Tag: entrepreneur

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

charlotte zhang

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

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

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

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

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

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

Brought to you by Alchemist Accelerator.

OUTLINE:

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

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

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

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

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

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

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

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Three E’s of Fund Discipline

railroad, discipline

At a dinner earlier this week, a Fund I GP shared how she had recently hosted her first AGM (annual general meeting). Of which, she spent a few hundred dollars to plan the whole thing. She called in favors on venue. Sponsors to cover food. And the only thing I believe she spent money on were gifts for her LPs. For comparison, when I caught up with a firm with 10+ active funds, they said they spend about $2M on their annual summit.

For the uninitiated, the annual summit or AGM is typically the event VC firms hold once a year for their investors, as well as for their portfolio to recap the year and share what’s next. I won’t go too deep here, but for those curious, I wrote a post last week on this.

Naturally, I had to tip my hat off. Not only is hosting a large event like an AGM time-consuming, to minimize the damage to one’s wallet to only a few hundred is a Herculean feat. And yes, she single-handedly pulled it off. While I wasn’t there myself, A+ for executional discipline.

One of three kinds of discipline that LPs expect of GPs. What are the three?

  1. Entry discipline
  2. Exit discipline
  3. Executional discipline

The three E’s.

Did I force myself to find three words that start with E’s that fit? I’m glad you noticed. Originally, called it: investing discipline, exit discipline, and operational discipline. But I digress.

Let me elaborate.

Entry discipline

Entry discipline is all about what and how you invest. It’s the one GPs talk about the most. While it is important – one of the three legs of the stool, it’s not the only one that matters. Nevertheless, it’s a bet on the investor.

These include:

  • Entry prices (pre-money versus post-money valuation)
  • Ownership on entry
  • Sourcing / picking / winning
  • Due diligence process (references, legal diligence, tech diligence, operational diligence, etc.)
  • Prepared mind
  • Terms of investment (you’d be surprised the number of
  • Pro rata rights, and drag along, and right of first refusal (ROFR)
  • Information rights
  • Portfolio governance (board versus board observer seats)

Exit discipline

In the words of Renaissance’s Jeff Rinvelt, “the one that wasn’t baked in for a lot of these firms was the exit manager – the ones that help you sell. […] If you don’t have it, there should be somebody that it’s their job to look at exits.”

Exit discipline is all about how you think about portfolio construction on a broader sense. And of course, how and when to exit positions. It’s the one LPs care about most in a liquidity-starved environment. It matters especially so for venture that’s known for long illiquidity periods. Still matters for buyouts and other assets, but those have shorter time horizons. When am I going to get my money back? Is there a plan? And while mileage will always vary fund to fund, are you at least primed to react when there are opportunities? Will it be consistent or will you suffer from opportunistic whiplash? It’s a bet on the fund manager. Or really in Jeff’s words, the exit manager.

These include:

  • Strategy on when AND how to sell. Simply, how much upside to cap to protect your downside.
  • Proactive and explicit communication on fund lifespan and extensions
  • Relationships with secondary buyers
  • Recycling
  • Early distributions (after the recycling period)
  • Enterprise value to breakeven. To 3X. To 5X.
  • The exit manager, if applicable

Executional discipline

To quote the amazing Ashby Monk, “the difference between your gross return and your net return is an investment in their organization.” In other words, executional discipline is a bet on the team. Is the team uniquely positioned to scale execution? Are they incentivized in the long-term to do the right thing for both founders and LPs? How is knowledge passed down?

These include:

  • Fees on capital committed versus capital deployed
  • Fund expenses (travel, meals, hotels, fund admin, legal, accounting, etc.)
  • Talent
  • Events, AGMs, brand-building exercises
  • Content engine, if one pays for such
  • GP salaries
  • Culture (deal attribution, short and long-term incentive plans, manifestos, succession planning, promotions, vesting schedules, etc.)
  • Carry
  • Reporting (Monthly, quarterly, or annually. It doesn’t matter which, just stick to it. Be consistent.)
  • Valuation Policy / Marks (FYI, SAFEs and convertible notes are not marks. But also, if a portfolio company is overvalued, what’s your valuation policy?)
  • LP Advisory Committee (LPAC)
  • LP Agreement (LPA) / Subscription Agreement
  • Capital calls
  • Cybersecurity policy / Information policy (Who gets access to what information?)
  • Compliance / PR

In closing

Obviously, as your track record and returns grow and speak for themselves, you accumulate a new type of currency in the karmic bank account: trust. You should always never exceed your means to pay. That your credit balance never exceeds your debit, but you undeniably have a greater credit line to operate the institution.

To simplify…

Entry DisciplineExit DisciplineExecutional Discipline
The betThe bet on the investorThe bet on the
fund manager		The bet on the
team

Note that for an emerging fund, these three disciplines are expected of the same individual. In many ways, much harder than if you had a fully staffed team.

Photo by Ales Krivec on Unsplash

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

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

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The Holiday Special | Nakul Mandan and Ben Choi | Superclusters | S4PSE1

ben choi, nakul mandan

“VC is more about the ground game than the air game.” – Nakul Mandan

“Entrepreneurs think it’s going to be like the Michael Keaton version, and the good ones, they actually have to work through the Christopher Nolan version of Batman.” – Ben Choi

Nakul Mandan is the founder of Audacious Ventures. Audacious is a seed stage venture firm managing ~$250M. Audacious’ foundational belief is that ultimately startup success comes down to two key ingredients: Large markets and A+ teams. Accordingly, the Audacious team focuses on two jobs: 1/ Invest in force of nature founders; 2/ Help them recruit an A+ team. Then they get out of the way. Prior to founding Audacious, Nakul was a GP at Lightspeed.

Some of the companies Nakul has backed over the last decade include: Gainsight, People.ai, WorkOS, Multiverse, Marketo, 6Sense, BuildingConnected, Vartana, Tezi and Maxima, amongst others.

You can find Nakul on his socials here:
X / Twitter: https://x.com/nakul
LinkedIn: https://www.linkedin.com/in/nakulmandan/
Personal Website: https://www.nakulmandan.com/

Ben Choi manages over $3B investments with many of the world’s premier venture capital firms as well as directly in early stage startups. He brings to Next Legacy a distinguished track record spanning over two decades founding and investing in early-stage technology businesses. Ben’s love for technology products formed the basis for his successful venture track record, including early stage investments in Marketo (acquired for $4.75B) and CourseHero (last valued at $3.6B). He previously ran product for Adobe’s Creative Cloud offerings and founded CoffeeTable, where he raised venture capital financing, built a team, and ultimately sold the company.

Ben is an engaged member of the Society of Kauffman Fellows and has been named to the Board of Directors for the San Francisco Chinese Culture Center and Children’s Health Council. Ben studied Computer Science at Harvard University before Mark Zuckerberg made it cool and received his MBA from Columbia Business School. Born in Peoria, raised in San Francisco, and educated in Cambridge, Ben now lives in Palo Alto with his wife, Lydia, and three very active sons.

You can find Ben on his socials here:
X / Twitter: https://x.com/benjichoi
LinkedIn: https://www.linkedin.com/in/bchoi/

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

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[04:14] Why is Nakul fascinated by Batman?
[06:41] Does entrepreneurial motivation often come from inspiration or frustration?
[10:33] Nakul’s childhood and early upbringing
[14:37] How Nakul grew from introvert to extrovert
[16:19] Did Ben see the ambition in Nakul from the day they first met?
[18:19] How did Ben’s parents’ work in Chinatown influence Ben as a teenager?
[22:47] How did Ben and Nakul meet?
[28:50] Would Nakul have raised in 2020 if he knew how hard it would be?
[33:49] Why did Next Legacy not invest in Fund I, but in Fund II?
[37:49] How did Nakul react to the pass on Fund I?
[39:56] The kinds of people at Next Legacy’s dinners
[43:49] Why Audacious kept a low profile in 2021
[49:01] Why Audacious deployed Fund I over 4 years, instead of 3
[51:46] Balancing the paradox of one of Audacious’ cultural values
[55:14] The difference between pitching individuals and institutions
[1:00:42] What is it like to be married to an interior designer?
[1:02:40] Nakul’s favorite coffee shop, bar, and restaurant
[1:05:56] What makes a sock special to Ben?
[1:07:17] Why does Ben still like venture?
[1:08:10] Why does Nakul still like venture?
[1:11:36] Thank you to Alchemist Accelerator for sponsoring!
[1:12:37] If you enjoyed this holiday episode, and want more like this, do let me know!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“The risk is slow failure. And actually that’s the worst kind of failure even for entrepreneurs that we back. They’re all talented people. Some ideas work; some don’t. It’s when they end up spending seven, eight years and then it doesn’t work. Then it takes out seven, eight years of their life.” – Nakul Mandan

“Entrepreneurs think it’s going to be like the Michael Keaton version, and the good ones, they actually have to work through the Christopher Nolan version of Batman.” – Ben Choi

“If you don’t wear ambition on your sleeve, how do people know you’re ambitious?” – Nakul Mandan

“VC is more about the ground game than the air game.” – Nakul Mandan

“Always remember there’s a human on the other side of every conversation.” – Nakul Mandan

“The thing about working with self-motivated people and driven people, on their worst day, they are pushing themselves very hard and your job is to reduce the stress in that conversation.” – Nakul Mandan

“If you have an understated personality, wear something really bright.” – Ben Choi

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

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

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

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LPs Should Get Paid More | Ashby Monk | Superclusters | S4E5

ashby monk

“Innovation everywhere, but especially in the land of pensions, endowments, and foundations, is a function of courage and crisis.” – Ashby Monk

Dr. Ashby Monk is currently a Senior Research Engineer, School of Engineering at Stanford University and holds the position of Executive Director of the Stanford Research Initiative on Long-Term Investing.

Ashby has more than 20 years of experience studying and advising investment organizations. He has authored multiple books and published 100s of research papers on institutional investing. His latest book, The Technologized Investor, won the 2021 Silver Medal from the Axiom Business Book Awards in the Business Technology category.

Outside of academia, Ashby has co-founded several companies that help investors make better investment decisions, including Real Capital Innovation (acquired by Addepar), FutureProof, GrowthsphereAI, Long Game Savings (acquired by Truist), NetPurpose, D.A.T.A., SheltonAI, and ThirdAct. He is co-founder and managing partner of KDX, a venture capital firm focused on investment technologies.

He is a member of the CFA Institute’s Future of Finance Advisory Council and was named by CIO Magazine as one of the most influential academics in the institutional investing world. He received his Doctorate in Economic Geography at the University of Oxford, holds a Master’s in International Economics from the Université de Paris I – Pantheon Sorbonne, and has a Bachelor’s in Economics from Princeton University.

You can find Ashby on his socials here:
X / Twitter: https://x.com/sovereignfund
LinkedIn: https://www.linkedin.com/in/ashby-monk-208a479/

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

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[03:44] “I don’t know what to do with my hands”
[04:44] The origin story of Ashby’s LinkedIn skills
[09:04] Ashby’s obsession with the worst title out there
[12:54] Titles at institutional investment firms
[17:05] Building the right incentives for institutional LPs
[20:54] The decision to buy or build for pension funds
[22:36] What’s a smart way to think about the difference of gross and net?
[23:17] When are management fees not justified?
[26:06] When managers charge fees on SPVs
[28:12] When are GPs still grateful for your LP capital?
[29:40] Challenges with the endowment model in PE and VC
[31:14] Why LPs misrepresent what budget fees come out of
[35:28] Compensation structure of a pension fund
[37:59] CalPERS compensation structure
[39:19] The highest paid employees in government jobs
[42:39] Traits of an incredibly talented investor
[47:06] Hire hard, manage light
[51:07] Ashby’s journey into the LP space
[56:05] Why should a young professional work at a pension
[1:00:24] Who outside of investments influences the way Ashby thinks about investing?
[1:02:28] What is organic finance?
[1:07:08] The post-credit scene
[1:12:32] Thank you to Alchemist Accelerator for sponsoring!
[1:13:33] If you enjoyed the episode, would love if you shared it with one friend who would enjoyed it as well!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“The fastest way to become a billionaire in America today is to set up an alternative investment firm and manage pension capital. Literally. That’s the fastest path. Faster than starting a tech company.” – Ashby Monk

“Many pension plans, especially in America, put blinders on. ‘Don’t tell me what I’m paying my external managers. I really want to focus and make sure we’re not overpaying our internal people.’ And so then it becomes, you can’t ignore the external fees because the internal costs and external fees are related. If you pay great people internally, you can push back on the external fees. If you don’t pay great people internally, then you’re a price taker.” – Ashby Monk

“You need to realize that when the managers tell you that it’s only the net returns that matter. They’re really hoping you’ll just accept that as a logic that’s sound. What they’re hoping you don’t question them on is the difference between your gross return and your net return is an investment in their organization. And that is a capability that will compound in its value over time. And then they will wield that back against you and extract more fees from you, which is why the alternative investment industry in the world today is where most of the profits in the investment industry are captured and captured by GPs.” – Ashby Monk

“[LPs] want to solve the problem for their sponsor by reducing the cost of a promise.” – Ashby Monk

“Innovation everywhere, but especially in the land of pensions, endowments, and foundations, is a function of courage and crisis.” – Ashby Monk

“The highest people paid in state jobs are football coaches.” – Ashby Monk

“I often tell pensions you should pay people at the 49th percentile. So, just a bit less than average. So that the people going and working there also share the mission. They love the mission ‘cause that actually is, in my experience, the magic of the culture in these organizations that you don’t want to lose.” – Ashby Monk

“The job of an investor is to look at the same data that you and I are looking at, and be ready to make a different conclusion. That’s how you outperform.” – Ashby Monk

“Hire hard; manage light.” – Ashby Monk

“The way best practices are communicated in this industry is through role models. So, Yale model, Canadian model, Norway model… There are no schools of investing. […] And the way models emerge is you get an innovation that results in outperformance.” – Ashby Monk

“I do research projects on nothing.” – Ashby Monk on research into solutions that don’t exist in the world yet

“There are two types of innovation. There’s innovation as an invention. And there’s discovery. And a lot of what I do is discover and apply.” – Ashby Monk

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

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

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

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The Most Common Rejection Email for Transformative Startups

The most common VC rejection by founders who end up building the world’s most transformative companies seems to be:

The market is too small.

Other variations:

  • Unfortunately, the size of the market didn’t make sense for our investment model.
  • The price of the round felt too expensive for our strategy. (An indirect assumption that the exit-to-entry multiple would be south of a 100X. In other words, there’s a cap on market size. Aka small market.)

There are plenty of public examples of founders (i.e. Airbnb, Instacart, Uber, Facebook/Meta, Shopify, eBay, Ford, NVIDIA, etc.) sharing their rejection emails from the first couple hundred VCs they’ve met. But also, I’ve been lucky enough to read a lot of the memos that GPs and partners have written in the decades past on their anti-portfolio.

Yep, that’s the blog post for today.

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

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

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Developing Taste as an LP

taste, donut, bite

Brian Chesky did a fireside chat recently where he talks about how he hired for roles at Airbnb, especially in the early days. To which, I highly recommend you checking the above link. Lots of nonobvious lessons worth noting. One thing especially stood out. Probably due to the recency bias of having a few friends text me who were thinking about investing in their first fund.

“Executives have more experience bullshitting you than you have experience detecting their bullshit. So it’s like an asymmetric game where you’re a white belt fighting a black belt and they’re just going to punch you in the face repeatedly.”

In a similar way, a lot of new LPs in venture have also yet to develop their taste for quality in the venture asset class. If you’ve never hired an executive, you have no idea what a great executive looks like. And if you’ve never invested in a fund, or seen a few, you have no idea what a great fund looks like. Most GPs, given the volume of LPs they pitch to, have more experience bullshitting you as an LP than you have experience detecting their bullshit.

And that’s okay. Everyone starts off this way. So the question then becomes how do you develop taste?

  1. Talk to as many as you can. Don’t overoptimize for quality. You have no idea what quality looks like, so don’t delude yourself that you do. Ask friends who they’ve talked to. Ask Twitter. And ask the GPs you talk to who are friends they respect who are also building a fund. Hell, try your luck at asking certain “influencers” in the space if they have recommendations. Realistically, if you raise your hand and say you’re an LP, GPs will flock to you. In 2024, deal flow, as measured by quantity, isn’t really hard for any LP out there.
  2. Prioritize references.

On the first point, as is the advice I give most first-time angel investors investing in startups, don’t invest in the first startup you see. Unless it’s for a reason outside of financial gain. To support a friend. To learn. For impact. To give back. All great reasons. But not if because your friend told you to.

Along the same thread, don’t invest in the first fund you see. Talk to at least 30-50 fund managers. Get a good understanding of what the average fund looks like. What is actually special about a GP versus what they say is special. Most of the time when someone claims that they are the special one, they usually aren’t. For instance, only [insert big name fund] invests with us. Or we are the only [insert industry or function] fund. Hell, if anyone gives you any sort of superlatives, they’re usually wrong. Only. Always. Best. Most. I’m sure there are more, but the rest are escaping me.

Secondly, prioritizes references over your initial judgment when interviewing and doing diligence. Dan Stolar from Colibri and I had a conversation recently about references, where the questions you ask are paramount. If you’re short on time, I’d recommend starting from the 25:50 mark.

In short, to existing LPs, ask:

  1. How did you get to conviction?
  2. Who else did you talk to that were comparable to this GP before you reached an investment decision?
  3. Is there anything you learned about the team after you made the investment?
  4. What kind of person do you think they should bring onboard either in the next fund or after they get to a close?
  5. Would it be possible to share your investment memo with me?
  6. What were some of the pushbacks or hesitations when this deal reached your investment committee?

To LPs more broadly:

  1. What are your primary motivations to be an LP in venture?
  2. How do you think about portfolio construction?
  3. Who are the GPs you’ve talked to that seem to stand above the rest? And why?

To co-investors/other GPs:

  1. How often do you share deals with this GP?
  2. How often do they share deals with you?
  3. Who are your top 3 emerging managers that you love seeing deals from and why?
  4. Is there an emerging manager you would hire to be a partner or GP at your firm if you could?
  5. How would you rate this GP on a scale of 1-10, with 10 being perfect?
    • What would get this GP to a 10?
  6. Did you or have you considered investing in their fund?
  7. What are some of this GP’s hobbies that I might not guess?
    • This shows you how well people know each other. You can also use this question for other reference archetypes.

To former colleagues and friends:

  1. If you were to hire someone under this GP, what traits or skillsets would you look to hire for?
  2. I hate surprises. Is there anything that could go wrong I should know now about this GP, so that I wouldn’t be surprised when it happens?
  3. Who is someone you would hire or work together again in a heartbeat?
    • Notice if they mention that GP. You don’t have to probe as to why they didn’t mention if they didn’t. But worth noticing. Also probably worth talking to that person they did mention to keep a strong talent network around you.

Obviously the above list isn’t all-inclusive. But nevertheless I imagine they’ll be good starting points. Also, I want to note that going deep is often more insightful than going wide.

Remember, almost everyone is incentivized to say good things about others. Or at least, there is little to no incentive to talk smack about anyone you know. So finding the best way to ask questions that unearth different perspectives and facets of a person is important.

Funnily enough and unintentionally, last week I wrote a similar post from the perspective of a GP, this one happened to be more for the LP.

Photo by Thomas Kelley on Unsplash

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

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

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The Difference Between GPs who Can and Should Raise | Dan Stolar | Superclusters | S4E3

dan stolar

“GPs and LPs are both equally busy, but different kinds of busy where on any given day, we’ll probably have the same amount of calls and all these things going on, but [LPs are] going to know [they’re] busy three months ahead of time and a GP won’t.” – Dan Stolar

Dan Stolar is a Principal at Colibri Equity Ventures, a single family office based in NYC and San Diego. Dan leads the venture capital strategy and also participates in all alternative private investments, including sports investing and private equity. As part of the venture strategy, Dan particularly focuses on investing in emerging venture capital funds. Since launching the strategy in late 2022, the firm has invested in ~15 managers. Dan started his venture capital journey as an intern at Viola Credit, a venture debt fund in Tel Aviv, before spending time in investment banking at Peter J. Solomon Co. (now Solomon Partners) where he focused on consumer and retail mergers & acquisitions. After banking, Dan spent ~5 years at Alpha Partners, a late-stage venture firm that partners with early stage managers helping them follow on in their late stage deals. Dan is still involved with Alpha as a Venture Partner. Dan is a proud New Jersey native, and a graduate of the University of Michigan (Go Blue!).

You can find Dan on his socials here:
LinkedIn: https://www.linkedin.com/in/danielstolar/
X/Twitter: https://x.com/dan_stolar

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

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[02:29] Dan’s high school scavenger hunt
[07:33] Telltale sign of excellence #1 in a GP
[09:29] How telling intros are
[11:16] Telltale sign of excellence #2
[13:46] Underwriting a Fund II vs Fund I
[17:40] What do LPs think of deadlines that GPs set for closes?
[18:48] What does a no that turns into a yes look like?
[22:26] Not all positive references are created equal
[25:50] Questions to ask an existing LP in a GP during diligence
[28:30] Reasons an investor would leave a firm
[30:13] The difference between a GP who can and should raise a fund
[33:01] Fund track records that aren’t scalable
[33:56] The one question that most GPs don’t have a good answer to
[35:09] Responsiveness between a GP and an LP
[38:39] Inbox overload for LPs
[41:21] What trivia does Dan excel at?
[45:07] Biking through snowstorms in NYC
[48:08] Thank you to Alchemist Accelerator for sponsoring!
[49:08] If you learned something from this episode, it would mean a lot to me if you could share it with one friend who might also enjoy it!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“I think a lot about someone’s transactional ability – or how transactional they actually are – correlates with how successful they’re going to be. […] Who you lift up is a much better indication of how good you are.” – Dan Stolar

“Getting an LP is like pulling a weight with a string of thread. If you pull too hard, the string snaps. If you don’t pull hard enough, you don’t pull the weight at all. It’s this very careful balancing act of moving people along in a process.” – Dan Stolar

“GPs and LPs are both equally busy, but different kinds of busy where on any given day, we’ll probably have the same amount of calls and all these things going on, but [LPs are] going to know [they’re] busy three months ahead of time and a GP won’t.” – Dan Stolar

“When a GP passes on a deal, the deal’s done. You’re not going to see that company again. When I pass on a fund, I might see that fund for another 12 years. So I’m going to be on those updates and those check-in calls.” – Dan Stolar

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

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

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

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The Case for Concentrated Portfolios | Jeff Rinvelt | Superclusters | S4E2

jeff rinvelt

“The line that sits for me is you got to pick well, you got to coach well, and then you got to finance well – and the financing includes the exit.” – Jeff Rinvelt

Jeff Rinvelt is a partner at Renaissance Venture Capital an innovative venture capital fund of funds. Jeff’s diverse background in venture capital and technology and his experience working in various start-up ventures uniquely position him to advise startups. In addition, Jeff is quite active in the Michigan start-up community, volunteering his time to mentor young entrepreneurs, judge pitch competitions, and guest lecture student classes and organizations. Through Jeff’s work on the Fund, his volunteer efforts, and his role as the chair of the Michigan Venture Capital Association’s board of directors, his passion for fostering a productive environment for venture capital investment in the State of Michigan is evident.

You can find Jeff on his socials here:
Twitter: https://twitter.com/rinvelt
LinkedIn: https://www.linkedin.com/in/rinvelt/

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

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[02:28] When Jeff went from engineering to finance
[06:26] An introvert in an extroverted industry
[07:42] Jeff’s transition from founder to investor
[11:06] The need for a fund of funds in Michigan
[13:54] Why start a fund of funds instead of joining another fund
[15:32] The minimum viable fund size for a fund of funds
[21:46] Renaissance’s portfolio construction
[24:15] Why Renaissance measures GP performance by net IRR
[28:18] How does Jeff assess a GP’s portfolio construction model?
[31:20] Jeff’s stance on reserves
[34:39] Who is the exit manager?
[37:22] Should VCs be public market investors?
[42:43] What would Jeff do if he had evergreen capital?
[44:01] Do the best GPs in Jeff’s portfolio send the deck first or have the meeting first?
[45:11] Why is Jeff trying to break your heart?
[48:32] Thank you to Alchemist Accelerator for sponsoring!
[49:33] If you enjoyed the episode, please do share this episode with ONE other person you think would enjoy it.

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Net IRR is the one that’s probably going to work. It takes a while for it to bake though – 5 or 6 years in.” – Jeff Rinvelt

“The line that sits for me is you got to pick well, you got to coach well, and then you got to finance well – and the financing includes the exit.” – Jeff Rinvelt

On portfolio construction models… “We are not in the Monte Carlo simulation game at all; we’re basically an excel spreadsheet.” – Jeff Rinvelt

“A lot of those skills [to be a fund manager] are already baked in. The one that wasn’t baked in for a lot of these firms was the exit manager – the ones that help you sell. […] If you don’t have it, there should be somebody that it’s their job to look at exits. ” – Jeff Rinvelt

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

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

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

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Micro(scopic) 10X Funds

young, kids, students

I wrote both a Twitter thread (I know it’s X now, but habits die hard) and a LinkedIn post recently on student and recent graduate funds. A good friend and I have been seeing a number of small sub-$10M funds run by college students and/or recent grads. And even more since the afore-mentioned social posts came out. In a way, it was my flag in the sand moment inviting additional conversations on the topic.

Full LinkedIn post here. Truncated this to make it easier to read.

The TL;DR version of the post, although the post itself is at most a two-minute read, is that these student funds are interesting. Most will die. But a small, small few will deliver insane returns. As such, as LPs, the underwriting for these funds, where sourcing is extremely predictable (i.e. invest in their peers), needs for these funds to be 10X funds, as opposed to 5X net for the typical seed fund or 3X for the typical Series A fund. Also, we know going in that most, if not all, of these funds won’t be enduring. Most likely one and done.

And so what does the underwriting look like?

I actually elaborated on this in response to a comment that asked what percent of unicorns were founded by students, but thought it made sense to expand here in this blogpost as well.

Venture, at the end of the day, is a game driven by the power law. I’m not the first to say that. And I won’t be the last. In other words, in VC, we are applauded not by our batting average (like buyouts or hedge funds), but by the magnitude of our home runs. We can miss on the vast majority, but as long as we strike one Uber or Coupang or Google or Facebook and it returns multiple times of our portfolio, then… we did it.

To quote a Midas list investor (who’ll go nameless for now, until I have his permission to share his name), who at the time was presenting on stage, “The only reason you are listening to me today is because I’m on the Midas list. And the only reason I’m on the Midas list is because of this one investment I made [redacted] years ago.”

Obviously, there was definitely some modesty there. In fact, he’s hit a number of exits in the years since. Nevertheless, when said in broad strokes, his point stands.

So to the comment that started it all. By numbers, a rather small number of unicorns were founded by active students. I don’t know the exact number (writing this on vacation, and I don’t have Pitchbook access on this small device), but I’m willing to bet that only a small percentage of unicorns are founded by students. And even less when you consider realized unicorn exits. Excluding the crazy markups of 2020-2022. It’s why the average age of a startup founder is 42 at the inception of the company.

That said, “Among the top 0.1% of startups based on growth in their first five years, [an HBR study finds] that the founders started their companies, on average, when they were 45 years old.” In fact, in the same study, they found “[r]elative to founders with no relevant experience, those with at least three years of prior work experience in the same narrow industry as their startup were 85% more likely to launch a highly successful startup.” In a separate Endeavor study, it’s also why there’s only a small sliver of founders with no work experience prior to the founding of their unicorn company.

All that to say, from Alexandr Wang to Jeff Bezos to Mark Zuckerberg to Patrick and John Collison, all were in their early twenties (or earlier) when they started their companies. Each, in their own right, an outlier.

To build a hypothetical portfolio — forgive my generalizations, but doing so for nice, even numbers…

Say one allocates a $10M fund of funds portfolio. It’ll write 10 $1M checks into $5M funds. In other words, for a 20% stake at the fund level. In a bad economy, where $200M is the median ARR to go public, and if we assume a 10x multiple on exit, a $2B unicorn exit in that $5M VC fund returns ~$2.2M in the fund of funds portfolio. 0.6% equity valued at $12M. A 2.4X on the $5M fund alone. And a little over $2.2M back to the LP, as the GP takes 20% carry. This assumes $100K checks, 2% ownership on entry and 70% dilution by the time of exit. Naturally, no reserves. needing about 10-11 unicorns to 2x. A lot to expect for a portfolio of student funds. 10 unicorns out of 400 is quite hard even for most seasoned investors.

And so one must believe that these student funds can find true outliers. And before anyone else. Additionally have enough downstream capital relationships to facilitate intros to funds who will lead current and future rounds. Which luckily for them, a lot of GPs of multi-stage funds are individual LPs in these funds. Playing a pure access approach.

And so, if there’s a $10B exit in one of the VC portfolios, under the same fund strategy assumptions as earlier, a single $10B company exit returns the whole fund of funds portfolio. Every other exit will just be cherries on top. So out of a 400 underlying startup portfolio, only one decacorn exit is needed. Instead of multiple unicorns.

Separately, and worth noting, although I’ll be honest, I haven’t had a single conversation with a young GP where any were as deliberate with their sell strategy as this, there are multiple exit paths today outside of M&A and IPO, most notably secondaries (portfolio and fund) (something that the one and only Hunter Walk wrote recently in a blogpost far more eloquently than I could have put it). And so even in a crazy AI hype right now, there are paths to liquidity in these multi billion valuations at the Series B and C, if not earlier. In the increasing availability of such options, my only hope is that these young fund managers have the wherewithal to be disciplined sellers. Perhaps, an additional reason these young VCs should have LPACs.

A blogpost for another day.

Photo by 🇸🇮 Janko Ferlič on Unsplash

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

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

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The GP Data You’ve Never Collected Before | Kelli Fontaine | Superclusters | S4E1

kelli fontaine

“Neutral references are worse than negative references.” – Kelli Fontaine

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.

You can find Kelli on her socials here:
X/Twitter: https://x.com/kells_bells
LinkedIn: https://www.linkedin.com/in/kellitrent/

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

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[02:11] How Kelli became a figure skater
[06:59] Kelli’s football fandom
[08:47] Picking schools for critical thinking for children
[10:55] The difference between likeability and founder-friendliness
[13:35] Correcting biases as LPs
[15:07] Examples of what makes GPs unique
[19:53] What kinds of data was Cendana NOT measuring when Kelli joined?
[21:58] What are datapoints that LPs should measure but aren’t?
[23:45] Startup metrics that LPs should track
[26:16] Can you trust the data out there?
[32:05] How does one start building a GP dataset from scratch?
[37:38] Why does Cendana do 40 reference checks per fund?
[39:47] Neutral references are worse than negative references
[42:28] The questions Kelli asks founders when diligencing GPs
[43:44] How Cendana does monthly calls with all their GPs and large LPs
[47:57] How often does Cendana send investor updates?
[49:13] The difference between monthly calls and taking an LPAC seat
[51:19] Kelli’s indelible sports moments to witness
[52:37] What makes Kelli laugh?
[56:14] Thank you to Alchemist Accelerator for sponsoring
[57:15] If you enjoyed this episode, it would mean a lot to me if you shared it with one other friend!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Neutral references are worse than negative references.” – Kelli Fontaine

“What is unique about their background that gives them a right to win today?” – Kelli Fontaine

“Everybody uses year benchmarking, but that’s not the appropriate way to measure. We have one fund manager that takes five years to commit the capital to do initial investments versus a manager that does it all in a year. You’re gonna look very, very different. Ten years from now, 15 years from now, then you can start benchmarking against each other from that vintage.” – Kelli Fontaine

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

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

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

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