Ok, before y’all rise up in arms, hear me out. And if by the end of this blogpost, you still want to bring the pitchforks and torches, so be it.
Generally, I get it. Who else is investing isn’t usually a great question. Because for most investors who ask this question, it means they’re outsourcing their conviction.
POV: you're at a tech week event full of contrarian investors who back founders at the earliest stage in frontier industries pic.twitter.com/k7p1cVNHjs
In fact, I wrote a quick LinkedIn (and tweet) post about it the day before yesterday. Which admittedly got a lot more attention than I expected. And if you have the time, it’s worth seeing the discussion on that post that ensued.
So, potentially hot take, I believe investors should ask the question. Who else is investing? It’s part of the diligence process. That said, when they ask that question is key. There’s a vast ocean between the shores of asking that question before you reach conviction and after.
If you pop the question before you reach conviction, well, we’ve seen the follies of that. Most evidenced by the manic rush of 2020 and 2021 into “hot deals” largely led by names that grew to popularity around the dinner table.
If you pop it after, it’s diligence. Where the availability of names shouldn’t convince you to bat or lack thereof to otherwise. But that you now have additional opportunities to reference check and cross-diligence the same opportunity. And it extends to the LP side as well. Jamie Rhode who’s now at Screendoor, said on a Superclusters episode that one of her greatest lessons as an LP was committing to a fund where there was a bunch of soft commits but far less in hard commits, and ended up overexposing Verdis (where she was at) to a single asset and taking a much higher ownership as an LP into a single fund.
Truth is, LPs pay GPs for their opinion. Not anyone else’s. And while given long feedback loops, no one really knows what’s right and what’s wrong except over a decade later and only in hindsight, you have to really believe it, and be able to back it up.
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.
Jamie Rhode is Principal at Verdis Investment Management, focused on venture capital, private equity and hedge fund investment sourcing and due diligence.
She joined Verdis from Bloomberg, where she held roles in both equity research and credit analysis. There, she created, managed and leveraged an extensive library of statutory and financial and market data for buy and sell-side clients that use Bloomberg to make investment decisions.
A licensed Chartered Financial Analyst, she earned her bachelor’s degree in Finance and Marketing from Drexel University’s College of Business Administration.
[00:00] Intro [04:27] What skills did Jamie acquire while working at Bloomberg [08:45] What inspired Jamie to go into equity research [11:55] Verdis’ original allocation model [13:27] How Verdis first built their deal flow in 2016 [15:26] What Jamie likes in a cold email [16:41] What kind of cold email to VCs won Verdis an 80% response rate? [20:27] Verdis’ inbound vs outbound deal flow over the years [22:34] Why Verdis’ mandate is to invest in diversified portfolios as opposed to concentrated portfolios [27:50] The downsides of early distributions [32:12] The benefits of early distributions [36:01] Luck versus skill [40:15] Why does Verdis measure “outliers” as opposed to unicorns [44:37] The relationship between proprietary deal flow and portfolio allocation models [45:55] How does Verdis decide which portfolio funds get re-ups [48:52] Why GPs shouldn’t conform their strategies to LPs’ mandates [51:08] Why LPs should also have consistent strategies [53:28] Why Verdis invests a third of their fund in funds based in Los Angeles [58:50] A case study on what happens when you skip a step in the due diligence process [1:02:57] The two things a GP can do to win Jamie over [1:05:32] When does Verdis like to receive their tax documents from GPs? [1:08:46] Thank you to Alchemist Accelerator for sponsoring [1:11:23] Legal disclaimer
“Diversified managers have struggled a lot more to raise capital than more concentrated managers. I think it’s a little bit of a contrarian approach.”
“That venture capital bucket is the compounding machine for the family. We don’t look to that bucket for liquidity.”
“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 public market which is 11% gets you a 3.5X.”
“90% of your overall return comes from asset allocation, not individual investments.”
“If that asset is compounding at 20%, still the last 20% of time produces 40% of your return.”
“Outliers don’t truly emerge until 8-10 years after the investment.”
“If you provide me exposure to the exact same pool of startups [as] another GP of mine, then unfortunately, you don’t have proprietary deal flow for me. You don’t enhance my network diversification.”
I’ve always been a fan of easter eggs. Cup of Zhou also happens to be one of them. Superclusters is another. But this time, rather than leaving it for surprise, I’d love to spell out why and with that, the purpose of this podcast.
In the startup world, we always say startups are the stars of our universe. They shine the brightest and they light up the night sky. We also have tons of aphorisms in the startup world. For instance, “Aim for the stars, land on the moon”. Startups are often called moonshots. They need to achieve escape velocity. And so on.
So if startups are the stars of the universe, galaxies would be VC firms that have a portfolio of stars.
And if galaxies were VC firms, superclusters would be LPs. Superclusters are collections of multiple galaxies. For example, the supercluster that the Milky Way is in is called Laniakea (Hawaiian for “immense heavens,” for the curious).
So why a podcast on the LP world?
The LP industry in ten years will be much bigger than it is today. We are not even close to the TAM of it.
The LP industry will be a lot more transparent than it is today. FYI, as many of you know already, the industry is very opaque. Many want and still like to keep their knowledge proprietary. But what’s proprietary today will be common place tomorrow. I’m not here to share anyone’s deepest, darkest secrets, or anyone’s social security number. That’s none of my business. But the tactics that make the greatest LPs great are already being shared over intimate happy hours and dinners between a select few. And it’s only a matter of time before the rest of the world catches up. We saw the same happen with the VC industry, and now people are moving even more upstream.
I think of content on a cartesian X-Y graph. On the X-axis, there’s intellectual stimulation. In other words, interesting. On the Y-axis, there’s emotional stimulation, or otherwise known as fun. Most financial services (for instance, hedge fund, private equity, venture capital, options trading) content tends to highly index on intellectual stimulation and not emotional. And for the purpose of this pod, I want to focus on making investing in VC funds fun AND interesting.
You can find my podcast on YouTube, Spotify, and Apple Podcasts for now. In full transparency, waiting on RSS feed approval for the other platforms, but soon to be shared on other platforms near you.
You can expect episodes to come out weekly with ten episodes per season, and a month break in between each to ensure that I can bring you the best quality content. 🙂
You can find my first episode with the amazing Chris Douvos here:
I am no doubt flawed, clearly evidenced by my verbal “ummmm’s” and “likes” in the podcast. But nevertheless pumped to begin this journey as a podcast host. I expect to grow in this journey tackling the emerging LP space and running a podcast, and I hope you can grow with me. So, any and all feedback is deeply appreciated. Recommendations of who to get on. What questions would you like answered. Formats that you find interesting. I’m all ears.
That said, I’m grateful to everyone who made this possible. My mighty editors, Tyler and JP. Without the two of you, I’d still be struggling telling head from tail on how to do J-cuts and L-cuts. The sole sponsor for the pod, Ravi and Alchemist. And while the pod itself is separate from Alchemist altogether, Ravi pushed me to make it happen. And for that and more, I am where I am now. Every single LP who took a bet on me for Season 1 when all I had for them was an idea and a goal. Chris. Beezer. Eric. Jamie. Courtney. Ben. Howard. Amit. Samir. Jeff and Martin.
And to everyone, who’s offered feedback, advice, introductions and pure energy to fuel all of this. Thank you!
And to you, my readers, I appreciate you taking time out of your busy day when there are so many things that fight for your attention, that you spend time with me every week! If I could just be a bit more self-serving, if you have the chance to tune in, I’d be extremely grateful if you could share it with one LP or one GP who could take something away from it.
Cheers,
David
P.S. Don’t worry. I’ll still continue to write on this blog weekly about everything else in between. That’s a habit I’m not willing to give up any time soon.
P.P.S. I’m already working on and recording for Season 2 of the pod, and I can tell you now that things will only get spicier.
P.P.P.S. Due to a million bugs and a half, I’m still working on launching a dedicated website for the podcast (superclusters.co), but until then, I’ll be sharing the show notes of each episode here.
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.
