Tag: startups

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LP Relationship Management: The 2 Frameworks You Need to Build Trust

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:

  1. Three hats on the ball
  2. 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:

  1. 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.
  2. The celebrity. They thrive on building and maintaining relationships. And their superpower is that they can make others feel like celebrities.
  3. 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.

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How to Underwrite Angel Track Records in Less than 2500 Words

angel

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:

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?
  • What is the GP’s valuation methodology?2 3
  • 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:

  1. Did she not see it?
  2. Did she not pick it?
  3. 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.

Photo by Csaba Gyulavári on Unsplash

  1.  We are choosing to ignore evergreen funds for the purpose of this article, but we know they exist. ↩︎
  2. 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. ↩︎
  3. 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. ↩︎
  4. 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! ↩︎
  5. 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.

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Venture Capital is DEAD! | El Pack w/ Chris Douvos | Superclusters

chris douvos

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.

You can find Chris on his socials here:
Twitter: https://twitter.com/cdouvos
LinkedIn: https://www.linkedin.com/in/chrisdouvos/

And huge thank you for Karen, Kevin, and David for jumping on the show.

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

OUTLINE:

[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

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“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

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

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

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

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My Worry with AI

I was grabbing lunch with my buddy Rahul the other day. And we were talking about how frickin’ tough it was for us to become proficient at our respective sport. Tennis for him. Swimming for me. On one hand, both of us wish it were easier. That he could pick up the racket for the first time, and win matches without breaking a sweat. That I could execute a perfect dive and a sub-20-second 50-sprint with just six months of practice. But the truth is neither of us could. We had select teammates who could though.

I remember one teammate who was two years older than I was. 14 to be exact. He swam with us for two months with no formal training prior, then went to his first competition. Broke 30 seconds for 50-yard freestyle in that very first race. A few months later, broke 25-seconds. In his first year, he never lost a sprint. It got to a point that while the rest of us were swimming six days a week. 2-4 hours a day. He swam with us twice, at best thrice a week. And he still won.

Was I envious? Hell ya. No doubt about it.

It wasn’t till later that year, where he was competing in meets a step above Junior Olympics — Far Western to be specific — that he lost his first race. Then at the next one again. Then again. And the guy broke. He took his anger out on the rest of us. Beat some folks up as well. Just, give or take, 18 months after he had started, he quit. I never saw him again.

Had he stuck with the sport, I’m confident he would have been one of the best. Some people do have the genetic disposition to do well in a certain craft. They won the genetic lottery. And I’m really happy for them. If you do have it, you should definitely lean into it. Why waste the free bingo tile you’ve been given?

Circling back from earlier… on the other hand, Rahul and I are both glad it took a shitload of effort to actually win for the first time. And even more the second time. Then the third. Which by the way, really fucking sucked. I once beat the shit out of a wall in my parents’ home with my bare knuckles ’cause I was so frustrated at plateauing. Much to my parents’ horror.

But it made us better people. We are the sum of all our mistakes. The sum of all our blood, sweat and tears.

The last few months I’ve been lucky to be a part of conversations about the intersection of AI and investing. So many funds we see have built out AI screening tools, automated email management, and memo creation. Some LPs too. The latter is few and far in between. And there were multiple discussions from senior LPs and GPs that they became the investor they were today because they did the work of putting together the memos and hunting down references and details. That they made mistakes, but learned quickly why certain mistakes were worse than others. Some miscalculations were more egregious than others. That they were scolded. Some fired. The younger generation may not have the same scrutiny. And with AI, they might not fully understand why they need to do certain things other than tell AI to put together a memo.

Similarly, so many companies are building things incredibly quickly. Vibe coded overnight. They’re getting to distribution faster than any other era of innovation. It’s not uncommon we’re seeing solid 7-figure revenues in year one of the company. Annual curiosity revenue from corporates is real. Likely temporary, but real. And it’s created a generation of puffed chests. Founders and investors, not prepared for the soon-to-come rude awakening.

As first-check investors, we bet on the human being. We bet on not only the individual’s vision, but all the baggage and wherewithal that comes with it. We bet on the individual’s ability to endure. Because unless we see a mass market of overnight acqui-hires for companies younger than three years, our returns are generated in years 9-15. The long term. And shit will hit the fan.

AI is amazing in so many ways. But it has made it harder to underwrite willpower.

I’m not a religious person. But a line I really like from my friends who are Christian in faith is, “Don’t pray for an easy life. Pray for the strength and courage to overcome a hard life.”

It’s why I have a bias to folks who have scar tissue. Or what Aram Verdiyan calls “distance travelled.” What others call “people who have seen shit.”

Years ago, a friend of mine told me that famous people live one of two lives. A life to envy. Or a life to respect. A life to envy is one where that individual gets things handed to them on a silver platter. They got everything in life they asked for. Rich kids with rich parents oftentimes. A lot of people would love to have lived that person’s life. A life to respect is one where the individual goes through trials by fire and eventually came out on top. They’re riddled with scars. And while many people would want to be in that person’s shoes today, they wouldn’t want to have lived the life that individual lived.

As investors, we bias towards people who have gone through the latter or is capable of going through the latter.

Photo by Yogendra Singh on Unsplash

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

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

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22 Years in Venture Secondaries | Abe Finkelstein | Superclusters | S5E9

abe finkelstein

“Buying junk at a discount is still junk.” – Abe Finkelstein

Abe Finkelstein, Managing Partner at Vintage, has been leading fund, secondary, and growth stage investments focused on fintech, gaming, and SMB software, among others, leading growth stage and secondary investments for Vintage in companies like Monday.com, Minute Media, Payoneer, MoonActive and Honeybook.

Prior to joining Vintage in 2003, Abe was an equity analyst with Goldman Sachs, covering Israel-based technology companies in a wide variety of sectors, including software, telecom equipment, networking, semiconductors, and satellite communications. While at Goldman Sachs, Abe, and the Israel team were highly ranked by both Thomson Extel and Institutional Investor. Prior to Goldman Sachs, Abe was Vice-President at U.S. Bancorp Piper Jaffray, where he helped launch and led the firm’s Israel technology shares institutional sales effort. Before joining Piper, he was an Associate at Brown Brothers Harriman, covering the enterprise software and internet sectors. Abe began his career at Josephthal, Lyon, and Ross, joining one of the first research teams focused exclusively on Israel-based companies.

Abe graduated Magna Cum Laude from the Wharton School at the University of Pennsylvania with a BS in Economics and a concentration in Finance.

Vintage Investment Partners is a global venture platform managing ~$4 billion across venture Fund of Funds, Secondary Funds, and Growth-Stage Funds focused on venture in the U.S., Europe, Israel, and Canada. Vintage is invested in many of the world’s leading venture funds and growth-stage tech startups striving to make a lasting impact on the world and has exposure directly and indirectly to over 6,000 technology companies.

You can find Abe on his socials here:
LinkedIn: https://www.linkedin.com/in/abe-finkelstein/

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

OUTLINE:

[00:00] Intro
[03:18] Abe’s first investment
[06:19] The definition of quality secondaries in 2003
[09:37] How did Abe know there would be capital to follow?
[15:45] Valuation methodology in the 2000s
[22:28] Minimum meaningful ownership for secondaries
[26:17] Why did founders take Vintage’s call in Fund I?
[30:41] The old-school way of tracking deal memos
[32:06] Our job is to play the optimist
[32:31] The headwinds of raising Vintage Fund I
[36:32] Moving Vintage’s physical books to the cloud
[39:06] How does Abe assign discounts to secondaries?
[42:23] Proactive outreach vs reactive deal flow
[46:18] What does Vintage do to stay top of mind?
[49:49] What’s changed in the secondaries market since 2000?
[55:32] Founder paranoia
[57:56] What does Abe want his legacy look like?

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Buying junk at a discount is still junk.” – Abe Finkelstein

“Everything that’s going on in the market today, I actually feel people are overreacting to it because there are these ups and downs. Hopefully this current situation doesn’t get people too freaked out because these are the times you want to be investing in. People just don’t think that way. They see the blood on the streets and they run from it first, instead of going in.” – Abe Finkelstein

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

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

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

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Individuals as LPs and as GPs

alone, individual

Two friends independently pinged me for my reaction to two recent social posts while I was on vacation, and I felt so strongly about the below that I had to:

  1. Respond to both of my friends while I was out, and
  2. Write this blogpost after.

Caveat: I don’t tend to write time-and-place ephemeral blogposts, usually evergreen ones, but I feel this topic has been the soup du jour for the last few months, and I need to get it off my chest. I still think a lot of what I write below will stand the test of time, but some parts may not age as well five years from now.

One friend of mine who runs her family office texted me last week and asked what I thought about Harry Stebbings’ recent tweet and Jason Lemkin’s recent comment:

To which, I responded:

I agree with most of what’s said. 99% of people don’t truly understand venture. They see one of two polar extremes. Either it’s the thing that will make them rich and it’s all amazing or it’s overhyped and way too risky. They’re both right and wrong at the same time. In the context of those investing in VC funds, most individuals and new LPs see venture through rose-tinted lens.

That said, what the world needs isn’t ‘do this’ or ‘don’t do this,’ but why and how. That requires education. Not an oversimplification of ‘VC good’ or ‘VC bad.’ There’s a lack of unbiased education right now, but public discussions of such is step one. We need to put illiquidity into perspective. Yes, it’s 17+ years. That’s 4, going on 5, Summer Olympics. Or one and a half zodiacs. That’s another 2-4 American presidents. And that’s over 50 Marvel movies and 34+ Marvel TV series, assuming they stay on pace with what they’ve been putting out in the last 2 years. That’s a long frickin’ time. Time enough for you to have a baby AND send them off to college before you get all the money gained back.

Illiquidity is also at an all-time high. Lots of funds are long in the tooth. LP expectations used to be 10+2. Fancy lingo for 10-year funds with 2-year extensions, opportunistically. Now that companies are staying private for 10-12 years, instead of the old 7-8 years, funds are now 10+2+2. In other words, 10-year funds, with a 2-year extension by GP decision, and another 2 years by LP advisory committee majority vote. But really, it’s starting to become 10+2+2+1+… You can guess where the rest of the numbers come from.

Secondaries are only really popular among the marquee names. For instance, SpaceX, Anduril, Stripe, and so on as of now. Everything else is sold at a discount. Which, 30-50% seem normal. But if a company has raised their last round pre-2021, I’ve seen 60-80% discounts.

GPs are also now expected to actively understand and manage exits. Most GPs don’t know how to. And neither are exits in venture a classically-trained subject. Before it was primarily, IPOs and M&As. Now, this includes secondaries. Ask GPs about their exit strategies. It doesn’t have to be foolproof, but they better have thought of it. And compare what they say to what their best-in-class private equity counterparts say. If there’s a lack of intentionality in the former, things may get really tough in the future.

Venture, sure as hell, is opaque. 75% of VC managers will tell you their top quartile. Who’s right? Who’s wrong? Samir Kaji recently wrote something that rings increasingly true today: “People forget that quartile rankings in VC never account or adjust for valuation methodologies used by the Gps in the sample set.”

Some GPs are liberal with their marks. Marks that put them in the best light. Some even accounting SAFEs as markups, which is bad practice. Pretty sure illegal too, but many new first-time GPs aren’t even aware of it. All that to say, in the first first 5-6 years of a fund, when nothing is noticeably obvious yet, it’s easy to game numbers.

And even if a GP is in the top quartile, top quartile in VC sucks. Ok, it’s not THAT bad. Median definitely sucks in venture though. It’s really not worth putting money in an average VC. But you can put your money in the S&P 500 or the NASDAQ for the same vintage. Dollar-cost average in, once a year in the first four years. And hold it till Year 10. And in many vintages, your public indices will be between a 3X and 4X. Which is as good as most top quartile vintages. If not, it’ll only lag slightly, ever so slightly, behind. Which is a small price to pay for being a liquid asset. If you’re an LP in VC funds, out of thousands of funds, you need to be in the top 20 funds per vintage. Hands down. Not top quartile. And arguably top decile may not even cut it.

And the truth is, just by the numbers, most individuals and new LPs won’t have good access. When your mom, your cousin, that one drunk uncle from Thanksgiving, are all starting their own VC funds, we now and will continue to live in a world where knowing a VC will be as common as knowing someone who wants to start their own company. Whatever that may be. And to have a chance to be good at VC, the average VC must have both a non-redundant AND an economically important network AND knowledge advantage, to borrow a framework that Albert Azout recently said on my podcast. Most do not. Most will fail to compete with the super-scale firms. If you haven’t checked out Gib Dilner’s recent recording on kinds of firms in the ecosystem today, I highly recommend it.

What kinds of networks GPs need to be competitive in today’s market?

The truth is most large funds who will cannibalize smaller emerging managers don’t send their good deals to emerging managers. Although emerging managers do send their best deals to the large funds. Looks good for markups. Looks good at the annual meeting when they present to you. But clearly, this dynamic is unrequited. As such, it’s why I believe as an LP, you need to be in managers who go really, really early, where the large firms still cannot access or priced out of accessing. Managers who extend their thesis so that the net new checks coming out of their funds include seed and Series A (unless they can actively lead this and the next round):

  1. Lose out on access above a $250K check. These days, even above a $100K check. Because large funds want the whole round. It’s how they can make their economics work.
  2. Don’t have the war chest to provide the capital to founders so that they can weather the market. That said, a good friend of mine, Henry, created the Lean AI Leaderboard. It’s a great dashboard for companies who get to profitability with a lean team and often very little in external capital. And if they do, these companies are seed-strapped, meaning they raise a seed round with the goal of never raising another round again. For investors in these companies, the good news is that they retain most of their equity from entry. The bad news is that unless these companies have a clear exit path, your money as an LP doesn’t go anywhere. More so, most of the VCs investing invest on SAFE notes, with no maturity dates. On paper, revenue is up, but no markups and no exit path. After the $100M range, there are very few companies who would acquire any of these small players, especially after the AI craze. That said, it’s too early to tell. And I’m not sure I have the fortune cookie to tell you what happens next.

But also, as an FYI, if you’re investing in a large platform, don’t expect double-digit or even high single-digit returns, you’re likely going to get a solid 2.5-3X (optimistically), but it’s a stable machine. Still think if that’s the case though, you should be investing in buyout funds or private credit. If you don’t have access to those, just public equities.

Also, not every person needs to start a venture firm. Not every good investor needs to be a fund manager. Being a fund manager is tough. You need to worry about K-1s and reporting (yes, that’s chasing founders down for metrics even when you have information rights), fund admin, running a business, filing taxes, and knowing when and how to sell. It’s actually easier to be a great investor at another larger shop. It’s the same as not every smart person needs to start their own company.

All that said… I’m still bullish on venture. I think it truly is, one of the most promising asset classes we have available to us. And I mean venture in the raw, unfiltered first check, pre-seed play. Not the Series A+ play. At least for emerging managers. After the Series A, I can’t think of a sustainable way you won’t get outcompeted by the large ones. For true early stage exposure as first check, the large platforms often have no incentive to play. Given their large fund sizes, they’ve priced themselves out of that true first-check bucket.

Something that harkens back to a Chris Paik line. “Any company that is pure execution risk without any market risk is not a suitable venture investment.”

A few days later, another friend asked me if I saw this, and if I had any immediate thoughts. On LinkedIn, Pavel Prata had posted a reaction to Jared Friedman’s request for full-stack AI companies, saying that “80% of VC funds will be automated within 3 years.” To be fair, Pavel’s not wrong. Directionally, that is where the industry is heading. Having been to a few annual summits that VCs host so far this year already, every single — oh yes, I mean, EVERY SINGLE — one that I went to (I went to seven at the time of writing this post) talked about using AI to either or both source deals and/or qualify deals. Some also talked about supporting their portfolio using their digitally-twinned brain. Simply, AI is in.

That said, there were some things that Pavel suggested I disagreed with, or at least thought he was oversimplifying:

  1. “Process 100X more deals.” While there are firms that make investment decisions algorithmically, and while I do see this working past-Series A (where we enter growth), in true early-stage investing fashion, the best investors invest prior to data. Prior to traction. Prior to anything obvious enough to track. And while you, as a firm, can probably see and filter 100X more deals. As a human GP with only 24 hours in a day, and building a portfolio of 30 investments across 3-4 years, I still go back to a piece of advice I received early on in my career. “You don’t have to invest in every great company, but every company you invest in must be great.”
  2. “Maintain relationships with 1000+ founders.” I have my doubts here. Until I start seeing people build long-term friendships and happiness with AI, I’m still a strong believer that people trust people. And this rapid scaling of AI only further proves that. It’s hard to scale trust. To scale intimacy. There might be a world where this does happen one day. But I don’t think this is three years away. That said, I do think that you as a solo GP or a small team can support your portfolio as if you were a fully-staffed 20+ person team within three years though.
  3. “Deploy capital 5X faster.” There are some things in life where faster isn’t necessarily better. Like performing a surgery. Or simply, music. No one needs to listen to My Heart will Go On on 5X speed. Venture is one of them. While it’s unclear whether Pavel means shorter deployment periods or faster decision-making, to address both, shorter deployment periods may indirectly lead to more companies getting funded. Or more capital going to the same companies. We don’t need either. An LP shouldn’t index venture, nor should more capital go into companies where the preference stack exceeds the valuation of the companies or making companies financially impossible to 3-5X any of the companies’ investors. Faster decision-making may make sense if it’s a competitive round, but true venture is betting on the non-obvious. Most non-obvious bets don’t need capital 5X faster.

To be fair, I do agree with the vast majority of where Pavel thinks the venture industry will go.

Photo by Matthew Henry on Unsplash

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

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

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Inside the 100-Year Family Office | Josh Kanter | Superclusters | S5E8

josh kanter

“The more you can create that context in the family owner’s manual, the more important it is and the more it is NOT the ‘in-case-of-emergency’ file. Because the in-case-of-emergency file is going to say I’m an LP in Fund VII from so-and-so and my withdrawal rights are such and such. Or here’s the document. You go figure out what my withdrawal rights are, if I have any.” The owner’s manual teaches future generations what to prioritize and why. – Josh Kanter

Josh Kanter is the family office principal at Josh Kanter Wealth Advisory Services. He is also the founder & CEO at leafplanner, a comprehensive solution on planning for the 100-year time horizon for a family office, birthed out of his own need with his own family of creating an everlasting institution.

After decades as a lawyer, he went on to focus on his family business where he also currently serves as President of Chicago Financial, Inc., a single family office overseeing a complex organization of trusts, investment and philanthropic entities for a multi-branch and multi-generational family.

You can find Josh on his socials here:
LinkedIn: https://www.linkedin.com/in/joshua-kanter/

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

OUTLINE:

[00:00] Intro
[04:01] Art, sculptures and Jun Kaneko
[12:30] The inception of Walnut Capital Corp
[15:36] How Josh defines creativity
[17:03] Creating the “freedom trust”
[17:56] Where did the name leafplanner come from?
[20:03] How did Josh get involved in the family venture business?
[23:22] Top lessons from being startups’ legal advisor
[25:48] Lessons as an investor and LP
[27:57] Investing in America’s biggest fraud
[30:01] The origin of leafplanner
[38:15] How do you start a family owner’s manual
[40:03] The importance of prioritization and context in the manual
[45:35] How do you make a owner’s manual searchable?
[49:50] The five kinds of capital (intellectual, human, social, financial, spiritual)
[53:15] What is the role of luck in Josh’s life?
[54:31] Josh’s primary vice when saying no
[56:51] Post-credit scene

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“You’ve got great founders. That doesn’t make them great CEOs.” – Josh Kanter

“I may not be the CEO of this company at some point. If I am not the person to take this forward, then let’s bring in the person who is. Success is more important than my ego.” – Josh Kanter

“The more you can create that context, the more important it is and the more it is not the ‘in-case-of-emergency’ file. Because the in-case-of-emergency file is going to say I’m an LP in Fund VII from so-and-so and my withdrawal rights are such and such. Or here’s the document. You go figure out what my withdrawal rights are, if I have any.” – Josh Kanter

On cloud storage providers like Box, Dropbox, Google Drive and so on: “Every one of those systems relies on the brain that built the architecture of how you organize them. So I use Box. I have 225,000 documents in Box. Those 225,000 documents are organized on how Josh’s brain works, so the folder structure [etc.].” – Josh Kanter

“Financial capital should be looked at merely as a tool to grow the other capitals: [Intellectual, human, and social].” – Josh Kanter

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

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

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

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THE Most Entrepreneurial LP Out There | Narayan Chowdhury | Superclusters | S5E7

ritujoy narayan chowdhury

“This is one of the big issues of a bunch of data work on venture is insights from some periods don’t mean anything or are not translatable to present time. It’s really frustrating. So we go back to people, reputations, and experience.” – Narayan Chowdhury

Ritujoy Narayan Chowdhury is the co-founder and Managing Director at Franklin Park, where he focuses on private equity investment opportunities, monitoring clients’ portfolios and conducting industry research. He also plays a key role in the development and implementation of Franklin Park’s technology platform, and regularly interacts with clients on investment and portfolio matters.

Prior to Franklin Park, Narayan worked with Hamilton Lane and Public Financial Management. He is a CFA Charterholder and a member of the CFA Institute. Narayan received a B.A. in Mathematics and Economics from Bucknell University.

You can find Narayan on his socials here:
LinkedIn: https://www.linkedin.com/in/narayan-chowdhury/
X / Twitter: https://x.com/RNC76

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

OUTLINE:

[00:00] Intro
[02:27] Why my parents moved to the US
[03:43] Narayan’s dad
[08:54] The friction that Narayan has with his team
[11:59] Why current analyst training creates bad habits
[15:00] What Narayan does when his family goes to bed
[16:37] When did Narayan first start playing with code?
[17:34] Narayan’s entrepreneurial origins and how much he got paid
[19:54] “Never sit alone at lunch”
[22:54] The Mike Maples story
[25:48] When Narayan realized VC is very different from PE
[30:05] The difference between underwriting VC and buyout
[34:28] What do you do when you’ve pigeonholed yourself in one industry?
[37:02] How do you know if a GP is a core part of an alumni network?
[38:32] A 2025 micro trend of misleading operating metrics
[43:40] How has VC changed in the past few decades?
[53:58] What do most people underappreciate about hockey?

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Every moment that [my daughter] is here and I’m not with her is a moment we’ll never get back.” – Narayan Chowdhury

“Every action should not be a wasted action, should not be duplicative, should be the best use of a person’s time. So any tool that we build that is contrary to that should be reevaluated constantly.” – Narayan Chowdhury

“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

“Never sit alone at lunch.” – Alan Patricof

“Looking backwards on track records in venture can be very scary decisions. It could be that the prior funds were completely passive throw-ins on a cap table where they were following some social cues in a ZIRP environment and perhaps they got lucky. Whether they were part of a giant outcome [or not], it sort of meaningless for the future because neither the syndicate nor the founder really know who that person ever was. And so, the go-forward benefit of that investment decision is zero versus ‘We were the trusted investor for that founder.’ Not all prior track records are the same. We have to go back to why, going forward, are founders going to seek out or accept those dollars.” – Narayan Chowdhury
*ZIRP: zero interest-rate policy

“I’d rather go bankrupt than lose this AI race.” – Larry Page

“The problem is that the barriers to entry on that strategy [to deploy a lot of capital] are pretty low. And you get killed – death by a thousand cuts – when you’re not the only one trying to flood the market with capital and outcompeting on price.” – Narayan Chowdhury

“This is one of the big issues of a bunch of data work on venture is insights from some periods don’t mean anything or are not translatable to present time. It’s really frustrating. So we go back to people, reputations, and experience.” – Narayan Chowdhury

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

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

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

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The Danger of Pivots

sunset, pivot

Mike Maples Jr. once said that 90% of Floodgate’s exit profits come from pivots. Hell, 50% of my angel investments have pivoted from the idea I first invested in. Pivoting is a constant norm of the entrepreneurial ecosystem. Many investors know it’ll happen. Great founders instinctually prepare for that possibility. Being married to the problem, not the solution is the direct reflection of what it means to prepare for pivots. By definition, Meriam Webster defines the word as:

pivot (n) – a usually marked change, especially an adjustment or modification made (as to a product, service, or strategy) in order to adapt or improve

As such, small feature improvements, changes and additions, even omissions rarely count as one. But a large product shift, where the core product is no longer the product you once sold, is one. In general, the common advice on the street is that you should embrace pivots, until you find product-market fit. But also knowing that you can always lose product-market fit, even after you obtain it. A pivot should either help you catch lightning in a bottle, or help you keep lightning in the bottle.

But that’s not the purpose of me writing this piece. It’s about the opposite. The quiet thing no one explicitly talks about when it comes to pivot. The TL;DR version is each time you pivot, you lose trust. You lose trust because you didn’t have conviction in your product. You lose trust because you didn’t have conviction on where the market will go. Hell, you lose trust because you didn’t do what you said you were going to do. You were not a person of your word. You lose trust because you made someone else lose trust. Because of you, they looked stupid. To their peers. To their bosses. Sometimes to their friends.

Once you lose trust, it’s really, really hard to get it back, if at all. In the age of information excess and product surplus, you won’t have the time or the attention from your customers to rebuild that trust. They’ll just move on to the next solution.

Slow Ventures’ Yoni also recently tweeted:

“Pivots almost never work:

  • You need an actually good idea. These are rare and hard to come up with in real time.
  • You need resources sufficient to test it. You’ve already spent much of the money you raised.
  • You need the energy and excitement to keep going RIGHT NOW. Struggling is exhausting and you’ve been struggling for a long time.”

All of which are true. But many truly great companies, as we know them today, have gone through their pivots. The idea that put them on the billboard was not the idea that was first funded. Instagram. Google (not their initial business model). Slack. Twitch. Lyft. Shopify. The list goes on.

That said, if you want investors who haven’t funded you to fund you after the pivot, you need a damn good reason as to why you’re doing so. And why it makes sense.

If you’ve known these investors for a while, great! You already have the pre-requisite of trust. You need it. The age of AI wrappers getting thrown left and right and startups going through their 28th pivot destroys trust. How do I know this is the one? How can I believe you when you say this is the one? Why should I have faith when you say this is the last time? There’s a great recent Hiten Shah tweet on this I really like, albeit from the customer perspective, but the analogy holds.

“Once belief slips, no amount of capability wins it back.

“What makes this worse is how often teams move on. A new demo. A new integration. A new pitch. But the scar tissue remains. Users carry it forward. They stop expecting the product to help them. And eventually, they stop expecting anything at all. This is the hidden cost of broken AI. Beyond failing to deliver, it inevitably also subtracts confidence. And that subtraction compounds.

“You’re shaping expectation, whether you know it or not. Every moment it works, belief grows. Every moment it doesn’t, belief drains out.

“That’s the real game.”

Just as with customers, it is with investors. Although investors can be more forgiving, knowing that this is part of the game. But no amount of faith is infinite, so choose how you voice your actions intentionally. Choose your interactions carefully. And if you do choose to interact, communicate proactively and deliberately. Notice how many withdrawals you’re taking from the bank of social capital, from your karmic bank account. And don’t forget to regularly deposit.

Photo by Bambi Corro on Unsplash

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

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

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You’re Looking at Networks Wrong | Albert Azout | Superclusters | S5E5

albert azout

“Networks are more persistent than performance.” – Albert Azout

Albert Azout is the Co-Founder and Managing Partner of Level Ventures, a technology investment firm built on software and data science and invests in both entrepreneurs and venture capital managers, including the likes of Air Street Capital, Emergent Ventures and Work-Bench, just to name a few. Prior to Level, Albert has been a serial founder, starting analytics businesses and even a social media company before Facebook.

You can find Albert on his socials here:
LinkedIn: https://www.linkedin.com/in/albertazout/
Substack: http://albertazout.substack.com/

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

OUTLINE:

[00:00] Intro
[02:36] The origin of Albert’s blog
[04:45] How did Albert first start coding?
[07:43] Albert’s interest in networks
[13:10] Entrepreneurship around Albert
[16:27] What is collaborative filtering?
[22:18] How complexity economics affect the networks of VCs?
[27:14] Fear and greed regimes
[28:51] Telltale signs that inform the kind of regime you’re in
[30:31] Why it’s the wrong time to be investing in defense tech
[34:53] What are most LPs missing about GP networks?
[37:31] How is Level Ventures looking at networks differently?
[44:42] Archetypes of GPs that Albert likes
[46:43] The 3 advantages GPs need to have
[55:02] How does Albert balance over- vs under-diligencing?
[57:15] Albert’s view on luck
[57:47] Albert the “consciousness expert”

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“You have to have an understanding of the regime you’re in for you to make good decisions as an investor.” – Albert Azout

“Price reflects the inefficiencies of the market.” – Albert Azout

“What really matters is what you’re hearing around you. When you hear overly coherent narratives, that’s a big thing for me. And it happens in subcycles as well. […] But when people are behaving and making decisions based on narratives that are overly coherent, that’s a big sign. That’s a very social problem.” – Albert Azout

“What you want to see in a venture company which you’re looking for huge outliers, is you want to see increasing returns to scale. You want to see demand-side feedback loops, where you have very low marginal costs of distribution. And that requires mostly winner-take-all, or winner-take-most kinds of markets.” – Albert Azout

“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

“Networks are more persistent than performance.” – Albert Azout

“Venture is simple but hard.” – Albert Azout

“We look for GPs who have one, a network advantage and two, a knowledge advantage – both of which have to be not redundant and economically important. And the third thing is the fund strategy itself. There’s a lot of nuances but there are two things that are important. One is that it has to be an outlier. […] It has to have the right construction for us. […] My second point is more important. It involves game theory, which is the competitive dynamics in the market. ” – Albert Azout

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

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

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