Adam Marchick from Akkadian Ventures joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on 3 GPs at VC funds to ask 3 different questions.
Cocoa VC’s Carmen Alfonso Rico asks what belief Adam held firmly for years but changed his mind recently on.
Good Trouble Ventures’ AJ Thomas asks about how GPs can better communicate risk to first-time LPs.
1517 Fund’s Danielle Strachman asks about the world view Adam has that shapes his investing thesis.
Over the past twenty years, Adam Marchick has had unique experiences as a founder, general partner (GP), and limited partner (LP). Most recently, Adam managed the venture capital portfolio at Emory’s endowment, a $2 billion portfolio within the $10 billion endowment. Prior to Emory, Adam spent ten years building two companies, the most recent being Alpine.AI, which was acquired by Headspace. Simultaneously, Adam was a Sequoia Scout and built an angel portfolio of over 25 companies. Adam was a direct investor at Menlo Ventures and Bain Capital Ventures, sourcing and supporting companies including Carbonite (IPO), Rent The Runway (IPO), Rapid7 (IPO), Archer (M&A), and AeroScout (M&A). He started his career in engineering and product roles at Facebook, Oracle, and startups.
[00:00] Intro [01:22] The anatomy of a good story [02:26] The job of an annual summit [05:35] How often does VC change? [07:25] Narratives LPs are looking for at GPs’ AGMs [08:25] “20% overall revenue growth in the portfolio is NOT exciting” [09:01] What founders talk about at an AGM [14:01] How does Adam spend time at an AGM [17:48] Enter Carmen and Cocoa VC [19:35] What did Adam change his mind about [21:09] How does an LP assess GP NPS? [22:16] Picking on-sheet references [24:33] The origin of Cocoa VC [26:08] What is Carmen’s superpower? [27:09] What does Carmen want from her LPs? [29:09] The best answers to “what do you want from your LPs?” [31:29] Controversial decisions for the LPAC [33:39] Enter AJ and Good Trouble Ventures [34:25] Communicating risk to your LPs [35:58] What about to first-time LPs? [38:06] Where do first-time LPs come from? [39:50] What inspired AJ’s question? [42:14] Is the convo different if LPs reach out vs you reach out? [43:45] The timing of LP conversations: most frequent vs most important [45:59] The trust equation [47:45] How to scale trust with LPs [51:35] How has GPs built trust with Adam? [53:29] How often does Adam keep in touch with his GPs? [56:06] Enter Danielle and 1517 Fund [58:38] What is Adam’s mental model? [1:01:43] How does Adam define low entry prices? [1:03:25] Tracking trends as an LP [1:06:55] 80-20 portfolio construction [1:10:37] Would 1517’s thesis 15 years ago count as market risk? [1:14:12] Adam’s last piece of advice [1:15:46] Akkadian Ventures and RAISE Global [1:17:06] David’s favorite moment from Adam’s earlier episode
“Venture is made on the exception, so if each company is growing at 20%, it’s not an exciting portfolio. If 3 companies are growing at 300%, that’s an exciting portfolio.” — Adam Marchick
“I always go back to tenets of venture. It’s backing great people, tackling large markets at low entry prices.” — Adam Marchick
“Similar to a founder, their job is to communicate upside potential. At worst, you can lose 1X. At most, the returns can be inspiring. I think your job is to talk about what can go right and what are the inputs required to make it go right.” — Adam Marchick
“The bulk of your conversations with an LP happen negative 6 months to time of investment. The most important conversations you have with an LP are Year 2 through 6 of your investment.” — Adam Marchick
“Trust equals credibility, reliability, and intimacy and the dividing factor of building that trust is whether or not you feel that self-orientation is only geared for the other person’s agenda or actually something that you’re co-creating together.” — AJ Thomas
“When something is getting really heated, it’s a great time to learn because so many people are working on something.” — Bryne Hobart
“When there is hype, you have to look at metrics that can’t be hyped.” — Adam Marchick
On portfolio construction… “80% should be on-thesis, and 20% should be ‘you couldn’t sleep at night if you didn’t do it.” — Adam Marchick
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.
“There are a thousand ways to put lipstick on the pig and there are a thousand skeletons [in the closet]. I’ve only seen five or six because I’ve only seen three startup experiences. And so you need to deputize as many people as you possibly can to essentially triangulate.” — Anurag Chandra
Anurag Chandra has spent over two decades in Silicon Valley as an investor, operator, and allocator. He has helped lead four venture capital funds, managing over $2.0B in aggregate AUM. Anurag has also been a senior executive in three enterprise technology startups, two of which were sold successfully to public companies. He is currently the CIO of a single-family office with an attached venture studio and a Trustee for the $4.5B San Jose Federated City Employees Retirement Fund, serving as Vice Chair of the Board, and Chair of its Investment and Joint Personnel Committees.
[00:00] Intro [02:10] Why is what Anurag is wearing a walking contradiction? [06:08] The man without a home, but comfortable in everyone’s home [10:17] The Stanford Review [12:55] The four assh*les of America [20:13] How did Anurag schedule regular coffee with Mark Stevens? [25:31] Mark Stevens’ advice to Anurag about staying top of mind [26:42] How often should you email someone to stay in touch? [30:33] Why should you be an asymmetric information junkie? [34:21] Where should you find asymmetric information in VC? [36:02] The ‘Oh Shit’ board meeting [40:09] How San Jose Pension Plan views GPs [43:55] Defining the ‘venture business’ [49:09] Process drives repeatability [54:06] How San Jose Pension Plan built their investment process from scratch [58:43] What is a risk budget? [1:01:52] What did San Jose Pension Plan do about their risk budget? [1:05:05] The people who changed Anurag [1:11:10] Post-credit scene
“You seem like a good guy. I’d love to find ways to work with you, but I’m going to forget you in two or three weeks. And you got to make sure that you stay in the front of my mind when I’m in a board meeting and there’s a company that could use your money. The best for you to do that is to shoot me an email from time to time and let me know what you’re working on. But do not make them long. I don’t need dissertations.” — Mark Stevens’ advice to Anurag
“There are a thousand ways to put lipstick on the pig and there are a thousand skeletons [in the closet]. I’ve only seen five or six because I’ve only seen three startup experiences. And so you need to deputize as many people as you possibly can to essentially triangulate.” — Anurag Chandra
“You can do two weeks or two years of due diligence on a company, in particular if you’re a mid-stage or later-stage investor. And it’s after the first board meeting—I have a friend who affectionately refers to it as the ‘Oh Shit!’ board meeting where you show up, and now you’re on the inside and you learn all the bad stuff about the company that was hidden from you. Now is that to suggest you should just invest after two weeks because even after two years you’re still going to end up with skeletons you were unable to uncover? No. I still think process matters.” — Anurag Chandra
“Look for GPs who are magnets, as opposed to looking for a needle in a haystack.” — Noah Lichtenstein
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.
One of my favorite questions as of late has been: “What is it you do to train that is comparable to a pianist practicing scales?” To me, it is fascinating to deconstruct a practice, or an action, or a set, and just drill on only one element of that practice. Every accomplished musician, athlete, veteran, chef, just to name a few, is uniquely familiar with the concept of repetition and refinement.
For example, part of my job, as now a podcast host, on top of doing research, prepping and making sure the guests are comfortable, getting involved in the editing room, just to name a few, is to ask questions. And because of the way I host Superclusters, my goal is to ask guests questions they’ve never been asked before. Admittedly, tall marching orders to those individuals whose job is to ask questions to get to the bottom of something in ways the recipients of their capital and their network may not expect. But alas I try. That said, I thought, how cool would it be if I could practice asking novel questions to someone who’s seen it all?
Admittedly, there are very few souls out there who would make great sparring partners for this drill. One that’s seen, heard, and thought of almost every known question out there. And even less I have had the chance to personally interact with. Of my limited Rolodex, luckily, the first person I asked was game. And that person happens to be this guy called Kevin Kelly.
The exercise would be, over a 30-day period, for me to ask him one question every day with the hopes that at least half are ones that he’s never been asked before. He then one-upped me and said he’d do the same. As such, it resulted in 60 queries that go beyond the obvious. While I’m not here to share the results of this “question-off”, I wanted to share the below as I hope this inspires you in ways that you might not have considered before. And if nothing else, fun journaling prompts for yourself. As such, I’ve bolded some of my personal favorites.
Kevin’s questions for me:
What would you do with a billion dollars? (After you gave your family cars, houses, yachts, and vacations, you would still have a billion dollars.)
Do you see yourself as part of an intellectual heritage? Who is on your tree?
What is a prediction you made that was very wrong?
What is the occupation that is the opposite of what you do?
You get to relive one day of your past life. You could either return it as was at full volume, or you could change it. What day do you choose?
If your life has a motto five words or less, what would it be?
What significant law do you think should be changed?
What do your friends get wrong about you?
What influential person would you most appreciate a compliment from?
What is something you can’t do that you’d give up 10% of your current wealth to do exceptionally well?
What do you know more about than anyone else you have met?
What is special about the neighborhood you live in?
What question do you wish people would ask you?
You get a 2-way ticket in a time machine. Do you go to the past or future? How far?
What is a rule you gave yourself as a child that you still keep?
What is the most recent thing you did for the first time?
Who is a thinker more people should know about?
What’s the strangest compliment you’ve ever received?
What widely accepted “fact” do you think will be proven false in the next 50 years?
What’s the most useless skill you’re proud of?
What is one non-obvious piece of advice you would give to someone who wanted to get rich?
They are making a film about you. What should the theme song be?
What is a famous book you think everyone should read, but for a reason other than the one it’s famous for?
What is something everyone you know of has done, but you have not?
What is the most profound thing you’ve learned from a work of fiction?
What is a popular piece of advice that you think is completely wrong?
What part of you is a mystery to you, the part of that you least understand?
What memory do you return to most often?
What’s the most persistent myth people have about you that you’ve never bothered to correct?
What’s a small thing you lost that still bothers you?
My questions for Kevin:
What was your earliest relationship with money?
Was there any specific groundswell in your early childhood and early life that led to the highest rate of change and growth? Were they largely technological, political or cultural in nature?
If you had a billion dollars to create a secret society that will last 200 years into the future, how would you go about doing so and what would they be working on?
As someone who’s used ChatGPT to write a novel you’ll never publish, yet has been an original thinker, thought-provoking writer for decades, what parts of your writing — no matter how far into the future, no matter how good the AI gets — will you never AI touch?
One of the pieces of advice you once gave was to be able to learn from those you disagree with or offend you. Has there ever been a relationship that has most challenged the grounds of which your ideals stand on? How do situations that have led you to refine your ideals differ from those that reinforce what you believe in?
If you were the main character of a movie about your life and you had an audience watching said movie, what would the audience be screaming at you to do?
Kevin, you’re a futurist. You see the world beyond the horizon. But to take a step back, there’s a quote from the show The Office that I really like: “I wish there was a way to know you’re in the good old days before you’ve actually left them.” With all the doom and gloom around us today, what are the reminders you keep close to your heart that today, we’re still in the good old days?
There’s so much gravitas and leniency given to a founder and their crazy ideas, but I’m curious, in your opinion, what were the greatest innovations at WIRED that weren’t a Kevin idea?
Has there been a habit or practice you’ve observed from an interviewee of yours that you’ve worked into your own rotation?
What, if anything, do your peers oversimplify about being a writer? And what, if at all, do they often overcomplicate?
What was your first failure? How did you know when to quit?
If you were to put together the perfect interviewer piece by piece Mr. Potato-Head-Style, how would you go about it? Who’s the researcher? Who opens the interview? Who’s the one in charge of going deep in questions? Who closes out the interview? Who’s responsible for the in-person interview setting?
What is the question that has taken the most mental calories for you to answer? Why?
You took a variety of roles across your career — some of which you’ve co-created and started, others you joined. Were “what’s best for the company” and “what’s best for Kevin” aligned the whole time?
When you have time to wonder, what’s the thought of idea you regularly find yourself coming back to because you find it so interesting, but most of the world may not?
What about your past do you desperately not want your children to know about?
One of the great Kevin Kelly-isms out there is “Don’t be the best. Be the only.” How much time and discipline do you think is necessary for an individual to fully appreciate that they themselves are the only one doing something? At what point does it become part of their identity?
As an enthusiast who’s been enamored by photography since you were in high school and took a deep dive into it in 1970, if you had a camera that could only take three photos total starting from today, what three moments would you photograph?
When was the last time you adopted the habits, wisdom, or advice from someone you disliked or held very little respect for?
What is an example of a mentorship relationship that you’re particularly proud to have your fingerprints on?
What’s something others would believe you’d be highly proficient in, but no matter how hard you’ve tried in the past, you’ve found it extremely difficult to raise your skill level at that?
What is it you do to train that is comparable to a pianist practicing scales?
If you lived your life 1000 times, would would be true in 999 of them?
What is the greatest accomplishment that you regret having achieved?
What was the harshest piece of criticism you gave where you knew that that individual or project was providing more meaningful value to the world than your criticism gave it credit for?
What coffee table books best encapsulate Kevin’s personality today? And would your coffee table have looked different today than in your 30s?
If you could only choose 2 personality traits to pass on to your grandchild — 1 strength and 1 weakness, which 2 would you pass on?
What was one major life decision you’ve made where it was better to not over-intellectualize the decision-making process and shoot from the hip?
You’ve had a non-traditional path to your life and your career. The stuff that typically goes in movies. And in so much of what you do, you’re a dreamer. You’re a visionary. How much did they first pay you to first give up on your dreams? Why did you say yes or no?
As someone who’s once recommended people to go to funerals, what is your biggest fear around what someone might say at yours?
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.
Beezer Clarkson from Sapphire Partners joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on four GPs at VC funds to ask four different questions.
Precursor Ventures’ Charles Hudson asks what is the one strongly held belief about emerging managers that she no longer believes is true.
NextView Ventures’ Stephanie Palmeri asks how much should an established firm evolve versus stick to their guns.
Humanrace Capital’s Suraj Mehta asks what the best way to build brand presence is.
Rackhouse Venture Capital’s Kevin Novak asks if you’ve deployed your capital faster than you expected, what’s the best path forward with the remaining capital you have left?
Beezer Clarkson leads Sapphire Partners‘ investments in venture funds domestically and internationally. Beezer began her career in financial services over 20 years ago at Morgan Stanley in its global infrastructure group. Since, she has held various direct and indirect venture investment roles, as well as operational roles in software business development at Hewlett Packard. Prior to joining Sapphire in 2012, Beezer managed the day-to-day operations of the Draper Fisher Jurvetson Global Network, which then had $7 billion under management across 16 venture funds worldwide.
In 2016, Beezer led the launch of OpenLP, an effort to help foster greater understanding in the entrepreneur-to-LP tech ecosystem. Beezer earned a bachelor’s in government from Wesleyan University, where she served on the board of trustees and currently serves as an advisor to the Wesleyan Endowment Investment Committee. She is currently serving on the board of the NVCA and holds an MBA from Harvard Business School.
[00:00] Intro [01:22] Where does Beezer’s advice come from? [04:03] Charles and Precursor Ventures [04:47] What’s something Beezer used to believe about seed stage venture that she no longer believes in [08:04] Why did Charles choose to bet on pre-seed companies? [10:21] What did LPs push back on when Charles was starting Precursor? [12:18] Definition of early stage investing today [14:38] Steph and NextView Ventures [18:13] When do you stick your knitting or move on from the past as an established firm? [30:48] Is venture investing in AI fundamentally different than investing in other types of companies? [32:52] Does competition for a deal mean you’ve already lost it? [36:09] Suraj and Humanrace Capital [36:54] How should emerging managers build their brand? [38:38] The audience most emerging managers don’t focus on but should [40:39] How much does visible brand presence matter? [43:47] Useful or not: Media exposure in the data room [45:40] Backstreet boys [46:37] Kevin and Rackhouse Venture Capital [47:28] What Kevin is best known for [48:03] Updated fund modelling when you’re ahead on your proposed deployment period [58:00] The typical questions Beezer gets on LPACs [1:03:22] Is venture broken? [1:06:41] David’s favorite Beezer moment from Season 1
“Whatever the evolution of venture is if you’re just following someone else, the odds of you doing as well as them is just harder and that is probably a truism about life.” — Beezer Clarkson
“If you’re going to get a 2X in venture over 20 years, frankly, as an LP, there are alternatives from a pure dollars in the ground perspective. But if you’re looking at trying to capture innovation, which AI is now one of the great innovations, where are you going to capture that if not playing in venture? So is venture broken is a question of who are you.” — Beezer Clarkson
“If you’re competing for the deal, you’ve already lost it.” — Beezer Clarkson
“I think the competition is more: Did I see it with enough time to build the conviction and build the relationship relative to the other people that might be coming in?” — Stephanie Palmeri
“Recycling is incredibly important, but incredibly hard to plan for, especially as early as you’re coming in, unless you’re seeing evidence of acqui-hires today and you know you’re going to have those dollars coming in. Obviously, really hard. So I would not bank your farm on that.” — Beezer Clarkson
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 need to make space for weird types of conversations to happen on the fringes that really inform you what’s going on at the frontier.” — Thorsten Claus
Thorsten Claus is a venture investor and builder with more than 15 years of private equity and venture capital experience. He has raised nine funds, managed over $4.8B across global platforms, and led or overseen more than 120 direct investments, generating returns of 3x–7x net to investors.
His current work focuses on dual-use technologies at the intersection of defense, security, and national resilience. Guided by the discipline of Howard Marks, the systems-level thinking of the Consilience Project, and a commitment to internalizing externalities, he invests in teams and technologies that strengthen sovereign capability and long-term societal stability.
Beyond capital, Thorsten is a hands-on builder. He machines defense-critical and space components, restores historic race engines, and writes on production systems and resilience at blog.thinkstorm.com. This grounding in physical production complements his investment practice, keeping judgment tied to real-world constraints.
[00:00] Intro [02:31] Downhill skateboarding [05:58] How do you see behind a corner when downhill skateboarding? [07:42] Hill hunting [10:15] How long does it take to go down the Sierras? [11:41] The most important part of the body for downhill skateboarding [16:02] David’s dumb question of the day [17:25] The accident that pivoted Thor’s life [19:34] The first race car Thor bought [20:51] Why Thor is a terrible race car driver? [23:52] How did Thor come to use the race oil that Porsche Racing uses? [24:59] The 3 things you need to welcome fringe conversations [27:07] Just another David misattribution [27:34] Truth is difficult these days [29:20] How do you prioritize which advice to take? [30:33] Thor’s weird definition of risk [31:59] How do you know if someone is giving you authentic advice? [34:40] How does Thor understand someone’s past without asking about it? [39:42] Lessons from fictional storytelling in diligencing GPs [43:22] Questions and responses that reveal a GP’s past [46:10] Books that Thor read to ask better questions [49:18] What is the USMC Christmas Tree? [53:40] The Christmas Tree in an investor’s portfolio [57:49] Can beggars be choosers? [1:00:41] The difference between capital formation and fundraising [1:03:00] Production vs product for a GP [1:06:54] Thor and cardistry [1:10:21] What are moments that reminds Thor we’re still in the good old days? [1:13:50] The post-credit scene
“You need to make space for weird types of conversations to happen on the fringes that really inform you what’s going on at the frontier.” — Thorsten Claus
“Risk is the probability of a fatal outcome within given resources.” — Thorsten Claus
“Is it really out of conviction that they’re acting on [the advice] or is it just a belief? You know, I believe in many things, but do I act accordingly? That’s the difference between belief and conviction.” — Thorsten Claus
“The self audit of our actions, behaviors, processes, and decisions is so important.” — Thorsten Claus
“What I find more interesting than the question about ‘what’s the one thing you don’t want me to know about you’ is what it reveals about what you think about me. So, a social interaction is always with me with others, or you with me as well, and a group with others. If I’m worried that you know something about me, that reveals something more about what you fear my attitude is or how this is seen or how you would think I would act. And that is super insightful.” — Thorsten Claus
“If you want to find out something about the why and the what, you ask open-ended questions. If you confirm bad news, you voice it for them.” — Thorsten Claus
“There are no bad teams, only bad leaders.” — Jocko Willink
“There was a whole time when I grew up here in America where everything was great. […] Everyone gets a participation prize. I hated that because it really devalues people who are truly great. And the fact is that there are only very few truly great people.” — Thorsten Claus
“Capital formation is a design principle. Fundraising is a sales process. Without true design around a customer base and a product, you will fail eventually.” — Thorsten Claus
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.
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!
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.
“It’s not the probability; it’s the consequence. It’s not the probability when something goes wrong. It’s the consequence when it goes wrong.” – Wendy Li
Wendy Li is the co-founder and Chief Investment Officer at Ivy Invest, a fintech investment platform bringing an endowment-style portfolio to everyday investors.
Before Ivy Invest, Wendy was Managing Director of Investments at the Mother Cabrini Health Foundation, where she built the Investment Office from the ground up and managed a $4 billion portfolio. Prior to Mother Cabrini Health Foundation, Wendy was Director of Investments at UJA-Federation, investing across a broad range of asset classes. Wendy began her career in the Investment Office at the Metropolitan Museum of Art. She has a Bachelor of Arts degree from Columbia University and is a CFA charterholder.
[00:00] Intro [02:29] Wendy’s family’s history with Columbia University [07:55] The importance of understanding family history [11:09] Why Wendy chose to work at The Met [15:16] How did Wendy know in the interview that Lauren would be her mentor? [19:18] Specialist vs generalist in 2006 [22:58] Pros and cons of using AI as an LP [29:02] The 80-20 rule for how an LP thinks [29:29] The one mistake EVERY SINGLE LP makes [33:27] What is the Takahashi-Alexander model? [39:38] Who do you learn from when your LP institution is so small? [41:22] The wisdom of an open-sourced LP reading list [45:34] What is headline risk? [47:09] What does ‘uncompensated risk’ mean? [50:20] Why now for ‘endowment-in-a-box’ [55:07] Wendy’s proudest dish from her mom’s recipe book [57:09] Wendy’s last piece of advice
“Where [using AI] is a challenge and can present a challenge to somebody’s development is in the utilization of these tools where perhaps there’s not an innate understanding of why the data is important.” – Wendy Li
“The pattern of mistakes that I certainly made and I saw the others make—and I know those listening and are earlier in their investor journey—will inevitably make-… We all make it. Even knowing this is a trap that we all fall into… even though they are all going to be aware of this trap, they’re still going to make the same mistake because we all do it, but we all have to learn this one and develop our own scar tissue on this one. It’s the exciting investment manager that other really smart LPs are invested with that is a ‘hard-to-access’ manager – that has a window in which they will take your capital. And there’s this sense of urgency. Sometimes real, sometimes forced. And there’s this sense that all these really smart investors are doing this thing. And the added layer on the endowment foundation side is oftentimes that there’s an investment committee member who is super excited about the investment because—and I’ll use a real quote that someone once said to me, ‘It would be a trophy manager to have in the portfolio’—and that is invariably a mistake that we all make in our investment careers. I would say that when I have been regretful of avoidable mistakes, it has had that pattern.” – Wendy Li
“I deeply subscribe to, ‘There’s always another train leaving the station.’” – Wendy Li
“There’s a great risk in being overconfident. There’s a great risk in assuming a normal distribution of events and returns.” – Wendy Li
“It’s not the probability; it’s the consequence. It’s not the probability when something goes wrong. It’s the consequence when it goes wrong.” – Wendy Li
“In-the-moment decision-making is always harder than you might remember post-mortem.” – Wendy Li
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.
