My family and friends have always enjoyed local restaurants and never found that higher end culinary flair ever satisfied the beast within. Also, having been a swimmer in a prior lifetime, I also ate like a vacuum cleaner. Food was inhaled rather than chewed.
In 2015, my mentor brought me to my first fine dining experience. One with a Michelin star at that. It was a multi-course meal, filled with words I knew the definitions of, but the permutation of which left me perplexed. Palate cleanser. Salad forks and dinner forks. Kitchen tours. And more.
I remember one distinct course where they had served us clams with the shells attached in a bowl. And another ornate bowl after we de-shell. The messiest part of the dinner, to be fair. After we were all done, they cleaned the table and brought us a glass bowl of water. With slices of lemon and grapefruit, adorned with flower petals.
Thinking it was a complementary drink, I took a swig. It was akin to spa water. Cool, and rather refreshing. Contrary to the calming effect of the drink, I saw, out of the corner of my eye, our waiter run across the room faster than any Olympian. After zigs and zags between tables, he stopped abruptly at our table. Now the whole restaurant stared curiously at what would happen next. Between lengthy exhales, he said, “Sir, this bowl is for washing your hands.” Embarrassed, I apologized profusely. To which, he consoled me profusely back. He took the bowl to get us a new one.
As I looked over at my dining mate, he said, “Man, I’m glad you took that bullet for us. I would have done the same.”
Nowadays, especially if I’m in a fine dining establishment, I almost always ask, “How would you recommend us to eat this?”
Most fund managers start the meeting off, almost immediately with the pitch. Most founders do the same too. I was at a virtual conference last week, where I was matched with 8 GPs on a 15-minute speed date, 6 out of 8 jumped straight into, “Let me tell you about my fund.” I get the urgency, but the first meeting should always be an opportunity to get to know the person you are talking to. As Simon Sinek says, start with the why. Then the how. Then the what. Most flip the order when they’re in pitch mode. Hell, some may not ever get into the ‘why.’
Most LPs do not invest in venture full-time. In fact, it’s the asset class they know least well. And within their smallest bucket of allocation, aka venture, emerging managers are the smallest of the smallest bucket in their larger portfolio. So if amount of capital equated to depth of understanding, most LPs know bar none about venture. At least, compared to you, the GP, who is pitching. Some may think they know a lot. They may even want to invest directly in early-stage companies themselves. And while they may not admit it to you, a number of LPs think your job, as a venture capital GP, is easy.
You, I, and every investor who has spent meaningful time in venture and is not deluding themselves, know that this is the exact opposite of any easy job that anyone can do well. Do note, raising capital easily and deploying capital easily and supporting entrepreneurs easily are all different things.
Nevertheless, depending on the LP’s proficiency level, you need to remind them:
- On venture and its risks (why the asset class) — Compare the asset class to others. Buyout. Real estate. Credit. And so on. Set expectations explicitly. If you yourself are not capable of comparing and contrasting between the asset classes, you should learn about the others yourself.
- Why emerging managers (Big multi stage fund vs you the Fund I) — You are not Andreessen, GC, Redpoint, Emergence, IVP, Industry, you name it. Neither should you at a Fund I or II. The risks of betting on emerging managers is present. If an LP indexes the emerging manager venture asset class, they’ll be disappointed. The mean is great, but the median is horrible. At least, compared to other asset classes they could be investing in. Do not pitch them, “emerging managers are more likely to outperform.” Inform them of the real risks at play.
- Why vertical/industry — Many emerging funds are specialists. For good reason. Based on your past experience, you’re likely to have more scar tissue but also real learnings than in other industries you did not have exposure to. Just like the first two, set the stage. How does your industry compare to others?
- Why you — Why the strategy? Why do you have GP-thesis fit? Why have all your previous experiences culminated to this one point in time to start this fund? And is your interest in running a firm enduring? If not, it’s also okay, but be explicit about it.
- Why they loved you — This is for the venture-literate LP AND if they’ve previously invested in you. Now they’re deciding if they should re-up. Were you true to your word? Have you stayed focused enough that your bets are still largely uncorrelated to the other bets in the LP’s portfolio? Why are you as awesome, but ideally more awesome compared to the last time you’ve chatted?
In that order. Starting from (1) to (5). Do not skip (1), (2), and (3).
If you jump straight to (4), that LP will consume that information within their own biases. Something you may not be able to control. And that will either make a fool out of them. Or a fool out of you. Just like I was at my first fine dining meal.
No one wants to be a fool. Don’t give anyone a chance to be one.
Photo by Santiago Lacarta on Unsplash
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
