Ben Ehrlich is the founder and General Partner of First Momentum Capital, where he helps seed a new generation of venture capital firms. He is also the Director of Strategy at the Long Term Stock Exhange. Previously Ben worked across the venture ecosystem supporting companies in the Canadian Technology Accelerator, OutCast Communications and Cribspot (YC 15). In his free time Ben takes his Irish setter doodle hiking and enjoys watching the University of Michigan football team (mostly) win.
[00:00] Intro [03:43] The origins of the Out of the Crisis podcast [06:54] Ben’s advice for rookie podcasters [08:35] How did Ben first meet Eric Ries? [11:46] The play-by-play for Ben’s interview with LTSE [13:36] What do decisions and conversations look like at LTSE? [16:23] Building trust among team members [18:29] How does Ben build trust with GPs? [25:14] How did First Momentum Capital start? [30:42] What was the pitch to close First Momentum’s first fund? [33:54] How does Ben underwrite Fund I managers? [36:42] How does Ben measure a GP’s future deal flow (as opposed to today’s)? [45:40] What does a “No” from Ben look like? [57:50] Thoughts on fund governance [1:05:57] What is the role of serendipity in Ben’s life? [1:08:17] Commisso Bakery in Toronto [1:10:35] Thank you to Alchemist Accelerator for sponsoring! [1:11:35] If you enjoyed the episode, I’d appreciate it if you could share it with one friend!
“Make sure to pay the government, doctors, and podcast producers on time.” – Ben Ehrlich
“If you want to build trust with someone [on your team], if they screw up, you have to be okay with them screwing up because you put them in the situation.” – Ben Ehrlich
“We’re looking for concentrated, non-correlated bets.” – Ben Ehrlich
My friend invited me to a demo day earlier this week. Albeit, it was a bunch of summer interns presenting their project they’d been working on for the last two months. The few investors and I who sat on the judging panel were all admittedly quite surprised by the quality of pitches and products from students and hell, even within two months. In fact, these 10-11 interns have gotten much further in product development and customer discovery than most founders I’ve seen across the span of a year. Whether sampling bias or not, the latter is probably about 50%+ of what I see these days. And you’d think that AI would have sped up the product development cycle.
But I digress.
Simply put, I was impressed. So, in efforts to simulate actual pitches at demo days, I asked a team who had presented five features they’d been working on and gotten each to a working prototype. “If you had to kill three of the five features, which three would you kill?”
To which, the “CEO” replied: “To be honest, all five are quite important. But if we had to kill a feature, it’d be the AI chatbot, but the rest of the four go hand-in-hand.”
I pushed for a more discerning answer, but was met with a paraphrased version of the last answer. And of course, it left a little more to be desired. What I was looking for was something of more prescriptive specificity. For instance, “we’d focus on usage metrics, particularly with respect to retention cohorts and actions per session across all the features. And depending on what features seem to perform better than others, our plan is to focus 70% of engineering resources on the top feature, 20% on the second most popular feature, and 10% focused on either a permutation of the other three or spending time with our customers to see where they’re the most frustrated.” It may not need to be the “right” answer, but having a thought-out answer is helpful.
After all, the original question boils down to the fact that most founders fail from indigestion not from starvation. Charles Hudson wrote this great piece last month, aptly named “The Last $250K.” In short, one of the most common behavioral changes he’s observed is when founders are down to their last $250K. And, three things stand out in particular:
“The most important things to work on become incredibly clear.”
“The data needed to validate the company’s hypothesis becomes much clearer.”
“There are things that the company was doing that they stop doing because those things don’t really matter given the gravity of the situation.”
It’s a quick read. And I highly recommend it. Much of which I personally agree with. Not sure if that’s usually the $250K mark, but my personal sample size is far smaller than Charles’. Constraints are the breeding grounds of creativity.
What’s really interesting is that my first reaction to that blogpost was just like how the last 4-6 months of runway leads to deep focus, how do the last 4-6 months affect fund managers? And it’s not too far off.
Deployment speed slows. The simple reason is that they no longer feel the fire under their belly to deploy. Either because they’re close to their target portfolio size or they need to elongate the time horizon while they’re actively raising their next fund.
The quality bar for what gets funded goes up. Since your deal flow pipeline is likely not contracting, there’s a flight to quality. And quality more often than not, translates to traction, logos/brands, and founder’s prior experiences. While there are always outliers, I see many GPs take less risky bets that they would’ve otherwise.
GPs are actively planning for the next fund’s strategy. And actively synthesizing lessons learned. Or at least, with respect with how they pitch LPs. And if they’re an emerging manager, or a fund without clear wins in their last fund, the most important things also become painfully clear. They often focus on the 20% that drove 80% of fund returns.
GPs are spending a lot more time on portfolio support. Not only because graduation rates become a lot more important (for fund returns and narratives for prospective LPs), but also because references matter in diligence. And well, if you’re fundraising for your next fund, you can be damn well sure that a sophisticated LP is going to do anywhere between 10-50 reference checks. On-list and off-list. 20-30% of which with your portfolio companies.
Thematically, focus. While there are other constraints that help improve a founder or a fund manager’s level of focus, limited runway (or capital to deploy) is a natural forcing function. The best ones I’ve seen often impose artificial constraints early on, before things get rough. Rules and codes of conduct. Things they promise themselves and the team never do. Aligning compensation behind performance. In other words, operational discipline.
Naturally, it should be to no surprise that investors of any kind spend a lot of time on organizational discipline before they choose to invest.
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.
Raida Daouk started her career in banking before moving to the investment team of BY Venture Partner, a venture fund with offices in Beirut and Abu Dhabi. She quickly climbed the ranks within the company and ultimately became a Venture Partner.
Recognizing a void in the market for personalized venture consulting services, Raida established Amkan Advisory, a boutique consultancy firm specializing in assisting family offices and high-net-worth individuals in identifying venture funds that align with their specific strategies. Given that first-time fund managers often possess the most aligned incentives with their investors, she understood the significant value they bring to the venture capital landscape. However, Raida also understood the reluctance of family offices to commit capital to relatively unproven managers. By curating a portfolio of carefully selected funds, she aims to mitigate the perceived risk associated with investing in first-time managers while still accessing the high-growth potential of emerging ventures.
Amkan Ventures emerged to offer LPs access to emerging managers beyond their direct reach. Focusing on small Funds I and II led by ambitious managers with a conviction-driven approach, the firm prioritizes delivering returns and nurturing opportunities in the venture arena.
Amkan Ventures’ first close occurred in April 2024, with one investment already made in a $30M fund I out of NY and one more about to be announced.
Raida currently serves on the Selection Committees of RAISE Global and The Bridge Platform.
[00:00] Intro [02:45] The impact of biology on Raida’s career [06:24] If Raida were to teach a founder psychology course [08:42] Raida’s definition of “running through walls” [10:16] Similarities and differences between founders and fund managers [11:36] What does GP-thesis fit look like? [14:38] How Raida got to a yes on Nebular Ventures? [20:35] The personas of different kinds of references [26:05] The one question that Raida always asks during reference calls [28:31] Is there such a thing as too many references? [31:57] What if you don’t have a network of references as an LP? [35:26] How does one set up the venture arm of a family office? [40:28] What is the GCC? [43:58] The best way to build relationships in the GCC [47:54] The origin story of Amkan Ventures [52:19] How did Raida build a strong understanding of the foodtech space? [53:58] Where did Amkan’s name come from? [58:26] What fund is in Raida’s anti-portfolio? [1:00:30] What’s Raida’s take on solo GPs? [1:03:10] How does your mindset change as an LP if you had evergreen capital? [1:06:58] Thank you to Alchemist Accelerator for sponsoring! [1:07:59] If you enjoyed this episode, it would mean a lot if you could share this with one other friend!
“It’s always best to start the relationship when there is no ask.” – Raida Daouk
“The average length of a VC fund is double that of a typical American marriage. So VC splits – divorce – is much more likely than getting hit by a bus.” – Raida Daouk
“The more constraints you have, the more conviction you will have in each manager.” – Raida Daouk
Lisa Cawley is the Managing Director of Screendoor, a highly respected LP of GPs, investing in firm-builders by firm-builders, with a unique model for partnering with allocators to access the emerging manager ecosystem. She’s been covering venture capital for more than a dozen years, since 2010 at Ernst and Young, a private investment firm, and now to Screendoor.
Lisa is a proud graduate of Loyola University Maryland where she’s earned her MBA and MS in Finance, as well as her BBA in Accounting, with a double minor in Information Systems and Spanish. Lisa is a CFA Charterholder and holds a CPA from the State of Maryland. In addition, she’s also a member of Class 29 of the Kauffman Fellows.
[00:00] Intro [03:43] How swimming has influenced Lisa’s life to date [11:16] How does Lisa evaluate competitive spirit in others? [14:36] The importance of understanding LP side letter terms [21:33] Investing as a team AND individual sport [23:45] Screendoor as the LP of GPs [28:43] How does Screendoor align incentives with their GP advisors? [31:05] How do GP advisors get assigned to portfolio managers? [35:09] LP-GP fit [37:46] Generation 1 vs Generation 5 of a family office [43:19] How does firm-building differ from fund-building? [49:09] Reference checking a fund manager’s “unique” value-add [55:24] Which two life lessons would Lisa canonize in a time capsule? [57:36] What was in Lisa’s last OS update? [1:01:23] The different facets of education in Lisa’s life [1:09:09] Final words on being thoughtful as an LP [1:14:05] Post-credit scene [1:25:27] Thank you to Alchemist Accelerator for sponsoring! [1:26:29] If you enjoyed the episode, I’d great appreciate it if you shared it with 1 other person!
“[Swimming, like venture] is both a team and individual sport.” – Lisa Cawley
“If you are governing things from a point of a legal document, whatever that may be and having to refer to that in order to trigger a behavior, that often to me feels emblematic of a transaction, not a relationship.” – Lisa Cawley
“Performance is everybody’s right to continue to do their business in venture.” – Lisa Cawley
“You can be a critic while still helping somebody, and you can be a critic while still giving empathy and doing so with respect.” – Lisa Cawley
Evan currently serves as Head of Venture Capital Investments and Research for Integra Global Advisors, a multi-family office. Prior to Integra, Evan served as Senior Manager of Data Science for Anheuser-Busch InBev where he oversaw data science and strategy for the US marketing organization. Prior to Anheuser-Busch, Evan spent two years as a Management Consultant at Marketing Management Analytics and held a technical role at Amazon. Evan earned an MS in Computer Science with a concentration in machine learning from Georgia Tech and studied computational and applied mathematics at the City University of New York and finance and psychology at the University of Miami.
[00:00] Intro [03:27] What are the mechanics of a great cold email? [07:54] Evan’s background in sports marketing [10:54] The kinds of data to ignore as an LP [13:01] Portability and replicability of track record [19:57] How much thesis drift is too much? [22:37] What happens when a partner isn’t pulling their weight? [29:35] Why does Evan have two bachelor degrees? [34:38] Why study quantum mechanics in applied math? [38:25] Evan’s journey to Integra [45:21] Buy vs Build at a fund-of-funds [47:40] Questions to ask when choosing which vendor to work with [51:24] How Evan thinks about operational diligence [58:30] Setting up an information policy in your firm [1:01:39] Valuation policy at a hedge fund vs VC fund [1:11:12] Why doesn’t Integra have strict mandates for geographies to invest in? [1:21:20] The fallacy with LPs overweighing DPI in 2020-2021 [1:27:15] Evan’s greatest life lesson [1:28:14] Evan’s favorite kosher restaurants in NYC [1:32:07] “Post-credit scene” [1:34:24] Thank you to Alchemist Accelerator for sponsoring! [1:35:25] If you liked this episode, it would mean a lot if you left a like and shared this episode with one friend!
“It’s important to be data-informed, not data-driven.” – Evan Finkel
“Not only does [an investment] have to be the best in that geography, it actually has to be better than the incremental dollar we could put in any other geography.” – Evan Finkel
“The way we think about VC is both on an absolute and a relative basis. On an absolute basis, we have to be able to underwrite a manager to 3X net or better, or ideally 4X net or better. Because otherwise the lockup doesn’t make sense. It doesn’t make sense to lock up your money for 10, 12, or 15 years with pretty limited distributions. In order to be able to consider a VC fund for our portfolio, we have to be able to underwrite it to at least 3X, but ideally 4X or better.
“But then there’s also a relative component. We’re not looking for the best relative managers. Understanding whether this is a really good year or weak year… You might be the best manager of a given vintage, but in absolute terms, you actually might not be quite as impressive. […] It helps us contextualize the performance of a given manager.” – Evan Finkel
“DPI generated in a chaotic environment is sort of similar to TVPI generated in a chaotic environment. It’s great it happened, but let’s contextualize it properly and don’t overweight DPI when you’re evaluating managers.” – Evan Finkel
“In venture, we don’t look at IRR at all because manipulating IRR is far too easy with the timing of capital calls, credit lines, and various other levers that can be pulled by the GP.” – Evan Finkel
Inspired by John Felix in our recent episode together, as LPs, we often get pitches where GPs claim they’re an N of 1. That they’re the only team in the venture world who has something. Usually it’s the fact that they have brand-name co-investors. Or they run a community. Or they have an operating background, like John says below. And it isn’t that unlike the world of founders pitching VCs.
The truth is most “unfair advantages” are more commonplace than one might think. Even after one hears 50 GP pitches, one can get a pretty good grasp of the overlap.
For the purpose of this blogpost, the goal is to help the emerging LP who has yet to get to 50-100 pitches. And for the GP who hasn’t seen that many other pitches to know what the rest of the market is like. Obviously, the world of venture shifts all the time. What’s unique today is commonplace tomorrow.
For the sake of this post, and to make sure I’m not using some words too liberally, let’s define a few terms I will use quite often in this blogpost:
Product: A fully differentiated edge that an emerging manager/firm has. In other words, a must-have, if the firm is to succeed.
Feature: A partially differentiated edge, if at all, an edge. In many cases, this may just be table stakes to be an emerging manager today. In other words, a nice-to-have or expected-to-have.
Networks
Product
Feature
Differentiated community (high/consistent frequency of engagement)
Alumni network (school or company)
Downstream investors that prioritize your signals
In-person events
Keeper test
Virtual events
Co-investors
Networks, in many ways, are synonymous with your ability to source. It’s the difference in a lot of ways from co-investing versus investing before anyone else (versus investing after everyone else). The latter of which is least desirable for an LP looking for pure-play venture and risk capital.
The quickest check is simply an examination of numbers. LinkedIn or Twitter followers. Newsletter subscribers. Podcast subscribers. Community members. While it’s helpful context, it’s also simply not enough.
Here’s a simple case study. Someone who has 5,000 followers on LinkedIn with hundreds of people engaging with their content in a meaningful way is usually more interesting than beat someone who has 20,000 followers on LinkedIn, who only has 10s of engagements. Even better if one generates a substantial amount of deal flow with their content alone.
One thing that is hard to evaluate without doing an incredible amount of diligence is your founder network referring other founders to you. From one angle, it’s table stakes. From another, true referral flywheels are powerful. In the former, purely having it on your pitch deck without additional depth makes that section of the deck easily skippable.
One of my favorite culture tests is Netflix’s Keeper test. That if a team member were to get laid off or fired, would you fight to keep them or be relieved? The best folks, you would fight to keep. And as such, one of my favorite questions during diligence to ask the breakout / top founders in each GPs’ portfolios is: If, gun to head, you had to fire all your investors from your cap table and only keep three, which three would you keep and why?
Do note I differentiate breakout and top founders. They’re not mutually exclusive, but sometimes you can be brilliant and do everything right and things still might not work out. But smart people will keep at it and start a new company. And maybe it was a smaller exit the first time, but the second or third time, their business may really take off. Of course, sometimes I don’t have the same amount of time to diligence each GP as an LP with a team, so I generally ask the question: If all of your portfolio founders were to drop what they’re currently doing regardless of outcome, and start a new business, who are the top 2-3 people you would back again without hesitation?
At the end of the day, for networks, it’s all about attention. It’s not about who you know, but about how well you know them AND who you know that TRUSTS what you know. In an era, where there is more and more noise and information everywhere, a wealth of information leads to a poverty of attention. But if you have a strong foothold on founders’ and/or investors’ attention in one way or another, you have something special.
Experience/expertise
Product
Feature
Early hire at a unicorn company + Grew a key metric by many multiples
Hired top operators who’ve gone on to change the world
Experience at a larger firm where you didn’t lead rounds / fight for deals
Independent board member
Experience only matters here where there are clear differentiations that you’ve seen and can recognize excellence. In a broader sense, having an operating background is unfortunately table stakes. As John mentioned, any generalities are.
While strong experiences help you source, its main draw is that it impacts the way you pick and win deals. Only those who have experience recognizing excellence (working with or hiring) know the quality in which A-players operate. Others can only imagine what that may look like. That’s why if you’re going to brag that you’re a Xoogler (or insert any other alumni), LPs are going to care which vintage you were at Google. A 2003 Xoogler is more likely to have that discerning eye than a 2023 Xoogler. The same is true for schools. Being a college dropout from a Harvard and Stanford is different from dropping out of college at a two-year program. Not that there’s anything wrong with the latter, but you must find other ways to stand out if so.
Given a large pool of noise when it comes to titles, it’s for that reason I love questions like: “What did you do in your last role that no one else with that title has done?”
Additionally, when it comes to references, positive AND negative references are always better than neutral references. Even better is that you stay top of mind for your founders regularly. A loose proxy, while not perfect, is roughly 2-3 shoutouts per year in your founders’ monthly updates. It takes a willingness to be helpful and for the founders to recognize that you’ve been helpful.
Process
Product
Feature
Response time/speed
Some generic outline of an investment process
Evidence of a prepared mind
Doing diligence
Asking questions during diligence most others don’t know how to
Yes, response time (or speed in getting back to a founder, or anyone for that matter) is a superpower. It’s remarkably simple, but incredibly hard to execute at scale. By the time, you get to hundreds of emails per week, near impossible, without a robust process. One of my favs to this day happens to be Blake Robbins’ email workflow who’s now at Benchmark.
Now I’m not saying one should rush into a deal, or skip diligence, but making sure people aren’t ghosted in the process matter immensely. As my buddy Ian Park puts it, it’s better for a founder or an LP to know that a GP is working on it than to not feel heard.
You’ve probably heard of the “prepared mind.” The idea that one proactively looks for solutions for a given problem as a function of their lived experiences, research, and analyses over the years.
Its origin probably goes as far back as Louis Pasteur, but I first heard it popularized in venture by the folks at Accel. Anyone can say they have a prepared mind. From an LP’s perspective, we can’t prove that you do or don’t have it outside of you just saying it in a pitch meeting. That’s why a trail of breadcrumbs matter so much. Most people describe it as a function of their track record or past operating experiences. Unfortunately, there may be a large attribution to hindsight bias or revisionist’s history. Being brutally honest with yourself of what was intentional and what was lucky or accidental is a level of intellectual honesty I’ve seen many LPs really appreciate. As an example, I’d really recommend you hearing what Martin Tobias has to say on that topic.
But the best way to illustrate a prepared mind is easier than one thinks. But it also requires starting today. Content. Yes, you can tweet and post on social media or podcast. But I’d probably rank long-form content at the top.
Public long-form writing (or production in general) is arduous. The first draft is rarely perfect. Usually far from it. With the attentive eye and the cautious mind, you go back to the draft again and again until it makes sense. Sometimes, you may even get third parties to comment and revise. Long-form is like beating and refining iron until it’s ready to be made into a blade. And once it’s out, it is encased in amber. A clear record of preparation.
In closing
Pat Grady had a great line on the Invest Like the Best podcast recently. “If your value prop is unique, you should be a price setter not a price taker, meaning your gross margins should be really good. A compelling value prop is a comment on high operating margins. You shouldn’t need to spend a lot on sales and marketing. So the metrics to highlight would be good new ARR/S&M, LTV:CAC ratios, payback periods, or percent of organic to paid growth.”
In a similar way, as a venture firm, if your value prop is truly unique, you’re a price setter. You can win greater ownership and set valuation/cap prices. If your value prop is compelling, the quality of your sourcing engine should be second to none, not just from being present online, but from the super-connectors in the industry, be it other investors, top-tier founders, or subject-matter experts.
Of course, all of the above examples are only ones that recently came to mind. The purpose of this blog is for creative construction and destruction. So if you have any other examples yourself, do let me know, and I can retroactively add to this post.
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.
Dave McClure has been a Silicon Valley entrepreneur and investor for over 25 years. He has invested in hundreds of startups around the world, including 10+ IPOs and 40+ unicorns (Credit Karma, Twilio, SendGrid, Lyft, The RealReal, Talkdesk, Grab, Intercom, Canva, Udemy, Lucid, GitLab, Reddit, Stripe, Bukalapak).
Prior to launching PVC in 2019, he was the founding partner of 500 Startups, a global VC firm with $1B AUM that has invested in over 2,500 companies and 5,000 founders across 75 countries. Dave created 20 VC funds under the 500 brand and invested in 20 other VC funds around the world.
Dave began his investing career at Founders Fund where he made seed-stage investments in 40 companies, resulting in 4 unicorns and 3 IPOs. He led the Credit Karma seed round in 2009 (acq INTU, over 400X return). His $3M portfolio returned more than $200M (~65X) in under 10 years.
Before he became an investor, Dave was Director of Marketing at PayPal from 2001-2004. He was also the founder/CEO of Aslan Computing, acquired by Servinet in 1998. Dave graduated from the Johns Hopkins University (BS, Engineering / Applied Mathematics).
[00:00] Intro [03:37] How did Narnia inspire the start of Dave’s entrepreneurship? [08:32] On the brink of bankruptcy [11:42] The lesson Dave took away from his first acquisition [13:19] What did Dave do that no one else did as a marketing director? [16:06] What do most people fail to appreciate about secondaries? [22:31] The 3 bucket method for secondaries [28:46] How much do fund returners matter for secondaries? [33:01] When do LPs typically think about selling fund secondaries? [42:04] What are two questions that Dave asks to see if a portfolio is good for a secondary? [46:10] Why is it complicated if a GP wants to buy an LP’s stake? [55:03] When do most funds return 1X? 2-3X? [57:13] Underwriting VC vs PE secondaries [1:01:49] How do institutional LPs react to VC secondaries? [1:07:01] The founding story of Practical VC [1:15:36] Closing Josh Kopelman in Fund I [1:18:47] How often does the PayPal Mafia get together? [1:23:49] What’s the most expensive lessons Dave learned over the years? [1:27:38] Thank you to Alchemist Accelerator for sponsoring! [1:28:29] If you enjoyed the episode, would deeply appreciate you sharing with one other friend!
Axios’ Dan Primack recently wrote a great update on the shifting tides of institutional LPs allocating to venture. Smaller LPs often need liquidity, given limited capital inflows. And unfortunately, cannot afford to play the long game. Those with access to additional sources of capital, as well as aren’t constrained by mandatory capital outflows, tend to have deeper desires to continue allocating to venture.
In conversations with a number of LPs who write $3-10M checks, many have learned first-hand venture’s J-curve. Something these emerging LPs have underestimated in the last few years. As such, a number of foreign LPs are holding back. Moreover, there are looming concerns of currency risk. For instance, US-based LPs who have historically invested in funds domiciled outside of the US, are now accounting for currency depreciation. Ranging from 20-30%. Which means, what normally would have been a 4X net fund based in, say, Japan, is now underwritten as a 3X net. And a 10X would be an 8X.
Early liquidity is nice. But any DPI in the first few years is almost never meaningful and often gets recycled back into the fund to make new investments.
With VC being underwritten to 15-year time horizons, as a GP, you need LPs who can afford that time horizon. Yes, most funds have 10-year fund terms, with the two-year extension. But if the 2008-2012 vintages have taught us anything, it’s that GPs will ask for extensions beyond that. Simply since the best companies stay private longer. Airbnb was private for 12 years. Klaviyo, 11 years. Reddit, 19 years.
Of course, some of these companies are outliers. But the average tech company still stays private for 9-10 years. Assuming venture’s three-year deployment period, the last (hopefully great) investment out of a fund may take till Year 13 to finally achieve a large exit, not including the lock-up period too. That’s not accounting for a growing number of funds pitching four to five-year deployment periods. Excluding emerging market funds, where emerging market companies go public faster.
Moreover, companies need double the revenue they needed back in 2018 to go public. Shoutout to Tomasz Tunguz for the graphic.
To make things even more spicy, an interesting trend right now is where we see VC firms moving into PE, and PE moving into VC. At the same time, you have some large institutions who are now investing across multiple asset classes, including public markets. Consequentially, an interesting discussion commences. Should private investors hold public assets?
I was fortunate to be in an LP discussion group recently where we debated that exact question. The general consensus was no. VCs are paid to be private market investors, not public markets. Where their expertise does not lend itself well to watching market movements closely. The only exceptions are crossover funds who build out specific public markets teams. And so when an LP invests, they know exactly what they’re getting themselves into. The expectation is to return the capital back to the LPs right after the lock-up period.
But if the narrative ever changes, prepare for an even longer haul. Good thing, most LPs also agree that evergreen funds don’t make sense for venture either. But that’s a discussion for another day.
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.
John Felix is the Head of Emerging Managers at Allocate where he leads manager diligence and product innovation within the emerging manager ecosystem. 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 $15 billion endowment. John graduated from Washington University in St. Louis with a BSBA in Finance and Entrepreneurship.
[00:00] Intro [02:35] The band that started it all [08:43] How did a band of 3 become a band of 5? [10:39] What bands served as inspiration for John? [13:37] Lessons on building teams and trust [19:48] The mischance that led John into the endowment world [22:34] What John learned under 3 different CIOs [26:20] What does concentration mean for Washington University’s endowment? [33:53] Portfolio construction perspectives at an endowment [36:26] The flaws of GP commits [41:25] How has John’s approach to emerging managers changed over the years? [44:17] What is key person risk? [47:06] One of the biggest challenges emerging managers face [50:45] Balancing over- and under-diligencing an emerging manager [56:28] What are traits that GPs think are unique but actually aren’t? [1:03:36] What makes a great cold email? [1:08:40] As a sports fan, do the highs or lows hit harder? [1:11:53] Thank you to Alchemist Accelerator for sponsoring! [1:12:54] Let me know if you enjoyed this episode with a like, comment or share!
“Being too dogmatic about things or having too black or white views will prohibit a lot of LPs from making really, really good investments.” – John Felix
“The biggest leverage on time you can get is identifying which questions are the need-to-haves versus nice-to-haves and knowing when enough work is enough.” – John Felix
This may very much be the hill I end up dying on as an angel. I also realize that the title of the blogpost itself is ionically charged. But it’s something I feel strongly about.
Two caveats.
One, this is going to be one of my more strongly worded blogposts. I don’t write many of these. It doesn’t give me joy to “call” people out. If you’re a reader to this blog for the more mild-mannered Cup of Zhou, I’ll see you next week. 🙂
Let’s just say I’m writing this out of frustration after chatting with a founder who hit all the below red flags. But more importantly, frustration at myself for not recognizing the below a mile away when I took the meeting. And the opening 2 questions for that meeting was can you share what you do? and what do you invest in? Both of which are quite evident on my LinkedIn. Moreover the cold outreach came via LinkedIn.
Two, I’m a small check angel. And this may not apply if you write north of a $100K angel check or a $250K LP check. You’re likely also excluded from this hill I’ll die on if you don’t have the network that would alert you on deals on a regular basis.
That said, if you’re a small check investor like me AND you have a decent network, any founder who doesn’t know exactly why they want you on the cap table outside of money is probably not a founder worth your time.
Why?
To them, you’re just another check, and not THE check. Whatever wrapper they put on things, you’re dumb money to them. Now, it’s not about feeling self-important. In fact, don’t delude yourself on your importance. It’s about being valuable, outside of the money. The early stages of company-building are so crucial that you really need all hands rowing in the same direction. Any hands that are idle, or worse, rowing in the opposite direction, is a waste of time, attention and resources.
They don’t know what they want. They don’t know the critical needs of the business. Is it talent? Is it getting to $1M ARR and developing a sales strategy? Is it scaling past product-market fit? Is it finding product-market fit? And because they don’t, they don’t know what they need help in. And any non-surgical answer, including terms relative to broad strokes, is a dud.
And in many ways, because of the above reasons, you’re wasting your dollar. The best founders are surgical and intentional to a fault. They’re also some of the best salespeople in the world. And they will make you feel like you’re the most important person in the world (whether actually true or not, but sometimes, even that doesn’t really matter). Because if they can win you over, they have a great batting average of winning key customers over.
FYI, also probably not worth your time if they:
Say you specialize in XX industry is not enough. Anyone can guess that at a glance at your LinkedIn. Even more so, if you’ve made it explicit.
Spend more time pitching to you than asking you questions to understand your values and what you’re interested in. They’re more interested in what comes out of their mouth than by how much reaches your ears.
Say you’re valuable for intros you can make. LinkedIn doesn’t tell people the strength of your first degree connections. For better or worse, I’m connected with a lot of people. Product of me being a bit too liberal with inbound connections early on. But it doesn’t mean I know them all equally as well. In fact, intros for a founder as an investor are table stakes. You must either be best friends with key decision makers/customers or downstream investors, or it’s really not as useful. And that only comes out if the founder spends time getting to know you, as listed in the second point above.
Ever since I added “Angel investor” to my LinkedIn profile, I’ve received a lot of noise. Quantity of deal flow went up by maybe 10-20 per week (and some weeks where I post something or get tagged in something that gets 5K+ impressions, that inbound deal flow from LinkedIn doubles if not more). But I’d say 95% of that are deals I would never invest in. Either since it’s out of scope, stage, check size, or just type of founder. Which at some point, when I remember to and I’m not typing this on my little 6×3 inch screen, I’ll have to redact that title, “Angel investor.”
Deal flow has become easy. But easy doesn’t mean good. The truth is, I’d rather mean a lot to a few than a little to a lot people.
And by the way, the same is true, if you’re a small check LP.
At the end of the day, as a founder (or emerging GP), it’s about finding your early believers. Those who choose to stand by you not just because everything’s going up and to the right. But those who will stand by you when shit hits the fan.
I was watching the latest episode of Hot Ones (yes, this is my guilty pleasure), where Sean is interviewing Will Smith, and Will shares that there are three kinds of friends in your life that you call at 3AM.
One kind of friend looks at the phone and pretends to be asleep.
A second kind of friend that picks up the phone that makes you feel bad for being in trouble.
And the third kind is putting their pants on while they’re answering the phone.
You want the third kind.
It also harkens back to the same conversationAakar, Ho, Vignesh, and I had two weeks ago. Believing comes from faith. And faith comes not just from where you are today, but where you will go. And that is established on Day 1.
To get early believers, you have to show you care. You have to give (even if it means your time, attention, and/or enthusiasm/interest), before you get. That is as true for investors as it is for customers.
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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.
