Two years ago, Dave and I sat down less than five blocks away from where we were sitting when those words escaped the clutches of Dave’s mindscape. That piece has since been cited a number of times from fund managers I’ve come across. And sometimes, even LPs. While each part of that piece was written to be evergreen knowledge, what we want to do is to add nuance to that framework, along with examples of how we might see the internal conflict of early distributions and long-term thinking manifest.
In effect, and the premise for this blogpost, you’re in Year 7 of the fund. You’re now raising Fund III. What do you need to do?
The urgency to sell at Year 7 is relatively low. Although booking some amount of DPI may motivate LPs to re-up or invest in Fund III. The urgency to sell at Year 12 is much higher. So, what happens between Years 7 and 12? If you do sell, do you sell to the market or to yourself via a continuation vehicle?
For starters:
Knowing when to sell WHEN you have the chance to sell is crucial. The window of opportunity only lasts so long.
Consider selling some percentage of your winners on the way up to diversify, but be careful not to sacrifice too much potential future DPI. Yes, this is something we’ll elaborate more on with examples of what exactly we mean.
Optimize selling price efficiency
At the moment the next round is being put together, you have no discount to the current round price. The longer you wait to transact, the more doubt settles in from outsiders, the deeper the discount as time goes on. And so, if you have the chance to sell, sell into the (oversubscribed) primary rounds in order to optimize for price efficiency. Unless maybe, you’re selling SpaceX, OpenAI, Anthropic, Anduril, Ramp, just to name a few. There is a BIG tradeoff in TVPI (versus future DPI) when selling a fast-growing asset early (assuming it keeps its pace of growth). There is also a BIG risk to holding on to a large unrealized gain if the company stumbles or the market crashes.
We live in a world now that multi-stage venture funds have become asset management shops. Their primary goal will be to own as much of an outlier company as possible to maximize their potential for returns. As such, they will choose, at times, to buy out earlier shareholders’ equity.
To sell your secondaries, you have a very small window of opportunity to sell. Realistically, you have one to two quarters to sell where you can probably get a fair market value of 90 cents to the dollar of the last round valuation. Ideally, you sell into the next round at the price the next round values the company. As Hunter Walk once wrote, “optimally the secondary sales will always occur with the support/blessing of the founders; to favored investors already on the cap table (or whom the founders want on the cap table); without setting a price (higher or lower than last mark) which would be inconsistent with the company’s own fundraising strategy; and a partially exited investor should still provide support to the company ongoing.” If you wait a year, some people start questioning the data. If you wait 2 years, you’re looking at a much steeper discount. And if it’s not a “Mag 10” of the private markets—for instance, Stripe, SpaceX, Anduril, just to name a few, where there is no discount—you’re likely looking at 30-60% discounts. As Hunter Walk, in the same piece, quotes a friend, “‘I think friendly secondaries are easy, everything else feels new.’” As such, Dave and I are here to talk through what feels “new.”
So, how do you know how much to sell?
First of all, lemons ripen early. In Years 1-5, you’re going to see slow IRR growth. Most of that will be impacted by businesses that fall by the wayside in the early years. In Years 5-10, IRR accelerates, assuming you have winners in your portfolio. And in the latter years, Years 10 onward, IRR once again slows.
Before we get too deep, let’s address some elephants in the room.
Why are we starting the dialogue around secondaries at Year 5? Five things. Year 5, 5 things. Get it? Hah. I’m going to see myself out later.
One, most investment recycling periods are in the first four years of the fund. So, any non-meaningful DPI is recycled back into the fund to make new investments. While this may not always happen, it usually is a term that sits in the limited partner agreement (LPA).
Two, most investments have not had time to mature. Imagine if you invested in a company in Year 1 of the fund. Five years in, this company is likely to have gone through two rounds of additional funding. If you come in at the pre-seed, the company is now at either a Series A or about to raise a Series B, assuming most companies raise every 18-24 months. If you were to sell now, before the company has had a chance to really grow, you’re losing out on the vast majority of your venture returns. And especially so, if you’ve invested in a company in Year 3 of the fund, you really didn’t give the company time to mature.
Three, by Year 5, but really Year 7, venture’s older sibling, private equity, should have had distribution opportunities. And even if we’re different asset classes by a long margin, allocators will, even subconsciously, begin to look towards their venture portfolio expecting some element of realized returns.
Four, QSBS grants you full tax benefits at Year 5. And yes, you do get some benefits with new regulation sooner by Year 3. But if you’re investing in venture and hoping to get to liquidity by Year 3, you’re in the wrong asset class.
Five, you will likely need to show (some) DPI in Fund I, in order to raise Fund III or IV. It’ll show that you’re not only a great investor, but also a great fund manager.
Outside of our general rule of thumb in our writeup two years ago, let’s break down a few scenarios. The obvious. The non-obvious. And the painful.
The obvious. Your fund is doing well. You’re north of 5X between Years 7 and 10. You have a clear outlier. Maybe a few.
The non-obvious. Your fund is doing okay. This is the middle of the road case. You’re at 3-5X in Years 7-10.
Then, the painful. You’re not doing well. Even in Year 7, you haven’t crested 3X. And really, you might have a 1.5-2X fund, if you’re lucky. 1X or less if you aren’t. But your job as a fund manager isn’t over. You are still a professional money manager.
In each of the three scenarios, what do you do?
It’s helpful to frame the above scenarios through four questions:
How much do you sell?
When do you sell it?
What is the pricing efficiency of those assets?
And what is the ultimate upside tradeoff?
The obvious (5X+ TVPI)
Here, it’s almost always worth booking in some distributions to make your LPs whole again. Potentially, and then some. At the end of the day, our job as investors is to—to borrow a line from Jerry Colonna’s Reboot—“buy low, sell high.” Not “buy lowest, sell highest.” As such, you should sell some percentage of your big winners to lock in some meaningful DPI. Selling at least 0.5X DPI at Year 7 is meaningful. Selling 1-2X DPI at Year 10 is meaningful. As you might notice, the function of time impacts what “meaningful” means. The biggest question you may have when you have solid fund performance is: How much should you sell knowing that in doing so, it might meaningfully cap your upside? Or if you should even sell at all?
Screendoor’s Jamie Rhode once said, “If you’re compounding at 25% for 12 years, that turns into a 14.9X. If you’re compounding at 14%, that’s a 5. And the public market which is 11% gets you a 3.5X. […] If the asset is compounding at a venture-like CAGR, don’t sell out early because you’re missing out on a huge part of that ultimate multiple. For us, we’re taxable investors. I have to go pay taxes on that asset you sold out of early and go find another asset compounding at 25%.” Taking it a step further, assuming 12-year fund cycles, and 25% IRR, “the last 20% of time produces 46% of that return.” She’s right. That’s the math. And that’s your trade off.
But for a second, we want you to consider selling some. Not all, just some. A couple other assumptions to consider before we get math-y:
20% of your portfolio are home runs. And by Year 5 of your fund, they’re growing 30% year-over-year (YoY). And because they are great companies, growth doesn’t dip below 20%, even by Year 15.
For home runs, we’re also assuming you sell into the upcoming fundraising round. In other words, perfect selling price efficiency. Obviously, your mileage, in practice, may vary.
30% of your portfolio are doubles, growing at 15% YoY. And growth doesn’t fall below 10%, even by Year 15.
For doubles, just because they’re less well-known companies, we’re assuming you’re selling on a 50% discount to the last round valuation (LRV).
20% of your portfolio are singles, growing at 7% YoY. Growth flatlines.
For singles, even less desirable, we’re assuming you’re selling on an 80% discount to LRV.
The rest (30%) are donuts. Tax writeoffs.
For every home run and double, their growth decays by 5% every year.
We’re assuming 15-year fund terms.
Example 1: Say you have a $25M fund, and at Year 10, you choose to sell 50% of the initial fund size ($12.5M). If you didn’t sell at Year 10, by Year 15, you’d have a 5.7X fund. But if you did sell at Year 10, you’d have a 3.8X fund. To most LPs, still not a bad fund.
The next few examples are testing the limits of outperformance and early distributions. Purely for the curious soul. For those, looking for what to do in the non-obvious case, you can jump to this section.
Example 2: Now, let’s say, in an optimistic case, your home runs—still 20% of your portfolio—are growing at 50% YoY in Year 5. All else equal. If you didn’t sell at Year 10, by Year 15, you’d have a 11.6X fund. If you did sell at Year 10, by Year 15, you’d have a 9.3X. In both cases, and even when you do sell $12.5M of your portfolio at Year 10, you still have an incredible fund. And not a single LP will fault you for selling early.
Example 3: Now, let’s assume your home runs are still growing at 50% YoY at Year 5, but only 10% of your portfolio are home runs and 40% are strikeouts. All else equal. If you sell $12.5M at Year 10, at the end of your fund’s lifetime, you’re at 4.8X. Versus, if you didn’t, 6.6X.
Hell, let’s say you’re not sure at Year 10, so you only sell a quarter of your initial fund size ($6.25M). All else equal to the third example. If you did sell, 5.6X. If you didn’t, 7.4X.
Example 4: Now let’s stretch the model a little. And play make believe. Let’s take all the assumptions in Example 1, but the only difference is your home runs are growing at 100% YoY by Year 5.
If you sell at Year 10, by fund term, you’re at 108.8X. If you don’t sell at Year 10, you have 110.7X.
And as we play with the model some more, we start to see that assuming the above circumstances and decisions, selling anything at most 1X your initial fund size at Year 10, at Year 15, you lose somewhere between 2X and 3X DPI.
If you sell three times your fund size, assuming you can by Year 10, you lose at most around 5X of your ultimate DPI at Year 15. If you sell five times your initial fund size (again, assuming the odds are in your favor), you lose at most 7X of your final DPI by Year 15.
Now, we’d like to point out that Examples 2, 3, and 4 are merely intellectual exercises. As we mentioned in our first blogpost on this topic, if your best assets are compounding at a rate higher than your target IRR (say for venture, that’s 25%), you should be holding. Even a company growing 50% YoY at Year 5, assuming 5% decay in growth per year, will still be growing at 39% in Year 10, which is greater than 25%. That said, if a single asset accounts for 50-80% of your portfolio’s value, do consider concentration risk. And selling 20-30% of that individual asset may make sense to book in distributions, even if the terms may not look the best (i.e. on a discount greater than feels right).
Remember what we said earlier? To re-underscore that point, it’s worth saying it again. There is a BIG tradeoff in TVPI (versus future DPI) when selling a fast-growing asset early (assuming it keeps its pace of growth). There is also a BIG risk to holding on to a large unrealized gain if the company stumbles or the market crashes.
If you’d like to simulate your own secondary sales, we’ll include the model at the very bottom of this post.
The non-obvious (3-5X TVPI)
This is tricky territory. Because by Year 7-10, and if you’re here, you don’t have any clear outliers (where it might make more sense to hold as the assets are compounding faster than your projected IRR), but you don’t have a bad fund. In fact, many LPs might even call yours a win, depending on the vintage and public market equivalents. So the question becomes how much DPI is worth selling before fund term to make your LPs whole, and how much should you be capping your upside. How much of your TVPI should you be selling for your DPI knowing that you can only sell on a discount?
We’re back in Example 1 that we brought up earlier, especially if you have a single asset that accounts for 50-80% of the overall portfolio value. Here if the companies are collectively growing faster than your target IRR—say 25% on a revenue growth perspective, hold your positions. If your companies are growing slower than your target IRR and are valued greater than 1.5X public market comparables, you should consider selling 20-30% of your positions to book meaningful distributions.
The painful (1-3X TVPI)
You’ve got a dud. No two ways about it. You’re really looking at a 1.5X net fund. Maybe a 1X. And mind we remind you, it’s Years 7-10. It’s either you sell or you ride out the lie you have to tell LPs. LPs will almost always prefer the former. And for the latter, let’s be real — hope is not a (liquidity) strategy. And if put less charitably, check this Tina Fey and Amy Poehler video out. I don’t have the heart to put what’s alluded to in writing, but the video encapsulates, while humorously framed, the situation you’re in. You’re going to have to try to sell your positions on heavy discounts.
In closing
If you made it thus far, first off, you’re a nerd. We respect that. We are too. And second off, you’re probably looking for the model we used. If so, hereyou go.
We also do cover how this blogpost came to be in the first ever episode of the [trading places] podcast. And if you’re interested in the topic of secondaries, the [trading places] podcast might be your new guilty pleasure.
Shoutout to Dave for the many iterations of this blogpost and building the model in which this blogpost is based around!
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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.
Having been to a number of talks and panels, my biggest frustration with these occasions is when a moderator asks a VC: “So what do you invest in?”
And the VC would respond, “Good people, good markets.” Or “Ambitious founders tackling ambitious problems.” Or some cousin of it. Well, of course. I’m not saying they’re wrong, but no venture capitalist ever says, “I want to invest in bad people building in bad markets.” It’s the kind of advice and “insight” that’s equivalent to a large company saying their company culture is a “family.” Not wrong, but tells me nothing about what you actually want. The same is true for most advice for investors. And well, advice in the investing world is given quite liberally, without liability and responsibility most of the time.
So I made it a mission to collect pieces of advice that were actually tactical or differentiated. Advice that would make you turn your heads and actually pay attention. And under the right circumstances, actually useful. It’s why I wrote this blogpost’s predecessors:
This is the third one in this 99 series for investors. And, if by chance, you’re a founder reading this, to understand the mentality of a differentiated investor, you might also like the 99 series for founders. But I digress.
In no particular order other than the chronological order I found them, below is the third set of 99 pieces of advice for investors:
1/ “Any company that is pure execution risk without any market risk is not a suitable venture investment.” — Chris Paik
2/ “[In the private markets,] I don’t think we’ve seen a 70% write down yet or 70% of these [private companies] worth less than the cash [they’ve spent to date].” Take public market comparables. To see how much public companies are worth as a function of the money they’ve spent to date, look at the “Cumulative Retained Earnings” (which tells you how much money they’ve burnt over their lifetime) compared to the “Enterprise Value” (or market cap minus the cash they have today). If their enterprise value is less than their cumulative retained earnings, that means they’re worth less than the money they’ve spent to date. — David Friedberg (timestamped 4/21/2023, when he said there are 70% of public companies that are worth less than the cash they’ve spent to date, but we haven’t seen a 70% haircut to private market valuations)
3/ The first best use of any consumer product is crime. — Pre-seed VC
4/ When looking for outliers, “Invest in companies that can’t be described in a single sentence.” — Chris Paik
5/ “Venture investing process as a two-stage process – the first where you ensure you avoid false negatives – that is, you ensure that there are no errors of omission, where you unwittingly pass on meeting a potential winner. The second stage is where you avoid a false positive or errors of commission, that is, picking the wrong company.” — Sajith Pai quoting Karthik Reddy
“How are you using AI? Is it a third-party? Let’s see those terms, contracts, etc.
How are you using customer data? Prior agreements? Prior policies in place? Subsequent policies in place? You could lose the data, the models, and the algorithms. If found in violation by the FTC. States privacy laws like Texas, California, and Virginia also should be looked at.”
7/ “When it’s cooler to be in a startup than in a band, we’re at the top of the market.” — A fund of funds General Partner
8/ “Buy when there is blood in the streets, and sell when there are trumpets in the air.” — A Warren Buffett attribution
9/ Does this founder have 20 years of experience of 20 one-year experiences? Depth vs breadth. Which does the industry/problem they’re building for require?
10/ While there is no one “right” way to run a partnership meeting, beware of conviction-led deals (as opposed to consensus-driven), since partners are incentivized to go into sales mode to convince the rest of the partnership and may make it harder for them to see the flaws in the deal.
11/ In early stage venture, debates on price is a lagging indicator of conviction, or more so, lack thereof.
Price also matters a lot more for big funds than small funds.
Price also matters more for Series B+ funds.
Will caveat that there’s an ocean of difference between $10M and $25M valuation. But it’s semantics between $10M and $12M valuation. How big your slice of the pie is doesn’t matter if the pie doesn’t grow.
Not saying that it’s correlated, but it does remind me of a Kissinger quote: “The reason that university politics is so vicious is because stakes are so small.”
12/ “Judge me on how good my good ideas are, not how bad my bad ideas are.” — Ben Affleck when writing Good Will Hunting. A lot of being a VC is like that.
13/ We like to cite the power law a lot. Where 20% of our investments account for 80% of our returns. But if we were to apply that line of thinking two more times. Aka 4% (20 x 20%) of our investments account for 64% of our returns. Then 0.8% account for 51.2% of our returns. If you really think about it, if you invest in 100 companies, we see in a lot of great portfolios where a single investment return more than 50% of the historical returns.
14/ “Early-stage investing is NOT about mitigating the possibility of failure It’s about discounting the probability of an outsized outcome – what is the size and likelihood of a HUGE win Investing in “safe” companies due to fear of failure is the surest way to a mediocre returns.” — Rick Zullo
15/ “[David Marquardt] said, ‘You know what? You’re a well-trained institutional investor. And your decision was precisely right and exactly wrong.’ And sometimes that happens. In this business, sometimes good decisions have bad outcomes and bad decisions have good outcomes.” — Chris Douvos
16/ When calling a reference and asking about someone’s weakness, “If you were to hire someone under that person, what would be the top traits you’d look for?”
17/ Give founders a blank P&L statement. Tell them that is not their P&L statement; it is their customer’s. And ask them where do they/their product sit on their customer’s P&L statement. Those who are aware of who they are and who they need to sell to do better than those who don’t.
18/ No one has a crystal ball. Well, the pessimists do. They’re right 90% of the time.
19/ “I want the guy who understands his limitations instead of the guy who doesn’t. On the other hand, I’ve learned something terribly important in life. I learned that from Howard Owens. And you know what he used to say? Never underestimate the man who overestimates himself.” — Charlie Munger
20/ “Instead of saying, ‘This risk exists,’ we reframe the risk and ask, ‘What do I have to believe for this to work?’ Doing this transforms risk from a source of fear and unknown into a set of clear assumptions to be systematically tested and de-risked.” For example, “We have to believe we can scale the hardware to XYZ performance metric by ABC date. What are the key engineering constraints bottlenecking that?” — Mike Annunziata
21/ Questions to ask investee (on-list and off-list) references by Graham Duncan:
How would you describe Jane to someone who doesn’t know her?
What’s your sample size of people in the role in which you knew Jane?
Who was the best person at this role that you’ve ever seen?
If we call that person a “100”, the gold standard, where’s Jane right now on a 1-100?
Does she remind you of anyone else you know?
If Jane’s number comes up on your caller ID, what does your brain anticipate she’s going to be calling about? What’s the feeling?
Three attributes I like to keep in mind are someone’s hunger, their humility, and how smart they are about people. If you were to force rank those for Jane from what she exhibits the most to least, how would you rank them?
What motivates Jane at this stage of her life?
If you were coaching Jane, how would you help her take her game up?
If you were going to hire someone to complement Jane doing the same activity (NOT a different role), what would they be good at to offset Jane’s strengths and weaknesses?
How strong is your endorsement of Jane on a 1-10? (If they answer 7, say actually sorry 7s are not allowed, 6 or 8? If the answer is an 8, “What is in that two points?”)
22/ “Neutral references are worse than negative references.” — Kelli Fontaine
23/ “If someone brags about their success or happiness, assume it’s half what they claim. If someone downplays their success or happiness, assume it’s double what they claim.” — George Mack
24/ “Historians now recognize the Roman Empire fell in 476 – but it wasn’t acknowledged by Roman society until many generations later. If you wait for the media to inform you, you’ll either be wrong or too late.” — George Mack
25/ “Joe Rogan and Warren Buffett are both entrepreneurs. But if you switched them, both businesses would fail. Rule of thumb: If a word is so broad that you can’t switch 2 things it describes, it needs unbundling.” — George Mack
26/ Are the founders at the same stage on the Maslow’s Hierarchy of Needs? If not, how have they come to terms with different motivations outside of the scope of the venture itself?
27/ $100K contracts take about 70 days to close. So a founder becomes interesting if they figure out how to close faster. — Gong State of Revenue Growth 2025 report
28/ Beware of “annual curiosity revenue.” “AI companies with quick early ARR growth can lead to false positives as many are seeing massive churn rates.” — Samir Kaji
29/ Data suggests that “never following on” beats “always following on” 63% of the time. “Outperformance for the typical portfolio is 12% better when you don’t follow on (3.52X vs 3.14X).” — Abe Othman
30/ “A successful reserve strategy depends both the chance of picking winners and the step up value at the next round. The stock price multiple * the probably of receiving funding = 1.” If the product of your variables is more than one, you should focus primarily on increasing your check size and ownership at entry. And as such, fewer to no reserves. If you’re below one, you’re better off with more reserves. — Clint Korver
31/ Be aware of “seed-strapping” among AI startups. Your SAFEs may never convert. “Watch for any revisions to *YC’s* SAFE or *YC’s* side letter (note: YC has a secret SAFE and side letter documentation not available on on their website, so careful with conclusions).” — Chris Harvey
32/ In underwriting AI companies in 2025, ARR and run rate are no longer signal. Instead, look at sales efficiency (how long it takes you to implement your product; if you charge more or double the price, will customers still buy your product?), the cost to acquire that revenue, and net dollar retention (gross churn, land and expand). — Nina Achadjian
33/ “The ‘raise very little’ strategy only works if you’re in a market that most people believe (incorrectly) is tiny or unimportant. If other people are paying attention, you have to beat the next guy.” — Parker Conrad
34/ Instead of asking founders/references what are their weaknesses, ask for 2-3 positive words that describe them and 2-3 positive words that DO NOT describe them.
35/ “You want to be pre-narrative. You want to position your capital in an area where the supply of capital increases over time and where those assets will be traded at a premium.” — Albert Azout
36/ “For Hard Tech companies, the only metric that matters before Series B is the ‘Speed of Hiring Impressive People’, aka the ‘SHIP’ rate.” — Mike Annunziata
37/ Beware of co-CEOs and founders who used to be VCs where their past firm isn’t investing. — Sriram Krishnan
38/ “If you don’t pay great people internally, then you’re a price taker.” — Ashby Monk
39/ “Buying junk at a discount is still junk.” — Abe Finkelstein
40/ “What do you do when you don’t know anything, you haven’t met anybody, you have no context, the human brain starts inventing rationale.” — Narayan Chowdhury
41/ “The bigger you get, the more established you get, the more underwriting emphasis goes into how this team operates as a structure rather than is there a star?” — Matt Curtolo
42/ “Price reflects the inefficiencies of the market.” — Albert Azout
43/ “You want to be pre-narrative. You want to position your capital in an area where the supply of capital increases over time and where those assets will be traded at a premium.” — Albert Azout
44/ “We don’t want a slow no. A slow no is bad for everybody.” — Sean Warrington
45/ “Today’s world is unpredictable, and this is as stable as it will ever be again.” — Seth Godin
46/ “Alfred is the worst e-commerce investor at Sequoia as he knows too much & I am the best biotech investor at Sequoia as I know nothing about biology.” — Roelof Botha, quoted by Finn Murphy
47/ “Since the job is not about simple pattern-matching but about finding true outliers, seniority and experience don’t guarantee success.” — Ian Park
48/ As your fund size grows, do be wary of investing in competing portfolio companies. While it’s always been a tradition in venture to not to, times may be changing. Be sure to be transparent and know how to separate church and state. “This is an issue where the business model for funds is at odds with what most founders want.” Ways you can do so. By Charles Hudson.
“Use a seed fund or scout strategy to meet as many promising, early-stage companies as you can.
“Focus on investing in Series A and Series B (instead of seed) rounds and pay up to get into the winners when it’s clear which companies are working.
“Buy secondary positions in the companies that matter but that you missed.
“Invest in competitors but have different investors take board seats and create firewalls to limit information spillover.”
49/ “I deeply subscribe to, ‘There’s always another train leaving the station.’” — Wendy Li
50/ “Alpha’s three things: information asymmetry, access, and, actually, taxes.” — Vijen Patel
51/ The worst mistake you can make as an early-stage investor is to believe you’re the smartest person in the room.
Fundraising from LPs
52/ “If you’re at 75-80% committed and then you say there’s a single close, that will drive urgency. If you’re at 10 to 30 to 40% committed, and you say there’s a single close, you have no catalyzing power. There’s just so much dirt to hoe. When I went out, when people would ask, ‘When are you closing?’ I would say, ‘We will close on this particular date and ideally it will be a single close. And here is where I am. I’ve closed X% of the pipeline and the total value of the pipe of interested investors was this amount of money.’ The goal was to show with a relatively small conversion rate, I could get to a single close.” — Tomasz Tunguz
53/ What to prepare for the due diligence questionnaire (DDQ) with institutional LPs. — Chris Harvey
54/ What Minal Hasan includes in the fund diligence room (specifically for Fund IIs)
Primary materials
Due Diligence Questionnaire
Pitch Deck
Appendix to Pitch Deck
Detailed Investment Thesis & Strategy
Term Sheet
LPA
Subscription Agreement
Legal
Incorporation Documents for LP, GP, and MC
Entity Org Chart
Team
Team Bios
Prior Partner Investment Performance
Hiring Plan
List of Advisors
List of References
List of Co-investors
List of Service Providers
Portfolio
One-pager on each company
Deal Pipeline
Governance
Board/Board Observer Seats
Policies
Sample Investment Memos
Sample Quarterly Report
Sample Capital Account Statement
Sample Capital Call Notice
Sample Distribution Notice
Financial Docs
Budget
IRR Spreadsheet
IRR Benchmarking
IRR Letter certified by accountant
Marketing
Press mentions
Authored thought leadership
55/ When fundraising, don’t share which other LPs you’re talking to. Even if LPs ask who you’re talking to. Unless money is in the bank, nothing counts. Tell the other LPs that you have non-disclosures with all your other LPs, but that you have a lot of interest. If you share the marquee names, the other LPs’ will base their decision on the closing of those LPs. If they commit, great. If not, it will materially impact how the new LPs view your fund.
56/ When working with overseas LPs, you should ask for their citizenship, where their capital is domiciled at, and who is the ultimate beneficial owner if not the person you are pitching? This would help you navigate CFIUS rules and knowing who you’re actually bringing on board.
57/ You should ask prospective overseas LPs what their citizenship is and who the ultimate beneficial owner (UBO) is, if not the person you are talking to, as you are doing diligence on your prospective LPs.
58/ “Going to see accounts before budgets are set helps get your brand and your story in the mind of the budget setter. In the case of the US, budgets are set in January and July, depending on the fiscal year. In the case of Japan, budgets are set at the end of March, early April. To get into the budget for Tokyo, you gotta be working with the client in the fall to get them ready to do it for the next fiscal year. [For] Korea, the budgets are set in January, but they don’t really get executed on till the first of April. So there’s time in there where you can work on those things. The same thing is true with Europe. A lot of budgets are mid-year. So you develop some understanding of patterns. You need to give yourself, for better or worse if you’re raising money, two to three years of relationship-building with clients.” — David York
59/ “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
60/ “Things that break the rules have a bigger threshold to overcome to grab the reader’s attention, but once they do, they tend to have a stronger, and more dedicated following. Blandness tends to get fewer dedicated followers.” — Brandon Sanderson on creative writing, but applies just as well to pitches
61/ In all great stories, the protagonist (in the case of a pitch, you) is proactive, capable, and relatable. Your pitch needs to show all three, but at the minimum two out of the three. — Brandon Sanderson
62/ “Data rooms are where fund-raising processes go to die.” Prioritize in-person and live conversations. When your investor asks you for documents, ask for 15 minutes on their calendar so you can “best prepare” the information they want. If they aren’t willing to give you that 15 minutes, you’ve lost the deal already. — Mark Suster
63/ “Funds can start with a private offering, then move to 506(c) after the prior offering is completed without a waiting period—new Rule 152(b) allows for a quick switch, you just can’t do them at the same time or start with Rule 506(c) then move to 506(b).” — Chris Harvey
64/ “Set your own agenda or someone else will.” — Melinda Gates
65/ To address key person risk if the GP, or one of the GPs, has a debilitating health condition within the fund term, include the below in the LPA, by Shahrukh Khan: Each Key Person shall, as a condition to their designation, represent and covenant to the Partners [inclusive of the GP and LPs] that, to the best of their knowledge, they are not currently experiencing any medical condition reasonably expected to materially impair their ability to perform their duties over the Term [usually 10-12 years] of the Fund. If, during the Investment Period [when the fund is actively making investments], a Key Person is diagnosed with or undergoes treatment for a condition that materially impacts their ability to fulfill their responsibilities, the General Partner shall promptly disclose to the Limited Partners that a Health-Related Key Person Event [we could define this broadly] has occurred. The specifics of the health condition need not be disclosed [maybe except to the LPAC if there is one?]. Upon such notification, the Investment Period will be suspended and cannot continue without the express approval of the Limited Partners. [I feel like this could mean that no new investments can be made until LPs review and vote on whether to proceed with the fund’s activities in light of the health-related situation.]
66/ When asking LPs what they invest in, sometimes what they don’t invest in is more helpful than what they say they invest in. Most LPs are trained to be generalists — by sector, by stage, by asset class — so asking what they do invest in often nets an answer like “We invest in everything” or “We only invest in the best,” which are often less helpful tells when you’re trying to figure out if you’re a good fit for them or not.
67/ If you have a 3(c)(1) fund, “if an investor owns >10% of your fund, the SEC’s look-through rule requires you to count ALL underlying beneficial owners toward your 100-investor limit.” The workaround is you create a side letter for large LPs that includes this statement: “The Investor’s Capital Commitment shall equal the lesser of [check size] or 10% of total fund commitments.” — Chris Harvey
68/ At your AGM, talk about categories of VCs you admire. For instance, “inception funds” or “superscale funds.” And the logos you admire in each category. Then show the funds that actually follow after your capital. This builds rapport with your LPs and that you’re not just shooting from the hip, where it “just so happens” that some random awesome fund follows your capital. Inspired by Gil Dibner.
69/ “If an LP isn’t following up with an ask for the data room, refs and lays out a path to a potential next meeting, then it’s a pass. Hint — don’t offer the dataroom. I always say yes.” — Endowment Eddie
70/ “[LPs] are underwriting your ability to create signal under uncertainty. If your fund slide can’t do that, your deck is already leaking trust.” — Thorsten Claus
71/ “I’m not here to tell you about Jesus. You already know about Jesus. He either lives in your heart or he doesn’t.” — Don Draper in Mad Men
72/ On GPs answering questions on operational excellence… “The best answer I could ask from a GP is for them to be super honest and say, ‘These are the people I’ve leaned on to help me understand what best practices look like.’” — Nicky Sugarman
73/ When reporting numbers, it’s helpful to have more than one TVPI number. One number should represent last round valuation prices. Another should be the number you believe is authentic to you, which likely includes some companies that have been proactively written down and revenue multiples that reflect where the company is currently at. Nevertheless, always explain your rationale as to why.
74/ When you’re fundraising from institutions, expect “27 months from first meeting to wire, 4.7% of prospects commit,” and “annual costs [of] $2.1M+ in infrastructure.” — Pavel Prata
75/ “Speed to fundraise does not always equate to a strong investor.” — Lisa Cawley
Fund strategy / portfolio construction / exiting
76/ If you have a follow-on strategy or a reserve strategy, track your “follow-on MOIC.” Return hurdles are 10x MOIC for initial capital. And 4-5x MOIC for follow-on capital. The more you invest in follow on, the less TVPI you’ll have. “If you’re going from pre-seed to seed, you’re tracking to a 5x MOIC. If you’re going from a seed to Series A, that goes down to 3x.” — Anubhav Srivastava (timestamped Apr 7, 2023)
77/ The reasons Fund I’s and II’s outperform are likely:
Chips on shoulders mean they hustle more to find the best deals. They have to search where big funds aren’t or come in sooner than big funds do.
Small fund size is easier to return than a larger fund size.
Rarely do they have ownership targets (nor do they need significant ownership to return the fund). Meaning they’re collaborative and friendly on the cap table, aka with most other investors, especially big lead investors.
Price matters less. Big funds really have to play the price game a little bit more since (1) likely to be investing in multiple stages with reserves, and price matters more past the Series A than before, and (2) they’re constrained by check size, ownership targets, and therefore price in order to still have a fund returner.
78/ “Strategy is choosing what not to do.” — Peter Rahal
79/ “We expect GPs to have 1% ownership for every $10M in fund size.” — Large multi-billion family office
80/ “Exiting a position in a company to return DPI to LPs is not a reflection of your stance on the company, but your stance on the market.” — Asher Siddiqui
Fund structure
81/ If you have more than $10M and are not a solo GP, consider separating your GP and management company entities. While there are about $5000-10,000 in costs per year, separating fund structures allows for more optimal tax planning, better liability protection, continuity across GP entities with future funds, and flexibility to adopt W2 employment for future employees which is hard to do under a partnership structure. — Chris Harvey
82/ If you’re a GP at a large fund making >$1-2M in annual fees, consider two metrics: (a) AUM times management fee divided by number of GPs, and (b) NPV of potential future carry on that AUM divided by number of GPs. You never want (a) to be greater than (b).
Portfolio Support
83/ “Just because I have a front row seat at a championships [basketball game] doesn’t mean I can coach an NBA team.” — Brian Chesky
84/ “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
85/ “The median value-add is about zero. The mean is less than zero. Most things work because they just work (right set of users wanted something at the right time) and the executive team builds the right culture to hire a great team to operate in that market, not because of what a VC does. Value-added service is ‘product as marketing’ for 90% of investors who pitch it.” — Kanyi Maqubela
86/ Get access to as many different offices of your portfolio company’s potential customers as possible. Even better if you know them so well, they give you their office keys. — John Gleeson
87/ “I find most meetings are best scheduled for 15-20 minutes, or 2 hours. The default of 1 hour is usually wrong, and leads to a lot of wasted time.” — Sam Altman
89/ If you don’t know what to ask your LPAC, ask about extensions on fund length (i.e. past 10+2 years), exceeding limits on company concentration and recycling, investing in startups across funds, and early DPI. — Hunter Walk
90/ At the annual summit… “When you speak on market/themes, I don’t want to hear from the managing partners. Bring out your young guns and the members of the team who are your ground game/first line.” — Endowment Eddie
“First extension: 63% of funds surveyed allow GPs to authorize the first extension at its sole discretion, typically for one year.
Second extension: 42% of funds surveyed require approval from the LPAC to authorize the second extension.
Third extension: 41% of funds surveyed require consent from the fund investors to authorize the third extension. Note that further extensions can always be approved by an amendment to the fund documents, but this would require consent from at least 50% and usually 75% of investors by commitment or interest.”
92/ “Too many calls I get on, it’s a re-hash of what the strategy is. Assume if I’m taking the call, I actually spent five minutes reminding myself of who you are and what you do.” — Chris Douvos
93/ “One thing I hate is when I meet with someone, they tell me about A, B, and C. And then the next time I meet with them, it’s companies D, E, and F. ‘What happened to A, B, and C?’ So I’ve told people, ‘Hey, we’re having serious conversations. Help me understand the arc.’ As LPs, we get snapshots in time, but what I want is enough snapshots of the whole scene to create a movie of you, like one of those picture books that you can flip. I want to see the evolution. I want to know about the hypotheses that didn’t work.” — Chris Douvos
94/ “Every letter seems to say portfolios have ‘limited exposure to tariffs.’ The reality is we’re seeing potentially the breakdown of the entire post-war Bretton Woods system. And that’s going to have radical impacts on everything across the entire economy. So to say ‘we have limited exposure to tariffs’ is one thing, but what they really are saying is ‘we don’t understand the exposure we have to the broader economy as a whole.’” — Chris Douvos
95/ “Bad performance is explainable, but operational failures erode trust and your LPs aren’t going to re-up.” — Liz Ferry
Building a team
96/ “You can’t exceed one associate per partner and expect those associates to have real influence.” — Mike Dauber
97/ “Scaling is not synonymous with increasing fund size. To me, scaling means you’re increasing in sophistication. You’re increasing in focus. And that’s really a sign of maturity and fund size is a byproduct of that.” — Lisa Cawley
Compensation
98/ In a 2024 survey, in regards to junior team members’ compensation, “AUM matters less than you think.” There’s only a 17% pay bump on base pay for associates between $1.5B funds and $156M funds. In addition, levers that can boost a GP’s take-home pay include GP staking and cashless contributions. — Chris Harvey, with reference to Deedy Das and Venture5 Media
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Kelli Fontaine from Cendana Capital joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on three GPs at VC funds to ask three different questions.
The Council’s Amber Illig asked what happens when a solo GP is incapacitated or passes away.
Oceans Ventures’ Steven Rosenblatt asked why most LPs follow the decision-making of other LPs.
NeuCo Academy’s Jonathan Ting asked what LPs think about GPs asking for help.
From investing in great fund managers to data to investor relations, Kelli Fontaine is a partner at Cendana Capital, a fund of funds who’s solely focused on the best pre-seed and seed funds with over 2 billion under management and includes the likes of Forerunner, Founder Collective, Lerer Hippeau, Uncork, Susa Ventures and more. Kelli comes from the world of data, and has been a founder, marketing expert, and an advisor to founders since 2010.
[00:00] Intro [01:26] Kelli’s new data discoveries [04:32] How did Kelli underwrite a manager with no LinkedIn? [06:19] Is too much data ever a problem? [08:18] Vintage year benchmarking [09:49] Telltale signs on GPs’ social profiles [10:57] Data Kelli wishes she could collect [15:59] Enter Amber and her new podcast [18:08] Amber’s background and The Council [19:08] How does Amber define top companies? [24:25] How can a solo GP set the firm up well in case they’re no longer there? [26:11] Kelli’s number one fear with solo GPs [28:30] Best practices for generational transfers [32:28] Solo GPs and their future plans [36:51] Enter Steven and Oceans [42:38] Would Kelli ever include AI summaries as part of the get-to-know-someone phase? [44:18] Why do LPs follow other LP’s decision-making? [48:43] What are the traits of an LP who is likely to have independent thinking? [51:16] Why don’t LPs talk directly with founders? [57:59] Enter Jonathan and NeuCo Academy [1:00:05] Is Kelli seeing more secondaries firms? [1:01:56] How often should GPs lean on LPs for help? [1:07:22] Are most LPs helpful? [1:12:21] What kinds of questions does Kelli get from her own GPs? [1:15:39] Kelli’s last piece of advice
“If that fund deployed over a year versus a manager of ours that deployed over four years, they’re going to look very different. So we do vintage-year benchmarking to see how their MOIC stacks up against how the revenue of companies stack up.” – Kelli Fontaine
“Team risk is the biggest risk in venture.” – Kelli Fontaine
“The same top ten firms are not the same that they were 15 years ago, and probably Silicon Valley. Generational transfer is very hard.” – Kelli Fontaine
“If you make the brand bigger than just you that it comes from DNA, support systems, things that you stand for that have had support to get there—so once that brand is made, the other team members embody that brand as well. That’s the way to do it. It’s really empowering other team members to own a part in that brand-building—outwardly and inwardly in decision-making.” – Kelli Fontaine
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
“19% of our GDP attracts about 55% of capital inflows, aka venture activity, and 81% is underinvested.” – Vijen Patel
We’re back with one of our crowd favorite formats, where we bring on one LP and one GP, and share why that LP invested in this GP. This time, we have Grady Buchanan, co-founder of NVNG, and Vijen Patel, founding partner of The 81 Collection.
Vijen Patel is an entrepreneur and investor. He founded The 81 Collection, a high growth equity firm in boring industries. Previously, he founded what is now known as Tide Cleaners. He bootstrapped what eventually became the largest dry cleaner in the country (1,200 locations) before selling to Procter & Gamble in 2018. Before Tide Cleaners, he worked in private equity, McKinsey & Company, and Goldman Sachs. He lives in Chicago with his wife and two kids.
Grady Buchanan is an institutional and risk-based asset allocation professional with a passion for bringing venture capital to those who have the interest. He founded NVNG in late 2019 and oversees investment strategies, the firm’s venture fund pipeline, manager sourcing, due diligence, and external events. Before launching NVNG, Grady worked with the Wisconsin Alumni Research Foundation’s (WARF) $3B investment portfolio, focused on private equity and venture capital initiatives, including fund diligence, investment strategy, and policy. Grady is based in Milwaukee, WI.
[00:00] Intro [02:41] The pressure of quitting a PE job for dry cleaning [05:09] Vijen’s self talk as a founder [06:50] How to overcome doubt [09:00] How Vijen learned customer success [10:35] What did Pressbox become? [12:41] The dichotomy between society’s needs and what gets funded [14:19] How did Grady go from selling pancakes to being an LP? [23:51] Why did Grady think he bombed the LP interview? [29:15] What is The 81 Collection? [32:22] How did Vijen meet Grady? [34:39] How is Vijen fluent in Spanish? [36:40] How did Grady meet Vijen? [42:21] How did Grady underwrite 81 Collection? [44:44] What about Vijen made Grady hesitate? [48:35] What’s one thing about 81 Collection that could’ve gone wrong? [50:33] The 3 things that create alpha [52:42] Why does NVNG have the coolest fund of funds’ names? [53:47] The legacy Grady plans to leave behind [56:06] The legacy Vijen plans to leave behind
“I wrote down everyone’s concerns, and I just sat on it. A lot of the founders we like to work with, the ones who we really love are the ones who take it in and listen, write it down, then take some time to synthesize everything and then they’ll act with conviction. ‘Why is this stupid? Tell me why. Let’s go deeper and deeper.’ And oftentimes these reasons are very rational and slowly over time, what if I derisk this by doing that?” – Vijen Patel
“19% of our GDP attracts about 55% of capital inflows, aka venture activity, and 81% is underinvested.” – Vijen Patel
“There’s this crazy stat we recall often: the 50 richest families on Earth, who often build in this 81, they’ve held, on average, their business for 44 years.” – Vijen Patel
“We invest in only amazing managers; we will not invest in every amazing manager.” – Grady Buchanan
“Alpha’s three things: information asymmetry, access, and, actually, taxes.” – Vijen Patel
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Pattern Ventures’ John Felix joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on three GPs at VC funds to ask three different questions.
Atria Ventures’ Chris Leiter asked about the common mistakes LPs make when underwriting solo GPs.
Garuda Ventures’ Arpan Punyani asked how quickly do most LPs get to conviction. First 10 minutes? First meeting?
Geek Ventures’ Ihar Mahaniok asked how LPs evaluate Fund IIs when the Fund I has no distributions.
John Felix is a General Partner and Head of Research at Pattern Ventures, a specialized fund of funds focused on backing the best small venture managers. Prior to Pattern, John served as the Head of Emerging Managers at Allocate where he was an early employee and helped to launch Allocate’s emerging manager platform. Prior to joining Allocate, John worked at Bowdoin College’s Office of Investments, helping to invest the $2.8 billion endowment across all asset classes, focusing on venture capital. Prior to Bowdoin, John worked at Edgehill Endowment Partners, a $2 billion boutique OCIO. At Edgehill, John was responsible for building out the firm’s venture capital portfolio, sourcing and leading all venture fund commitments. John started his career at Washington University’s Investment Management Company as a member of the small investment team responsible for managing the university’s now $13 billion endowment. John graduated from Washington University in St. Louis with a BSBA in Finance and Entrepreneurship.
[00:00] Intro [02:20] What’s changed for John since our last recording? [04:08] What is Pattern Ventures? [06:22] Why is Pattern’s cutoff for funds they’re interested in at $50M? [07:32] How does John define noise? [09:34] Do non-sexy industries require larger seed funds? [11:36] How does think about overlap in the underlying startup portfolio? [15:22] Enter Chris and Atria Ventures [18:03] Should solo GPs scale past themselves? [24:14] Partnerships have more risk than solo GPs [26:10] How does John think about spinouts from large VC firms? [27:53] The psychology of being a partner at a big firm versus your own [30:38] Enter Arpan and Garuda Ventures [31:26] Geoguessr [32:52] Garuda’s podcast, Brick by Brick [34:52] How quickly do LPs know they intuitively want to invest in a GP? [38:02] The analogy to what GPs do to founders [43:50] There are many ways to make money [44:57] Quantifying intuition as an investor [49:12] Enter Ihar and Geek Ventures [49:36] How do LPs evaluate Fund IIs when Fund I has no DPI? [53:01] How do you know if a GP did what they said they were going to do? [54:47] What if the key value driver is off-thesis, but everything else is on-thesis? [56:21] Is signing 1 uncapped SAFE per fund reasonable? [57:14] What is the allowable percentage of exceptions in a fund? [1:01:32] Good vs bad exceptions [1:06:06] Reminders that we are in the good old days [1:07:31] John’s last piece of advice to new allocators [1:09:00] David’s favorite moment from John’s last episode
“In life, it’s always easy to justify ‘why now’ is not the right time. I think it’s hard to justify ‘why now’ is the right time to do something.” – John Felix
“We love investing in things that are contrarian and non-consensus, but there has to be a path to becoming consensus because something can’t remain non-consensus forever. There has to be a catalyst that the market eventually realizes this or else the company’s not going to be able to raise venture capital. It’s not going to be able to sustain it and continue to grow and survive.” – John Felix
“The type of spinouts we want to back are the people who are successful in spite of working at the big brand, not because they worked at the big brand.” – John Felix
“You need to earn the right to start your new firm to do your own thing. I don’t think enough people realize that.” – John Felix
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
A while back, my friend Augustine, CEO and founder of Digify, asked me to write something for his company, Digify’s blog, about how I think about maintaining relationships between fundraising cycles when I was still an investor relations professional. As such, I wrote a mini two-part series on the frameworks and tactics I use to maintain LP relationships. Been given the liberty to cross-post on this humble blog of mine, in hopes that it helps any emerging managers or IR professionals here.
Voila, two of two! The first one you can find here (also linked below).
Author’s note: My promise to you is that we’ll share advice you’ve likely never heard before. By the time you get to the end of this article, if you’re intimidated, then we’ll have done our job. Because that’s just how much it takes to fight in the same arena as people I’ve personally admired over the years and work to emulate and iterate daily. That said, this won’t be comprehensive, but a compilation of N of 1 practices that hopefully serve as tools in your toolkit. As such, we will be separating this piece into Part 1 and 2. The first of which is about overarching frameworks that govern how I think about managing relationships. The second of which focuses on tactical elements governed by the initial frameworks brought up.
It’s easy to stay high-level and strategic. I won’t. I personally find it helpful to have tactical examples on how to execute frameworks on LP relationship management. As your mileage may vary, the below will hopefully serve as tools for the toolkit, as opposed to Commandments or the Constitution for investor relations practices.
Tactic 1: Co-create
In general, people who help create a product have more mental and emotional buy-in to the continued success of said product. It’s why influencers leverage their fanbase to generate new ideas for content. It’s why laws and propositions are voted on. It’s why your parents asked what you wanted for dinner. It’s why, if you’re a junior team member and want budget and resources for your project, you ask for feedback from leadership (often). While not every LP wants to be intimately involved in the day-to-day, and even if they don’t end up helping, it still goes a long way when you ask for their feedback and advice for major firm decisions, regardless of whether they’re on the LPAC or not. Building strong LP relationships requires making them feel like true partners in the decision-making process. They want to be involved in:
Hiring/promoting a new partner or GP
Pivoting or expanding fund strategy
Increasing the length of the deployment period or fund term
Generating early DPI
Breaking a partnership
LPs want to hear news before they become news. And if time and expertise allows, they’d like to write the press release with you.
In addition, if you have the bandwidth and resources, host events with them on topic areas they’re interested in. Even if it’s a small gathering of four to six people, it’s the intentionality and the willingness that counts.
Tactic 2: Follow up without asks, often and thoughtfully
I think a lot about Ebbinghaus’ Forgetting Curve. Effectively, how long does it take someone to forget new information and as a function, how often do you need to remind someone for them to retain memory of that new piece of information? Within an hour, the average person forgets half of what they learned. Within 24 hours, the average person forgets 70% of it. And within a week, they forget 90%. I won’t get too technical here, but if you are interested in learning more, I highly recommend reading this paper: Murre and Dros’ Replication and Analysis of Ebbinghaus’ Forgetting Curve.
And so, in theory, every time someone’s memory of you, of your thesis, or of your firm drops below 90% memory retention, you should remind them. Rough intervals of which are within minutes, within 2 hours, within a day, within a week, within 30 days, and so on. In practice, after you catch up with an LP, text them a note saying that you’ll follow up within the day. And yes, texts are often far more effective in maintaining relationships with LPs than emails. Emails are read by other team members and often lost in inboxes. The only exception to this rule is if you or your LP is an RIA, and requires all communication to be archived, including text.
Outside of scheduled catchups, spend a lot of time tracking people’s hobbies and interests in your CRM, and sending LPs an article, video, interview or insight that reminded you of them or that you think they’d genuinely appreciate; it goes a long way. Oh, and sending thank you notes more often than you think you need to, especially unprompted ones, really helps cement relationships. Over time, this will become a habit. Here’s an example of an email I send often:
Hey [name],
Read this article [link article] this morning as I was grabbing my morning coffee and it reminded me of our conversation half a year back on [insert topic you were talking about].
One of my favorite lines from the piece was [insert quote from the article] – something I thought you would really get a kick out of.
I know you’re busy, so there’s no need to reply to this email, but I want to send this your way in case it’s interesting for you, as well as send you good vibes on this beautiful Tuesday.
Keep staying awesome,
David
Two things here:
You do not have to write like me.
Telling people that they don’t have to reply is more likely to result in a reply. Works for me 80-90% of the time when sending to a warm connection. Though, your mileage may vary.
When I had Felipe Valencia from Veronorte on my podcast, he mentioned that he brought Colombian coffee for GPs whenever he visited the States. I also know of IR people and GPs who do the same for LPs. And vice versa from LPs to Heads of IR and GPs, especially from our Asian counterparts, where gifting culture is more common. Do note though that if your LP is from a public institution—sovereign wealth fund, pension, endowment, or sometimes, even a large corporation—individuals are not allowed to accept gifts more than $50, or sometimes none at all.
“Going to see accounts before budgets are set helps get your brand and your story in the mind of the budget setter. In the case of the US, budgets are set in January and July, depending on the fiscal year. In the case of Japan, budgets are set at the end of March, early April. To get into the budget for Tokyo, you gotta be working with the client in the fall to get them ready to do it for the next fiscal year. [For] Korea, the budgets are set in January, but they don’t really get executed until the first of April. So there’s time in there where you can work on those things. The same thing is true with Europe. A lot of budgets are mid-year. So you develop some understanding of patterns. You need to give yourself, for better or worse if you’re raising money, two to three years of relationship-building with clients.”
Knowing the timing of when to see who is important, especially these days when you’re required to meet and build relationships across the world. Strategic timing can make or break an LP relationship, particularly when it comes to securing allocations.
While the above are usually for pensions, corporates and sovereign wealth funds, endowments, foundations, and large family offices all have recurring cycles. And meeting a few months before the ball has to roll can mean the difference between you being a line item somewhere and being on top of the docket.
Tactic 4: The 11-star experiences
I first learned of this when tuning into a Reid Hoffman and Brian Chesky interview, which I highly recommend. It was further reinforced as I spent more time learning from people in the hospitality and culinary world.
To summarize, everyone knows what a 1- to 5-star experience looks and feels like. But when everyone is optimizing on a 5-point scale, to outcompete others, you must compete on a scale they have yet to conceptualize. And so a five out of five experience is one where you leave happy and content enough to leave a glowing review because all the boxes were checked. Everything in your ideal vacation, retreat, or dining experience was fulfilled. So… if that’s the new baseline, then what does a six out of five experience look like?
Maybe that’s sending a limo to pick someone up at the airport, so they don’t have to find their own way to the establishment. That could also be finding your guest’s favorite bottle of champagne and having it ready when they enter your premises.
So, if that’s a six out of five, what does a seven out of five look like? You’ve pre-booked everything your guest is interested in before they show up and without them having to lift a finger. Or you learned that on their entire NY trip, your diners never had the chance to try an original New York hot dog from a street vendor, so you replace one course of the menu just so that they can try it. (True story. Would highly recommend reading Will Guidara’s Unreasonable Hospitality.)
So, if that’s a seven-star experience, what does an eight look like? What about a nine-star? 10-star? 11-star?
At some point, the stakes get quite insane. Meeting their role model from the history books. Using time travel or teleportation devices. Meeting aliens. But trust me, if competitive sports taught me anything, it’s that it’s good to envision the impossible as possible. And, the most important part to envision in this entire exercise is the genuine, and unstoppable smile that appears.
So what does this look like in practice? I cannot list everything out there, because it’s 1. not possible, and 2. if I can spell out a true 7- or 8-star experience, it’s generalizable. And if it is, it won’t feel special. That said, let me list out some I’ve done in the past that hopefully serve as inspiration. Caveat, I’m a Bay Area native, and I still live in the Bay Area.
An LP tells me they’re coming to visit the Bay. I send them a suggested itinerary based on the number of days they’re here, which balances both work and some under-the-radar touristy things. On top of that, I send hotels I suggest, restaurants I recommend, and more. All of which I offer to call on their behalf because I know the staff there and I might be able to get them a discounted rate or an automatic upgrade.
If I recommend a restaurant, and they agree to host a meeting there or just to try it out, I call the restaurant, tell them that they’re really important people to me (can do so if I’m a regular patron there already), and on top of that, I ask them to give the guests a kitchen tour.
I ask a local chocolatier to custom make some bonbons for me that are inspired by the individuals visiting, that I give to the LPs when I meet them in person.
If it’s a rush order, I call one of the long-established fortune cookie shops in San Francisco for them to do a custom order and write custom fortunes inside each fortune cookie. And inside each fortune is a fun fact about each person I’ve introduced them to meet while they’re here.
When it comes to intros, 70% of my intros will be relevant to their business interests. Startups. VCs. Other LPs. 20% of my intros are my recommendation of who they should meet but might not know they should. 10% are 1-2 people I think extremely highly of who are outside of technology and startups, but will offer a fascinating perspective to the world. A YouTuber with millions of subscribers. A legendary restaurateur. A lead game designer. An author. A Nobel prize winning professor. Naturally, I do the last selectively. My job is also to protect their bandwidth. For the last set of intros, I also don’t take intro requests.
All-in-all, LPs, like the rest of us, are human. We’re emotional creatures. We love stories. We are naturally curious. We love wonder. Their job doesn’t always allow for them to be, especially with tons of back-to-back diligence meetings, conversations with stakeholders, and so on. So it makes me personally really happy when I can balance suspense and surprise when I help them craft trips to the Bay.
In closing
These are just a few strategies and tactics among many. The goal with this piece was never to be exhaustive, but to inspire possibilities and your favorite practices. And if you’re willing, I, as well as the Digify team, are always all ears about practices you’ve come to appreciate and build into your own routine. Until the next time, keep staying awesome!
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
A while back, my friend Augustine, CEO and founder of Digify, asked me to write something for his company, Digify’s blog, about how I think about maintaining relationships between fundraising cycles when I was still an investor relations professional. As such, I wrote a mini two-part series on the frameworks and tactics I use to maintain LP relationships. Been given the liberty to cross-post on this humble blog of mine, in hopes that it helps any emerging managers or IR professionals here.
Voila, the first of two!
Author’s note [aka me]: My promise to you is that we’ll share advice you’ve likely never heard before. By the time you get to the end of this article, if you’re intimidated, then we’ll have done our job. Because that’s just how much it takes to fight in the same arena as people I’ve personally admired over the years and work to emulate and iterate daily. That said, this won’t be comprehensive, but a compilation of N of 1 practices that hopefully serve as tools in your toolkit. As such, we will be separating this piece into Part 1 and 2. The first of which is about overarching frameworks that govern how I think about managing relationships. The second of which focuses on tactical elements governed by the initial frameworks brought up.
One of the best pieces of advice I got when I started as an investor relations professional was that you never want your first conversation with an allocator to be an ask. To be fair, this piece of advice extends to all areas of life. You never want your long-anticipated catch up with a childhood friend to be about asking for a job. You never want the first interaction with an event sponsor to be one where they force you to subscribe to their product. Similarly, you never want your first meeting with an LP to be one where you ask for money.
And in my years of being both an allocator and the Head of IR (as well as in co-building a community of IR professionals), this extends across regions, across asset classes, and across archetypes of LPs.
So, this begs the question, how do you build and, more importantly, retain rapport with LPs outside of fundraising cycles? The foundation of any successful LP relationship lies in consistent engagement beyond capital asks.
To set the context and before we get into the tactics (i.e. what structured variables to track in your CRM, how often to engage LPs, AGM best practices, etc.), let’s start with two frameworks:
Three hats on the ball
Scientists, celebrities, and magicians
“Three hats on the ball”
This is something I learned from Rick Zullo, founding partner of Equal Ventures. The saying itself takes its origin from American football. (Yes, I get it; I’m an Americano). And I also realize that football means something completely different for everyone based outside of our stars and stripes. The sport I’m talking about is the one where big muscular dudes run at each other at full force, fighting over a ball shaped like an olive pit. And in this sport, the one thing you learn is that the play isn’t dead unless you have at least three people over the person running the ball. One isn’t enough. Two leaves things to chance. Three is the gamechanger.
The same is true when building relationships with LPs. You should always know at least three people at the institutions that are backing you. You never know when your primary champion will retire, switch roles, go on maternity leave, leave on sabbatical, or get stung by a bee and go into anaphylactic shock. Yes, all the above have happened to people I know. Plus, having more people rooting for you is always good.
Institutions often have high employee turnover rates. CIOs and Heads of Investment cycle through every 7-8 years, if not less. And even if the headcount doesn’t change, LPs, by definition, are generalists. They need to play in multiple asset classes. And venture is the smallest of the small asset classes. It often gets the least attention.
So, having multiple champions root for you and remind each other of something forgotten outside of the deal room helps immensely. Your brand is what people say about you when you’re not in the room. Remind people why they love you. And remind as many as possible, as often as possible. This multi-touch approach is essential for nurturing a robust LP relationship strategy.
Scientists, celebrities, and magicians
My buddy Ian Park told me this when I first became an IR professional. “In IR, there are product specialists and there are relationship managers. Figure out which you’re better at and lean into it.” Since then, he’s luckily also put it into writing. In essence, as an IR professional, you’re either really good at building and maintaining relationships or can teach people about the firm, the craft, the thesis, the portfolio, and the decisions behind them.
To caveat ‘relationship managers,’ I believe there are two kinds: sales and customer success. Sales is really capital formation. How do you build (as opposed to maintain) relationships? How do you win strangers over? This is a topic for another day. For now, we’ll focus on ‘customer success’ later in this piece.
There’s also this equation that I hear a number of Heads of IR and Chief Development Officers use.
track record X differentiation / complexity
I don’t know the origin, but I first heard it from my friends at General Catalyst, so I’ll give them the kudos here.
Everyone at the firm should play a key role influencing at least one of these variables. The operations and portfolio support team should focus on differentiation. The investment partners focus on the track record. Us IR folks focus on complexity. And yes, everyone does help everyone else with their variables as well.
That said, to transpose Ian’s framework to this function, the relationship managers primarily focus on reducing the size of the denominator. Help LPs understand what could be complex about your firm through regular catchups—these touchpoints are crucial for maintaining a strong LP relationship:
Why are you increasing the fund size?
Why are you diversifying the thesis?
How do you address key person risk?
Why are you expanding to new asset classes?
Are you on an American or European waterfall distribution structure?
Why are you missing an independent management company?
Who will be the GP if the current one gets hit by a bus?
The product specialists split time between the numerator and the denominator. They spend intimate time in the partnership meetings, and might potentially be involved in the investment committee. Oftentimes, I see product specialists either actively building their own angel track record and/or working their way to become full-time investment partners.
One of my favorite laws of magic by one of my favorite authors, Brandon Sanderson, is his first law: “An author’s ability to solve conflict with magic is directly proportional to how well the reader understands said magic.”
In turn, an IR professional’s ability to get an LP to re-up is directly proportional to how well the LP understands said magic at the firm.
My friend and former Broadway playwright, Michael Roderick, once said, the modern professional specializes in three ways:
The scientist is wired for process. The subject-matter expert. They thrive on the details, the small nuances most others would overlook. They will discover things that revolutionize how the industry works. The passionately curious.
The celebrity. They thrive on building and maintaining relationships. And their superpower is that they can make others feel like celebrities.
The magician thrives on novelty. Looking at old things in new ways – new perspectives. The translator. They’re great at making things click. Turning arcane, esoteric knowledge into something your grandma gets.
The product specialists are the scientists. The relationship managers are the celebrities. But every IR professional, especially as you grow, needs to be a magician.
Going back to the fact that most LPs are generalists, and that most venture firms look extremely similar to each other, you need to be able to describe the magic and your firm’s ‘rules’ for said magic to your grandma.
For the next half, I’ll share some individual tactics I’ve worked into my rotation. Most are not original in nature, but borrowed, inspired, and co-created with fellow IR professionals.
This post was first shared on Digify’s blog, which you can find 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!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“The revenue and economic models for groups are misaligned with how human nature functions.” – Samira Salman
Samira Salman is a generational force—a rare blend of financier, strategist, and connector—revered for her ability to move capital, catalyze ventures, and cultivate the kinds of high-trust relationships that shape industries and define legacies. With over $5.5 billion in closed transactions spanning multiple asset classes, she is not merely a dealmaker—she is a trusted consigliere to some of the world’s most sophisticated families, investors, and visionaries.
Samira is the Founder & CEO of Salman Solutions, a bespoke advisory firm, and the visionary behind Collaboration Circle, an invitation-only global ecosystem recognized by Fortune Magazine as the premier “by families, for families” platform—curating aligned capital, deal flow, and meaningful connection across generations of wealth. She also serves as Chief Operating Officer of a private single-family office, overseeing a portfolio that blends venture capital, direct investments, and multi-generational governance.
Educated as a mergers and acquisitions tax attorney, Samira’s early career at Arthur Andersen, Deloitte, KPMG, and Shell Oil laid the foundation for her structural brilliance and financial fluency. She holds an LL.M. in Taxation, a JD, and a BS in International Trade and Finance—with a minor in Economics. Her legal acumen, combined with a deep intuition for human behavior, gives her a unique edge in structuring elegant, effective solutions that drive growth, mitigate risk, and unlock hidden value.
Samira’s proprietary methodology for business growth and ecosystem development has positioned her as one of the most connected and trusted figures in private finance. Her work spans advisory mandates, capital formation, co-investment syndication, family office strategy, and the orchestration of transformational events for UHNW families and industry trailblazers. She is the rare operator who bridges worlds—money and meaning, structure and soul, intellect and instinct.
Her multicultural upbringing and global exposure across dozens of countries have imbued her with a refined sensibility, cultural fluency, and a fierce commitment to authenticity. Samira doesn’t just build businesses—she builds trust-based systems that endure. Her work is rooted in the principle that Relationships Under Management (RUM) are the new AUM—and she is the embodiment of that thesis.
A passionate advocate for women’s economic empowerment, arts and culture, and global impact, Samira has served as an Honorary Advisor to the United Nations for Social Impact Projects and the NGO Committee on Sustainable Development. She has held board roles with numerous arts, education, healthcare, and professional institutions including the Houston Ballet, Center for Contemporary Craft, and Fresh Arts.
[00:00] Intro [02:27] How did Samira find herself at TASIS? [04:17] How did TASIS feel when she first arrived? [07:27] From tax lawyer to family offices [09:55] How did Samira decide to quit being a lawyer? [17:12] Why did Samira want to be a tax lawyer? [19:44] Journaling [22:39] The blessing of a lawyer brain [25:19] The Oprah episode that changed it all [29:45] How did Salman Solutions start? [33:28] Samira’s first interaction with family offices [36:43] Show and tell with Samira’s journals and pens [41:27] What did Samira mean that most family offices fall short of raising their own capital? [42:54] What is the common family office hero arc into VC? [44:05] Family office trends that Samira’s seen [47:17] The starting point for families interested in VC [50:13] Advice to a friend who wants to invest in VC [53:31] Book, podcast and conference recommendations [55:42] How does one qualify for Collaboration Circle? [56:21] Content recommendations, continued [59:57] How Collaboration Circle started [1:06:59] The 3 pieces of Collaboration Circle [1:09:49] Community economic models and human nature misalignment [1:12:43] How to create safe environments [1:18:02] The Dior bag tradition [1:21:20] Reminders that we’re in the good old days
“The very first thing everybody has to do is give themselves permission to lean into what they are interested in and what does it for them and what they understand and what they have an affinity for, regardless of what everybody else says you should be doing.” – Samira Salman
“Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.” – Margaret Mead
“The revenue and economic models for groups are misaligned with how human nature functions.” – Samira Salman
“Numbers and volume are not what programs humans to feel safe and to be authentic and to create. In order for us to do our best work and be our most thoughtful, our most creative, we have to be fully dropped down into our bodies and safe in our nervous systems. And some of the environments our industry has curated are literally the exact opposite of that.” – Samira Salman
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
You know that feeling when you enjoy something so much, you have to do it again. That’s exactly what happened with my buddy Ben Ehrlich. There’s a line I really like by the amazing Penn and Teller. “Magic is just spending more time on a trick that anyone would ever expect to be worth it.”
Ben is exactly that. He’s a magician with how he thinks about underwriting, arguably, the riskiest class of emerging managers. This piece originated opportunistically from another series of intellectual sparring matches between the two of us. Both learning the lens of how the other thinks. It was pure joy to be able to put this piece together, just like our last. Selfishly, hopefully, two of many more.
You can find the same blogpost under his blog, which I highly recommend also checking out.
Venture is a game of outliers. We invest in outlier managers, who invest in outlier companies, capitalizing on outlier opportunities.
Angel investments have excelled at catching and generating outlier outcomes. However, in recent years, angel checks are not just a critical piece of the capital stack for startups, they are also a way where amazing people can learn and grow into spectacular investors. In the past 20 years, angel activity has gone from a niche subsection, to a robust industry with angel groups all over the world, and the emergence of platforms to facilitate their growth.
As LPs, we see this every day. A common story that we diligence is the angel turned institutional VC. This process is what allows aspiring GPs who come from all walks of life, with often quite esoteric track records, to raise funds and prove they can be exceptional venture capitalists. These people are often the outliers at the fund level. The non-obvious investors who are taking their angel investing experience and turning it into elite cornerstones of the venture ecosystem. For example:
Arthur Rock, having done a few years of angel investments, goes to raise his first $5M fund that returns $90M in 1968. Then goes on to invest $2.5M for 50% of the company two guys with no business plan started. By the way, that became Intel.
Each of these angels-turned-investors returned their earliest believers many times over. And these are far from the only examples.
So, as an allocator, it is logical to want to pattern match to the angel investor turned GP as a way to assess how good a manager might be in building their firm. However, with more venture firms than there have ever been, and more ways to access angel-investing, differentiating signal from noise has never been harder. The hardest being where the track record is too young, too limited, and there’s not enough to go on. So it begs the question: How the hell do you underwrite an angel track record that’s still in its infancy?
The simple answer is you don’t. At least not completely. You look for other clues. Telltale signs.
So, our hope with this piece is to share what we each look for – most of which is beyond the numbers. The beauty of this piece is that even while writing it, Ben and David have learned from each other Socratically on how to better underwrite managers. This is one that can be pretty controversial, and we don’t agree on everything. So, let us know what you think….
Understanding the returns
Every pitch deck we look at has a track record slide. Usually this is some amalgamation of previous funds (if they have any), advisor relationships, and angel investing track record. Angel investing track record is usually the largest number in terms of TVPI or IRR. However it also has the least clear implications, so we need to be careful in understanding what it means. Here are the steps we take in understanding the track record.
Step 1: Filtering the Track Record
First, we get aggressive with filtering the track record the GP shows you. Not the select investments track record on the deck, but the entire track record including advisor shares, SPVs, funds, and any other equity stake. We do this as angel track records are usually the result of opportunistic or inbound access over a long period of time. The companies in their angel portfolio don’t necessarily relate to their thesis or plan for their fund. So cutting the data by asset type and starting with thesis vs off thesis investments is a helpful starting point.
Next, it’s helpful to understand the timeframe. Funds have fixed lifespans1, and strict deployment time periods, which we call vintages. In order to understand the performance, we break down the time periods of their investments including entry date, exit date, values relative to median at that time, and average hold period. Naturally, also, we do note entry valuation, entry round, exit valuation, and ideally if they have it price per share. Having the afore-mentioned will help you filter returns, especially if a GP is pitching you a pre-seed/seed fund, but the bulk of their returns come from one company they got into at the Series B.
Lastly, it’s helpful to group investments into quartiles. Without sounding like a broken record, it’s important to remember that venture is fundamentally outlier-driven. Grouping the investments, understanding them at the company specific level vs aggregate is critical to the next phase, which is understanding the drivers of the track record.
Also, it’s important to note that some vintages will perform better than others. And as an LP, it’s important to consider vintage diversification (since no one can time the market) and what the public market equivalent is. For a number of vintages, even top-quartile venture underperforms the QQQ, SPY, and NASDAQ. A longer discussion for another post. Cash, or a low-cost index is just as valid of a position as a venture fund.
Step 2: Understanding the Drivers
Once you have broken down the data, we want to understand the real drivers behind the returns from the track record. We tend to start by asking these questions:
Are there other outliers in the off-thesis investments?
What are the most successful on-thesis investments?
Has any money actually been delivered, or is it entirely paper markups?
For the on-thesis investments that returned less than 10X the check size, what did this individual learn? How will that impact how this GP makes decisions going forward?
How much of a GP’s track record is attributed to luck?
And simply, do the founders in the GP’s supposed track record even know that the GP exists?4
With respect to the second-to-last question, if their on-thesis track record has more than 10 investments, we take out the top performer and the bottom performer, is their MOIC still interesting enough? While there is no consistency of returns in venture, it gives a good sense of how much luck impacts the GP’s portfolio.
The last question is extremely prescient, since the goal of a GP trying to build an institution – a platform – is that they need the surface area for serendipity to stick to compound. Yesterday’s source of deal flow needs to be worse than today’s. And today’s should be eclipsed by tomorrow’s. As LPs, we want the GPs to be intimately involved in the success of their outliers not because attribution of value add matters, but because great companies bring together great teams. Great teams aggregate and spawn other ambitious people. Ambitious people will often leave to start new ventures. And we want the GP to be the first call. More on that in the next section.
Step 3: Transferability to a Fund
Lastly, the analysis will need to shift from purely quantitative to qualitative guided by the quantitative. We are moving from the realm of backward-looking data, into forward projection. The main question here is how do all the data points we have point to the success of the fund and the differences in running a fund versus an angel portfolio such as:
Fixed deployment periods
Weighted portfolio risks
Correlation risk between underlying portfolio companies
Information rights and regulatory requirements
Angel check size vs fund’s target check size
One heuristic that we use is that of finding the “hyper learner.” The idea is basically, how fast is this person growing, learning and adding it into their decision-making around investing. Do they have real time feedback loops that influence their process, and can they take those feedback loops to the next level with their fund? Essentially, understanding that what matters with emerging VCs is the slope, not y-intercept, so can you see how their decisions will get better?
While everyone learns differently, some of the useful thought experiments to go through include:
What is the GP’s information diet? Where are they consuming information through channels not well-documented or read by their peers?
How are they consuming and synthesizing information in ways others are not?
How does each iteration of their pitch deck vary between themselves?5
Do you learn something new every conversation you have with the GP?
Overall, this is more a bet on the person learning how to be a great fund manager, and can’t all drive from just pure angel investing track record.
The details the numbers can’t tell you:
“We spend all our time talking about attributes because we can easily measure them. ‘Therefore, this is all that matters.’ And that’s a lie. It’s important but it’s partial truth.” — Jony Ive
Angel track records can point to how serious the potential GP is about the business of investing. At the same time, there are factors outside of raw numbers that also offer perspective to how fund-ready a GP is. Looking through the details, it is important to ask in the lead-up to making the decision to run a fund, how have they spent their time meaningfully? For example:
What advisory roles have they taken? What impact did they deliver in each? For those companies and firms, who else was in the running? And why did they ultimately go with this individual?
Have they taken independent board seats? Why? What was the relationship of the founder and board member prior to the official role?
If they’re a venture partner or advisor to another VC firm, what is their role in that firm? When do they get a call from the GPs or partners of that firm?
Is the angel/advisor part of non-redundant, unique networks?
Does the angel/advisor have a unique knowledge arbitrage that founders want access to?
Does the GP’s skillset match the strategy they’re proposing?
Money isn’t the only valuable asset. Time, effort, experience, and network are others. Especially if an angel has little capital to deploy (i.e. tied up in company stock, younger in their career, saving up for a life-impacting major purchase like a house), the others are leading indicators to how a network may compound for the angel-turned-GP over time.
Anti-portfolio
Lastly, one of the hardest parts of understanding angel investing track record is the anti-portfolio as popularized by BVP. As picking is such an important aspect of a GP’s job, understanding how the person has previously made investment decisions based on the opportunities they are pursuing and what they missed out on is critical.
The stopwatch really starts counting when the angel decides that she wants to be a full-time investor one day. The truth is no third party will really know when that ticker starts, outside of the GP’s own words. And maybe her immediate friends and family. While helpful to reference check, it’s her words against her own.
Instead, we find their first angel check or their first advisory role as a proxy for that data point. The outcome of that check isn’t important. The rationale behind that check also matters less than the memos of the more recent checks. Nevertheless, it is helpful to understand how much the GP has grown.
But what’s more helpful is to come up with a list of anti-portfolio companies. Companies within the investor’s thesis that rose to prominence during the time when that individual started to deploy. And within good reason, that individual may have come across during their time angel investing or advising. In particular, if the angel has not been able to be in the pre-seed. More often than not, folks investing in that round are friends and family. If they are in the seed round, the questions that pop up are:
Did she not see it?
Did she not pick it?
Or, did she not win it?
For the latter two questions, how much has she changed the way she invests based on those decisions? And are those adjustments to decision-making scalable to a firm? In other words, how much will that scar tissue impact how she trains other team members to identify great companies?
Contradictions
One of the most important truths in venture is that to deliver exceptional returns, you have to be non-consensus and right. This ultimately derives from someone being contradictory, with purpose throughout their life.
There is beauty in the resume and the LinkedIn profile. But it often only offers a snapshot into a person’s career, much less their life. So we usually spend the first meeting only on the GP’s life. Where did she grow up? How did she choose her extracurriculars? Why the college she chose? Why the career? Why the different career inflection points?
We look for contradictions. What does this GP end up choosing that the normal, rational person would not? And why?
More importantly, is there any part of their past the GP does not want us to know? Why? How will that piece of hidden knowledge affect how she makes decisions going forward?
Naturally, to have such a dialogue, the LP, who more often than not are in a position of power in that exchange, needs to create a safe, non-judgmental space. Failure to do so will prevent candid discussions.
In Closing
It is extremely easy to over-intellectualize this exercise. There are always going to be more unknowns to you, as an LP, than there are knowns. Your goal isn’t to uncover everything. Your time may be better spent investing in other asset classes, if that’s the case. Your goal, at least with respect to underwriting emerging managers, is to find the minimum number of risks you can stomach before having the conviction to make an investment decision.
And if you’re not sure where to start with evaluating risks, the last piece (Ben’s blog, cross-posted on this blog) we wrote together on the many risks of investing in emerging managers may be a good starting point.
We are choosing to ignore evergreen funds for the purpose of this article, but we know they exist. ↩︎
Beware of GPs who count SAFEs as mark ups. While we do believe most aren’t doing so with deception in mind, many GPs are just not experienced enough in venture to know that only priced rounds count as marks. ↩︎
Separately, is the GP holding 2020-early 2022 marks at the last round valuation (LRV)? Most companies that raised during that time are not worth anything near their peak. Are they also discounting any revenue multiples north of 10-20X? How a GP thinks here will help you differentiate between who’s an investor and who’s a fund manager. ↩︎
This may seem callous, but we have come across the instance multiple times where an aspiring GP over states (or in one case, lied) their position on the cap table. Founder reference checks are a must! ↩︎
David sometimes asks GPs to send every version of their current fund’s pitch deck to him, as an indicator on how the GP’s thinking has evolved over time. Even better if they’re on a Fund II+ because you can see earlier funds’ pitches. Shoutout to Eric Friedman who first inspired David to do this. ↩︎
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.
Ahoy Capital’s founder, Chris Douvos, joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on three GPs at VC funds to ask three different questions.
Pachamama Ventures’ Karen Sheffield asked about how GPs should think about when and how to sell secondaries.
Mangusta Capital’s Kevin Jiang asked about how GPs should think about staying top of mind with LPs between fundraises.
Stellar Ventures’ David Anderman asked Chris about GPs who start to specialize in different stages of investment compared to their previous funds.
Chris Douvos founded Ahoy Capital in 2018 to build an intentionally right-sized firm that could pursue investment excellence while prizing a spirit of partnership with all of its constituencies. A pioneering investor in the micro-VC movement, Chris has been a fixture in venture capital for nearly two decades. Prior to Ahoy Capital, Chris spearheaded investment efforts at Venture Investment Associates, and The Investment Fund for Foundations. He learned the craft of illiquid investing at Princeton University’s endowment. Chris earned his B.A. with Distinction from Yale College in 1994 and an M.B.A. from Yale School of Management in 2001.
[00:00] Intro [01:03] The facade of tough times [05:03] The last time Chris hugged someone [06:53] The art (and science?) of a good hug [08:32] How does Chris start his quarterly letters? [10:35] Quotes, writing, and AI [15:13] Venture is dead. Why? [17:33] But… why is venture still exciting? [21:13] Enter Karen Sheffield [21:48] The never-to-be-aired episode with Chris and Beezer [22:55] Karen and Pachamama Ventures [24:19] The third iteration of climate tech vocabulary [26:55] How should GPs think about secondaries? [33:53] Where can GPs go to learn more about when to sell? [36:53] Are secondary transactions actually happening or is it bluff? [38:44] “Entrepreneurship is like a gas, hottest when compressed” [42:26] Enter Kevin Jiang and Mangusta Capital [44:21] The significance of the mongoose [46:36] How do LPs like to stay updated on a GP’s progress? [59:35] How does a GP show an LP they’re in it for the long run? [1:03:57] David’s Anderman part of the Superclusters story [1:05:41] David Anderman’s gripe about the name Boom [1:06:31] Enter David Anderman and Stellar Ventures [1:10:21] What do LPs think of GPs expanding their thesis for later-stage rounds? [1:21:43] Why not invest all of your private portfolio in buyout funds [1:25:48] Good answers to why didn’t things work out [1:28:13] Chris’ one last piece of advice [1:35:18] My favorite clip from Chris’ first episode on Superclusters
“Every letter seems to say portfolios have ‘limited exposure to tariffs.’ The reality is we’re seeing potentially the breakdown of the entire post-war Bretton Woods system. And that’s going to have radical impacts on everything across the entire economy. So to say ‘we have limited exposure to tariffs’ is one thing, but what they really are saying is ‘we don’t understand the exposure we have to the broader economy as a whole.’” – Chris Douvos
“Everybody is always trying to put the best spin on quarterly results. I love how every single letter I get starts: ‘We are pleased to share our quarterly letter.’ I write my own quarterly letters. Sometimes I’m not pleased to share them. All of my funds – I love them like my children – equally but differently. There’s one that’s keeping me up a lot at night. Man, I’m not pleased to share anything about that fund, but I have to.” – Chris Douvos
“There’s ups and downs. We live in a business of failure. Ted Williams once said, ‘Baseball is the only human endeavor where being successful three times out of ten can get you to the Hall of Fame.’ If you think about venture, it’s such a power law business that if you were successful three times out of ten, you’d be a radical hero.” – Chris Douvos
“Tim Berners-Lee’s outset of the internet talked about the change from the static web to the social web to the semantic web. Each iteration of the web has three layers: the compute layer, an interaction layer, and a data layer.” – Chris Douvos
“Venture doesn’t know the train that’s headed down the tracks to hit it. Every investor I talk to—and I talk mostly to endowments and foundations—is thinking about how to shorten the duration of their portfolio. People have too many long-dated way-out-of-the-money options, and quite frankly, they haven’t, at least in recent memory, been appropriately compensated for taking those long-term bets.” – Chris Douvos
“Entrepreneurship is like a gas. It’s the hottest when it’s compressed.” – Chris Douvos
On communication with LPs, “come with curiosity, not sales.” – Chris Douvos
“Process drives repeatability.” – Andy Weissman
“The worst time to figure out who you’re going to marry is when you’re buying flowers and setting the menu. Most funds that are raising now, especially if it’s to institutional investors—we’re getting to know you for Fund n plus one.” – Chris Douvos
On frequent GP/LP checkins… “Too many calls I get on, it’s a re-hash of what the strategy is. Assume if I’m taking the call, I actually spent five minutes reminding myself of who you are and what you do.” – Chris Douvos
“One thing I hate is when I meet with someone, they tell me about A, B, and C. And then the next time I meet with them, it’s companies D, E, and F. ‘What happened to A, B, and C?’ So I’ve told people, ‘Hey, we’re having serious conversations. Help me understand the arc.’ As LPs, we get snapshots in time, but what I want is enough snapshots of the whole scene to create a movie of you, like one of those picturebooks that you can flip. I want to see the evolution. I want to know about the hypotheses that didn’t work.” – Chris Douvos
“We invest in funds as LPs that last twice as long as the average American marriage.” – Chris Douvos
“The typical vest in Silicon Valley is four years. He says, ‘Think about how long you want to work. Think about how old you are now and divide that period by four. That’s the number of shots on goal you’re going to have to create intergenerational wealth.’ When you actually do that, it’s actually not very many shots. ‘So I want to know, is this the opportunity that you want to spend the next four years on building that option value?’” – Chris Douvos, quoting Stewart Alsop
When underwriting passion… “So you start with the null hypothesis that this person is a dilettante or tourist. What you try to do when you try to understand their behavioral footprint is you try to understand their passion. Some people are builders for the sake of building and get their psychic income from the communities they build while building.” – Chris Douvos
“There’s pre-spreadsheet and post-spreadsheet investing. For me, it’s a very different risk-adjusted return footprint because once you are post-spreadsheet—you talk about B and C rounds, companies have product-market fit, they’re moving to traction—that’s very different and analyzable. In my personal opinion, that’s ‘super beta venture.’ Like it’s just public market super beta. Whereas pre-spreadsheet is Adam and God on the ceiling of the Sistine Chapel with their fingers almost touching. You can feel the electricity. […] That’s pure alpha. I think the purest alpha left in the investing markets. But alpha can have a negative sign in front of it. That’s the game we play.” – Chris Douvos
“Strategy is an integrated set of choices that inform timely action.” – Michael Porter
“I’m not here to tell you about Jesus. You already know about Jesus. He either lives in your heart or he doesn’t.” – Don Draper in Mad Men
“If there are 4000 people investing and people are generally on a 2-year cycle, that means in any given year, there are 2000 funds. And the top quartile fund is 500th. I don’t want to invest in the 50th best fund, much less the 500th. But that’s tyranny of the relativists. Why do we care if our portfolio is top quartile if we’re not keeping up with the opportunity cost of equity capital of the public markets?” – Chris Douvos
“In venture, the top three funds matter. Probably the top three funds will be Sequoia, Kleiner, and whoever gets lucky or whoever is in the right industry when that industry gets hot.” – Michael Moritz in 2002
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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.
