’re really looking at a 1.5X net fund. Maybe a 1X. And mind we remind you, it’s Years 7-10. It’s either you sell or you ride out the lie you have to tell LPs. LPs will almost always prefer the former. And for the latter, let’s be real — hope is not a (liquidity) strategy. And if put less charitably, check this Tina Fey and Amy Poehler video out. I don’t have the heart to put what’s alluded to in writing, but the video encapsulates, while humorously framed, the situation you’re in. You’re going to have to try to sell your positions on heavy discounts.
In closing
If you made it thus far, first off, you’re a nerd. We respect that. We are too. And second off, you’re probably looking for the model we used. If so, hereyou go.
We also do cover how this blogpost came to be in the first ever episode of the [trading places] podcast. And if you’re interested in the topic of secondaries, the [trading places] podcast might be your new guilty pleasure.
Shoutout to Dave for the many iterations of this blogpost and building the model in which this blogpost is based around!
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.
A few months ago, my good friend Sam hosted a happy hour for LPs, which he invited me to. There I caught up with a former fund-of-funds (FoF) manager who has booked some of the most impressive returns I’ve ever heard of for a pure FoF play. For context, more than one fund generated over 15X net distributions to their LPs. The numbers were enough to impress me. But I had to ask: “Across all the funds you were a part of, what is something that you look for that you’re reasonably confident others don’t?”
He said two things, but one stood out. “Gratitude. I look for managers who never forget who put them in business.”
In all honesty, I found that odd. Not because I disagreed. I love folks who recognize and are grateful to the people who got them to where they are today. But because it didn’t occur to me that it should be the top two things one should optimize for when picking managers. Naturally, it kept gnawing at me.
In my own experience, gratitude seems to compound. Grateful individuals thank you often and sometimes when you least expect it, and more often than not, assuming you’ve done real work to help them, they compliment behind your back. The people they talk to end up learning about you. Their teammates learn about you. And you’ve earned multiple occasions to meet their teammates and those close to them. When a GP or founder’s teammates leave and start new things, those people often think to call you first.
Grateful GPs often hire talent who are just as humble, and in turn, as second nature, extend their appreciation often. Those same GPs are more likely to invest in people who have similar traits as well. So, it begins this flywheel.
As an LP, I look for emerging GPs whose network and deal flow compounds over time. That the first moment I meet them is the smallest network they will ever have again. So I expect and underwrite a GP’s ability to compound deal flow over time. So Fund n+1 is better than Fund n, and Fund n+2 is exponentially better than Fund n. Gratitude is one way GPs can increase the surface area for serendipity to stick. For there to be more quality inbound opportunities in the future.
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.
Kelli Fontaine from Cendana Capital joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on three GPs at VC funds to ask three different questions.
The Council’s Amber Illig asked what happens when a solo GP is incapacitated or passes away.
Oceans Ventures’ Steven Rosenblatt asked why most LPs follow the decision-making of other LPs.
NeuCo Academy’s Jonathan Ting asked what LPs think about GPs asking for help.
From investing in great fund managers to data to investor relations, Kelli Fontaine is a partner at Cendana Capital, a fund of funds who’s solely focused on the best pre-seed and seed funds with over 2 billion under management and includes the likes of Forerunner, Founder Collective, Lerer Hippeau, Uncork, Susa Ventures and more. Kelli comes from the world of data, and has been a founder, marketing expert, and an advisor to founders since 2010.
[00:00] Intro [01:26] Kelli’s new data discoveries [04:32] How did Kelli underwrite a manager with no LinkedIn? [06:19] Is too much data ever a problem? [08:18] Vintage year benchmarking [09:49] Telltale signs on GPs’ social profiles [10:57] Data Kelli wishes she could collect [15:59] Enter Amber and her new podcast [18:08] Amber’s background and The Council [19:08] How does Amber define top companies? [24:25] How can a solo GP set the firm up well in case they’re no longer there? [26:11] Kelli’s number one fear with solo GPs [28:30] Best practices for generational transfers [32:28] Solo GPs and their future plans [36:51] Enter Steven and Oceans [42:38] Would Kelli ever include AI summaries as part of the get-to-know-someone phase? [44:18] Why do LPs follow other LP’s decision-making? [48:43] What are the traits of an LP who is likely to have independent thinking? [51:16] Why don’t LPs talk directly with founders? [57:59] Enter Jonathan and NeuCo Academy [1:00:05] Is Kelli seeing more secondaries firms? [1:01:56] How often should GPs lean on LPs for help? [1:07:22] Are most LPs helpful? [1:12:21] What kinds of questions does Kelli get from her own GPs? [1:15:39] Kelli’s last piece of advice
“If that fund deployed over a year versus a manager of ours that deployed over four years, they’re going to look very different. So we do vintage-year benchmarking to see how their MOIC stacks up against how the revenue of companies stack up.” – Kelli Fontaine
“Team risk is the biggest risk in venture.” – Kelli Fontaine
“The same top ten firms are not the same that they were 15 years ago, and probably Silicon Valley. Generational transfer is very hard.” – Kelli Fontaine
“If you make the brand bigger than just you that it comes from DNA, support systems, things that you stand for that have had support to get there—so once that brand is made, the other team members embody that brand as well. That’s the way to do it. It’s really empowering other team members to own a part in that brand-building—outwardly and inwardly in decision-making.” – Kelli Fontaine
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 used to send intro requests for as many people as I humanly could. Admittedly, a sillier, more naive me a long, long while back.
The most number of intro requests came from people I did not know. Usually founders. Given that I had just entered the venture world at that time, I was labeled as an investor or, at least, someone, who was connected to the investor world based on my LinkedIn. I also had a habit of adding anyone who reached out to connect (unless they were obviously spam). At the time, I thought, “What was the downside?”
Spoiler alert: There is a downside.
They would try to tell me about their startup. Then asked if I would invest. I’d say no, so they’d ask if I knew anyone who might be interested. A fair question. And a natural lead-in, had I offered any names, to: Can you intro me to them?
In trying to be a good Samaritan, I’d ask for the deck and blurb in a forwardable email. Half of them would. Half of them would say something to the effect of “You know enough about my company already; you write the email.”
And my dumbass, fearing to offend, would go out of my way to write intros for strangers who didn’t even bother to write anything themselves. So, I’d send that email to a friend or colleague in the industry. “You interested?” along with the email they sent me. And if they didn’t, just their LinkedIn, website, and/or deck.
Naturally, most would say no. Some would ask for my take on them. To which, I’d share that I didn’t know much about them outside of the obvious. I wasn’t investing myself, but they wanted to meet. 10-20% of the time, some friends and colleagues would say yes. (To this day, I wonder if it was just their policy to say yes to all warm intros or they were trying to be considerate of me. Some, over the years, I’ve asked. As such, it’s all the above.)
Over time, I would just include “I’m not investing. Only met them once.” in addition to “You interested?” in those emails.
Then one day, and I don’t remember when I first thought to myself, why the hell am I putting my reputation on the line each time for someone I don’t know and personally haven’t bothered to dig deeper only to write an email to show I also didn’t care about them? Why would I put myself through that? It had also become emotionally taxing to me to go through all those actions only to disappoint the founders (and myself) 99% of the time. Not only would I feel bad (often delayed disappointment and resent at myself), but I also wasn’t doing anyone any good.
So I stopped. Full stop. Period.
Around the early innings of the pandemic when it felt like there was a greater influx of deals and noise.
My rule became, and still is, unless:
I’m investing/invested
I’m advising (investing my time)
I’ve worked with you before and I would instantly jump at the chance to work together again
I’ve hired you
I’ve known you for so long and to a level we’ve become good friends and I feel like you’re a good reflection of the people I choose to surround myself with (that does not mean you have to be successful, but that you need to have good values and the discipline to pursue them)
You are someone I care about
Or someone, that has wowed me in a fundamental way.
AND I know the other person who you want an intro to well enough…
I’m not writing any intros.
I still read every email I get. Cold or not. And I still respond to every warm email I get. But for my fragile heart that can’t stand disappointing more people and the volume of emails I get, I’m not responding to any emails that look like they’re templated, AI-generated, or written without care. So I can focus on the ones that matter.
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.
“19% of our GDP attracts about 55% of capital inflows, aka venture activity, and 81% is underinvested.” – Vijen Patel
We’re back with one of our crowd favorite formats, where we bring on one LP and one GP, and share why that LP invested in this GP. This time, we have Grady Buchanan, co-founder of NVNG, and Vijen Patel, founding partner of The 81 Collection.
Vijen Patel is an entrepreneur and investor. He founded The 81 Collection, a high growth equity firm in boring industries. Previously, he founded what is now known as Tide Cleaners. He bootstrapped what eventually became the largest dry cleaner in the country (1,200 locations) before selling to Procter & Gamble in 2018. Before Tide Cleaners, he worked in private equity, McKinsey & Company, and Goldman Sachs. He lives in Chicago with his wife and two kids.
Grady Buchanan is an institutional and risk-based asset allocation professional with a passion for bringing venture capital to those who have the interest. He founded NVNG in late 2019 and oversees investment strategies, the firm’s venture fund pipeline, manager sourcing, due diligence, and external events. Before launching NVNG, Grady worked with the Wisconsin Alumni Research Foundation’s (WARF) $3B investment portfolio, focused on private equity and venture capital initiatives, including fund diligence, investment strategy, and policy. Grady is based in Milwaukee, WI.
[00:00] Intro [02:41] The pressure of quitting a PE job for dry cleaning [05:09] Vijen’s self talk as a founder [06:50] How to overcome doubt [09:00] How Vijen learned customer success [10:35] What did Pressbox become? [12:41] The dichotomy between society’s needs and what gets funded [14:19] How did Grady go from selling pancakes to being an LP? [23:51] Why did Grady think he bombed the LP interview? [29:15] What is The 81 Collection? [32:22] How did Vijen meet Grady? [34:39] How is Vijen fluent in Spanish? [36:40] How did Grady meet Vijen? [42:21] How did Grady underwrite 81 Collection? [44:44] What about Vijen made Grady hesitate? [48:35] What’s one thing about 81 Collection that could’ve gone wrong? [50:33] The 3 things that create alpha [52:42] Why does NVNG have the coolest fund of funds’ names? [53:47] The legacy Grady plans to leave behind [56:06] The legacy Vijen plans to leave behind
“I wrote down everyone’s concerns, and I just sat on it. A lot of the founders we like to work with, the ones who we really love are the ones who take it in and listen, write it down, then take some time to synthesize everything and then they’ll act with conviction. ‘Why is this stupid? Tell me why. Let’s go deeper and deeper.’ And oftentimes these reasons are very rational and slowly over time, what if I derisk this by doing that?” – Vijen Patel
“19% of our GDP attracts about 55% of capital inflows, aka venture activity, and 81% is underinvested.” – Vijen Patel
“There’s this crazy stat we recall often: the 50 richest families on Earth, who often build in this 81, they’ve held, on average, their business for 44 years.” – Vijen Patel
“We invest in only amazing managers; we will not invest in every amazing manager.” – Grady Buchanan
“Alpha’s three things: information asymmetry, access, and, actually, taxes.” – Vijen Patel
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.
Pattern Ventures’ John Felix joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on three GPs at VC funds to ask three different questions.
Atria Ventures’ Chris Leiter asked about the common mistakes LPs make when underwriting solo GPs.
Garuda Ventures’ Arpan Punyani asked how quickly do most LPs get to conviction. First 10 minutes? First meeting?
Geek Ventures’ Ihar Mahaniok asked how LPs evaluate Fund IIs when the Fund I has no distributions.
John Felix is a General Partner and Head of Research at Pattern Ventures, a specialized fund of funds focused on backing the best small venture managers. Prior to Pattern, John served as the Head of Emerging Managers at Allocate where he was an early employee and helped to launch Allocate’s emerging manager platform. Prior to joining Allocate, John worked at Bowdoin College’s Office of Investments, helping to invest the $2.8 billion endowment across all asset classes, focusing on venture capital. Prior to Bowdoin, John worked at Edgehill Endowment Partners, a $2 billion boutique OCIO. At Edgehill, John was responsible for building out the firm’s venture capital portfolio, sourcing and leading all venture fund commitments. John started his career at Washington University’s Investment Management Company as a member of the small investment team responsible for managing the university’s now $13 billion endowment. John graduated from Washington University in St. Louis with a BSBA in Finance and Entrepreneurship.
[00:00] Intro [02:20] What’s changed for John since our last recording? [04:08] What is Pattern Ventures? [06:22] Why is Pattern’s cutoff for funds they’re interested in at $50M? [07:32] How does John define noise? [09:34] Do non-sexy industries require larger seed funds? [11:36] How does think about overlap in the underlying startup portfolio? [15:22] Enter Chris and Atria Ventures [18:03] Should solo GPs scale past themselves? [24:14] Partnerships have more risk than solo GPs [26:10] How does John think about spinouts from large VC firms? [27:53] The psychology of being a partner at a big firm versus your own [30:38] Enter Arpan and Garuda Ventures [31:26] Geoguessr [32:52] Garuda’s podcast, Brick by Brick [34:52] How quickly do LPs know they intuitively want to invest in a GP? [38:02] The analogy to what GPs do to founders [43:50] There are many ways to make money [44:57] Quantifying intuition as an investor [49:12] Enter Ihar and Geek Ventures [49:36] How do LPs evaluate Fund IIs when Fund I has no DPI? [53:01] How do you know if a GP did what they said they were going to do? [54:47] What if the key value driver is off-thesis, but everything else is on-thesis? [56:21] Is signing 1 uncapped SAFE per fund reasonable? [57:14] What is the allowable percentage of exceptions in a fund? [1:01:32] Good vs bad exceptions [1:06:06] Reminders that we are in the good old days [1:07:31] John’s last piece of advice to new allocators [1:09:00] David’s favorite moment from John’s last episode
“In life, it’s always easy to justify ‘why now’ is not the right time. I think it’s hard to justify ‘why now’ is the right time to do something.” – John Felix
“We love investing in things that are contrarian and non-consensus, but there has to be a path to becoming consensus because something can’t remain non-consensus forever. There has to be a catalyst that the market eventually realizes this or else the company’s not going to be able to raise venture capital. It’s not going to be able to sustain it and continue to grow and survive.” – John Felix
“The type of spinouts we want to back are the people who are successful in spite of working at the big brand, not because they worked at the big brand.” – John Felix
“You need to earn the right to start your new firm to do your own thing. I don’t think enough people realize that.” – John Felix
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.
