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 [02:57] Who was Beezer’s first mentor? [06:57] How did Beezer get to work with the founder of eBay? [10:45] The strength of diverse backgrounds [14:11] How Hustle Fund convinced Foundry Group to invest in their fund [15:27] Why should another venture fund exist in this world? [19:41] What does proprietary “access” to deal flow mean? [23:53] Superpowers on the Sapphire Partners team [25:35] How does Sapphire resolve disagreements? [27:11] Why does entire Sapphire team meet with GPs? [28:18] A sneak peek into Sapphire investment process [33:34] What does Sapphire look for in a pitch deck? [34:58] The art and science behind Sapphire’s own portfolio construction [43:37] How does Sapphire look at fund managers’ portfolio construction? [47:50] Meaningful fund metrics in the first 5-7 years of a VC fund [52:44] How to think about recycling [56:15] What keeps Beezer humble? [58:22] What is an investment opportunity Beezer missed because what she didn’t do? [1:04:03] Thank you to Alchemist Accelerator for sponsoring! [1:06:39] Legal Disclaimer
“It’s the access and why do the great people pick you that is much harder. And that speaks to what it is that you, the investor, are bringing to the table. There’s an LP-GP corollary to this too. The strongest GPs can pick their LPs, what gives the access from the LP side. So it’s a really different way of saying why are you so special. But it’s repeatable.”
“The good and the bad of being an LP is that you’re the peanut gallery to the show. So yes, a VC doesn’t exist unless LPs back them. The LPs are limited partners. We’re limited, which is there for a reason. You’re not driving the bus. There’s humility in that. I liken it to being a parent. There’s all sorts of things you take pride in in your kids. But at the end of the day, it’s your fund; it’s not me. You’re the one making the choices. The same way, it’s the entrepreneurs that make the companies.”
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. In addition to successfully identifying and catalyzing nascent funds, he bridges a gap between the providers of capital and the consumers of capital by creating platforms for transparent dialogue. Chris authors the blog SuperLP in which he chronicles his adventures investing in venture capital and private equity; and his brick oven pizza parties, small gatherings of LPs, GPs, and entrepreneurs, are well-known in the Valley. He is sought after not only for investment capital, but also for his advice, and serves on numerous managers’ advisory boards.
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. He started his business career as a strategy consultant at Monitor Company. Chris regularly speaks at industry conferences and business schools and is a frequent resource for tech and business media. He earned his B.A. with Distinction in history from Yale College in 1994 and an M.B.A. from Yale School of Management in 2001. He was awarded the CFA Charter in 2004.
[00:00] Intro [03:01] What Chris learned from the founder of Greylock and the Chief Investment Officer at Yale’s Endowment. [06:25] How a timber pitch and losing the nose game earned a Chris a front-row seat to venture capital. [10:35] How 2001 is similar to 2023. [12:44] What legislation makes California special? [13:11] Do firms need to have geographical presence? [16:44] How did Chris first start to build his deal flow? [23:17] What needs to go in a good cold email [24:53] Breaking down how Chris constructed his first opinion on great venture capital firms [30:04] How did Josh Kopelman build ‘ecosystem as a service’ in 2004 [33:28] How did Chris end up backing Data Collective [37:52] What are the 4 leading indicators of fund manager outperformance? [48:46] Which firm of Chris’ recent portfolio is willing to be wrong and alone? [51:32] Chris’ Peter Dolan impression [56:09] Thank you to Alchemist Accelerator for sponsoring [58:45] Legal disclaimer
“Entrepreneurship is like a gas. It’s hottest when it’s compressed.”
“Have an opinion. Have a viewpoint. There are so many investors who are just caught up in these tides. They’re heat-seeking missiles, looking for the new, new thing. The reality is that by the time, the new, new thing is new to them, it’s already a little bit longer in the tooth in the ecosystem — all the great deals have been done.”
“I’m looking for well-rounded holes that are made up of jagged pieces that fit together nicely.”
I’ve always been a fan of easter eggs. Cup of Zhou also happens to be one of them. Superclusters is another. But this time, rather than leaving it for surprise, I’d love to spell out why and with that, the purpose of this podcast.
In the startup world, we always say startups are the stars of our universe. They shine the brightest and they light up the night sky. We also have tons of aphorisms in the startup world. For instance, “Aim for the stars, land on the moon”. Startups are often called moonshots. They need to achieve escape velocity. And so on.
So if startups are the stars of the universe, galaxies would be VC firms that have a portfolio of stars.
And if galaxies were VC firms, superclusters would be LPs. Superclusters are collections of multiple galaxies. For example, the supercluster that the Milky Way is in is called Laniakea (Hawaiian for “immense heavens,” for the curious).
So why a podcast on the LP world?
The LP industry in ten years will be much bigger than it is today. We are not even close to the TAM of it.
The LP industry will be a lot more transparent than it is today. FYI, as many of you know already, the industry is very opaque. Many want and still like to keep their knowledge proprietary. But what’s proprietary today will be common place tomorrow. I’m not here to share anyone’s deepest, darkest secrets, or anyone’s social security number. That’s none of my business. But the tactics that make the greatest LPs great are already being shared over intimate happy hours and dinners between a select few. And it’s only a matter of time before the rest of the world catches up. We saw the same happen with the VC industry, and now people are moving even more upstream.
I think of content on a cartesian X-Y graph. On the X-axis, there’s intellectual stimulation. In other words, interesting. On the Y-axis, there’s emotional stimulation, or otherwise known as fun. Most financial services (for instance, hedge fund, private equity, venture capital, options trading) content tends to highly index on intellectual stimulation and not emotional. And for the purpose of this pod, I want to focus on making investing in VC funds fun AND interesting.
You can find my podcast on YouTube, Spotify, and Apple Podcasts for now. In full transparency, waiting on RSS feed approval for the other platforms, but soon to be shared on other platforms near you.
You can expect episodes to come out weekly with ten episodes per season, and a month break in between each to ensure that I can bring you the best quality content. 🙂
You can find my first episode with the amazing Chris Douvos here:
I am no doubt flawed, clearly evidenced by my verbal “ummmm’s” and “likes” in the podcast. But nevertheless pumped to begin this journey as a podcast host. I expect to grow in this journey tackling the emerging LP space and running a podcast, and I hope you can grow with me. So, any and all feedback is deeply appreciated. Recommendations of who to get on. What questions would you like answered. Formats that you find interesting. I’m all ears.
That said, I’m grateful to everyone who made this possible. My mighty editors, Tyler and JP. Without the two of you, I’d still be struggling telling head from tail on how to do J-cuts and L-cuts. The sole sponsor for the pod, Ravi and Alchemist. And while the pod itself is separate from Alchemist altogether, Ravi pushed me to make it happen. And for that and more, I am where I am now. Every single LP who took a bet on me for Season 1 when all I had for them was an idea and a goal. Chris. Beezer. Eric. Jamie. Courtney. Ben. Howard. Amit. Samir. Jeff and Martin.
And to everyone, who’s offered feedback, advice, introductions and pure energy to fuel all of this. Thank you!
And to you, my readers, I appreciate you taking time out of your busy day when there are so many things that fight for your attention, that you spend time with me every week! If I could just be a bit more self-serving, if you have the chance to tune in, I’d be extremely grateful if you could share it with one LP or one GP who could take something away from it.
Cheers,
David
P.S. Don’t worry. I’ll still continue to write on this blog weekly about everything else in between. That’s a habit I’m not willing to give up any time soon.
P.P.S. I’m already working on and recording for Season 2 of the pod, and I can tell you now that things will only get spicier.
P.P.P.S. Due to a million bugs and a half, I’m still working on launching a dedicated website for the podcast (superclusters.co), but until then, I’ll be sharing the show notes of each episode here.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
This past week, one particular graphic stood out. Endeavor shared some research they’ve been working on for a bit on the common themes in unicorn founders. And the below graphic is what came out of that.
For any VC out there, the above may be interesting to compare to your own deal flow and portfolio. For any founders out there reading the piece, and while this is a loaded term that comes with a lot of baggage, the above is where you might see a lot of investors regress to pattern recognition. So if you don’t look like a founder that’s illustrated above, be sure to address the implicit elephant in the room early on in your pitch. The best way to do so is through metrics. The second best way is to share leading indicators of grit and market / problem obsession.
While the study itself is fascinating, and I highly recommend you taking a deeper dive into it, one particular portion is worth underscoring. “Another difference between the emerging market and US founders is how fast they grow their companies. Founders in emerging markets achieved unicorn status for their companies in an average of five and a half years, while US founders took more than six years.”
Why is that noteworthy?
So I will preface that this is completely anecdotal. I’ve seen about two dozen or so emerging market funds myself, and have chatted with about the same number of LPs who have invested in emerging market funds. And the statisticians out there may say that isn’t statistically significant. So take what I’m about to say next with a grain of salt.
In the decks I’ve seen and the conversations I’ve had, I’ve noticed something else. That funds investing in the US and Western European markets tend to have an expected deployment period of 3-4 years. I’ll caveat that this period in practice may differ from the pitch. But nevertheless the model holds. LPs in US-oriented funds often expect 6-8 years before any exits or liquidation events happen. Which is why so many LPs say it takes a fund an average of 6-8 years to settle into its quartile. (And, here’s another example.)
And it is because of that, GPs are incentivized to deploy their last net new check before year 4, and for others year 3. ‘Cause compounding takes time.
But on the flip side, I’ve seen emerging market funds err on the side of longer deployment periods. Usually 4-5 years. At least in the pitch. In my very, very basic diligence, aka asking lawyer friends who help funds set up in emerging markets, that seems to corroborate with their experience.
Reading the tea leaves
So I don’t know how much of this deployment period pitch is intentional by design, or accidental. The latter in the sense, that at least in Asian and SEA markets, professionals tend to be more conservative than in the US. So longer deployment periods help investors proceed with caution. In fairness, some investors are more intentional than others. But the logic seems to hold. If it takes less time for exits to materialize in emerging markets, for the same 10-year fund, one can afford to deploy their last net new check later.
All this to say, Endeavor’s piece was quite thought-provoking for an LP, just as much it’s been for a VC or founder.
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’s this line I love in Jerry Colonna’s Reboot, and I’m loosely paraphrasing just because I’m travelling and I don’t have the book in front of me, “The saying is buy low, sell high; not buy lowest, sell highest.”
The reason I bring up that line is that I’ve been hearing a lot of investors talk about timing the market. At least that was the case before this wonderful trip I’ve been taking across the Pacific, as I sip my hojicha atop my hotel in the backdrop of the Kyoto evening metropolis. When’s a good time to sell? What price makes sense on the secondary market? Should I be investing now? When’s a good time to re-up? Is it a good idea to re-up? Should I be generating DPI for my investors now? Or should I hold? When should I start my fund? When should I begin fundraising?
Now, I don’t pose the above questions as if I have all the answers. In fact, I don’t. I try to. But I don’t. Although I’ve heard 50-60% is the discount secondary buyers have been able to get for great companies that became overvalued in the pandemic days. On the flip side, while Dave and I did published a blogpost not too long ago on early DPI, the truth is there are different ways to make money. Ed Zimmerman shared some of his investments’ data recently to illustrate that exact point.
Another obvious truth is that as investors for an alternative asset class — hell for any asset class, our job is to make our LPs money. Ideally, more money than we were given. For other asset classes, it’s measured in percentages. For venture, it’s multiples. And because of that raison d’être, it’s our job to think not only about the upside, but also the downside protection. Hence, why early DPI matters in some of your best outliers. It always matters.
But from what I’m seeing and hearing, it matters more in a bear market, like today. Than the bull we were in yesterday. Why?
Liquidity is a differentiator.
Because of the point 1, giving LPs some liquidity back makes it easier to get to conviction as you raise your next fund.
Point 2 holds the most weight if you’re an emerging manager on Funds I through III, or have sub $100M AUM. Although Funds I and II, you have little to go off of. As such, sticking to your strategy may be more important to some LPs. In other words, consistency.
Also seems to matter more if your LPs are investing off balance sheet. For instance, corporates.
While I was in Tokyo earlier this trip, I caught up with a colleague. We spent the evening chatting about fund managers and current deployment schedules. (In case you’re wondering, no, we didn’t spend the whole time talking the biz.) And we see a lot of folks slowing down their pace of deployment. Could be the case of deal flow contraction, as Chris Neumann recently wrote about. Could be the case of loss of conviction behind initial fund strategy. We’ve also seen examples of VCs stretching their deployment schedule as their fundraises have been extended to 2024. All in all, that means VCs’ bar for “quality” has gone up.
But let me explain in a bit why I put “quality” in quotation marks.
So, timing comes down to two things:
Entry point
Exit point
I’ve seen a plurality of investors consider exit options as a means to *crossing fingers* convince existing LPs to re-up to the next fund. Debatable on how effective it is. As many LPs I’ve chatted with are “graduating” a lot more of their GPs than years prior. In other words, fancy shmancy word for they’re not re-upping on certain existing managers. Some LPs say it’s an AUM problem (but I’ve also seen them make exceptions). Others say it’s strategy drift. But more so say that certain GPs haven’t been a good fiduciary of capital, which ends being a combination of:
High entry points
Faster than promised deployment schedules (i.e. 1-1.5 years instead of 2-4 years)
Investing in a company where the preference stack is greater than the valuation of the company (similar to the first bullet point)
Reactive communication of strategy drift, instead of preemptive and proactive
Logo shopping which led to strategy drift
All that to say, there are a good amount of LPs who, though appreciate the extra liquidity from partial exits, are not re-investing in existing managers. In addition, they’re holding off until on new ones till earliest Q1 next year to build the relationship earlier. Especially those $5M+ checks.
So, quality, for both GPs and LPs, is this new sugar coating of a term to account for time it takes to figure out where they want to put the next dollar. Investors on both sides are waiting to pull the trigger at 90% conviction, instead of the usual 70%. And realistically, for pre-product market fit companies and firms (i.e. pre-seed, seed startups and Funds I-III), 90% usually never comes until it’s too late. Meaning one misses their entry point.
I have no doubt (as well as many if not all my peers) that the greatest companies of the next generation are being built today. But only a small handful will make it out the gauntlet of fire. Even good companies won’t make it, unfortunately.
So, for the one building, the importance of communicating focus and discipline will be more powerful than ever. My buddy Martin also recently tweeted by an unrelenting focus on a niche audience may serve more useful than targeting a seemingly large TAM.
For the one investing, there is no good time. Our job is to buy low, sell high. Not buy lowest, sell highest. Waiting for the right moment will only have you miss the moment. In the surfing analogy, where the market is the wave, the product is the board, the team is the surfer, and you need all three to be a great surfer, you don’t want to be on the shore when the wave hits. It is better to be paddling in the water before the wave hits than on the shore when the wave does hit. Timing is only obvious in hindsight, never in foresight.
There’s also a great Chinese proverb that the best time to plant a tree was 20 years ago, the next best time is today.
So in this flight to quality, consider what quality actually means. Is it a function of you doubting your original thesis? Then re-examine what caused the doubt. Was your thesis founded on first principles? For consumer, which is where I know a little bit more about, is it founded on the basis and habits of the human condition? Is it secular from technological and hype trends?
Is quality waiting on numbers or external validation? That’s fine if you’re a growth or late stage investor. You’re never going to get it if you’re a true pre-seed and seed. If you’re waiting on a large amount of traction, you’re not an early-stage investor. Round-semantics aside.
You built a fund around a 10-15 year vision. Deploy against that. Or… although we don’t see this much these days, return any remaining capital back to your LPs.
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 recent favorite soundbites is Rich Paul‘s. For the uninitiated, he’s the agent behind LeBron James and Draymond Green. And in his recent Tim Ferriss episode, he said: “Some people define the business card and some people are defined by their business card, and so I don’t carry a business card.”
Some of the most exciting conversations I’ve been having as of late have been in the world of family offices. There’s this shift in generational wealth transfer, but often times without sufficient knowledge transfer. At the same time, there are many next gens leaning more into risk and philanthropy. Many want to increase their exposure to venture and private equity as an asset class, but are still learning how to underwrite such risk.
My conversations echo a lot of what Citi’s been seeing as well. Two in five family offices wanted to increase their exposure to illiquid asset classes, namely the PE and VC asset classes. And while many bucket VC and PE in the same asset class, the truth is the assets operate very differently. Even within venture, underwriting the risk and performance of a sub-$40M fund versus a $40-100M fund versus a $100-500M fund versus a $500M+ VC fund are completely different. Some LPs may disagree on the exact benchmarks (for instance, sub-$100M funds and everything else), but the reality of assessing an emerging manager and an established manager are different. But I digress.
The rest are either rebalancing or figuring out their re-up strategy. Yet, as I’m sure GPs are seeing today, that shift in strategy, requires time, research, and confidence before family offices can pull the trigger. Many are waiting to Q1 next year, but engaging in conversation today.
I’ve also written before about one of my favorite lines from Engineering Capital’s Ashmeet Sidana, “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.”
And I’m seeing a similar vein with family offices. The next gen don’t want to be defined by their predecessor’s goals and records. They want to define their own legacy.
There’s also the saying: If you know one family office, you only know one family office. So any broad-stroke generalizations are loosely correlated at best. That said, anecdotally, having talked with about a hundred or so family offices, here’s what I’ve come to notice.
My crudely drawn 1D scale of whether venture capital is an asset class or an access class
Smaller and/or emerging LPs see VC as an access class. Larger and more sophisticated and established LPs see VC as an asset class.
The Mendoza line — the line that separates the emerging LPs from the established ones —seems to be around 20-30 managers or over 6-7 years of venture data. For the latter, that means, you’ve seen Fund I’s and II’s graduate to Fund III’s and IV’s.
So the question for many of the next generation leading family offices has flipped from: Are you defined by your surname? To: Do you define your surname?
For those that pursue the latter, they’re a lot more proactive than previous generations. They participate in communities. Go to events. Seek education on the matter. Network with their existing managers to discover new ones. Some have also built covenants to co-invest in their manager’s breakout winners. Quite a few are building emerging manager programs or would like to. They’re hungry. Hungry to learn.
The problem I’m seeing with many managers is that they’re seeking transactional relationships. The urgency to get to their first or final close leads them to optimize for LPs who can close fast. And I get it, that’s been the game historically. But it’s leaving a massive opportunity in the market for those who have the time and are willing to educate their and prospective LPs. Who are willing to spend time building a relationship through giving first.
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.
The other day, I had a super insightful conversation with one of my awesome teammates here at Alchemist Accelerator about access and exposure. The difference between accelerators and emerging early-stage managers.
I’ll preface that for investors, particularly emerging managers, the three things you need to win are sourcing, picking, winning. And to be a GP, you need at least two of the above three. But for the purpose of this blogpost, I’m only focusing on sourcing.
I’ll also preface with the fact that I may be biased. I started in venture at SkyDeck, an accelerator. Additionally, I advise at a bunch of studios, incubators and accelerators. Moreover, I worked at On Deck when we launched our accelerator. And now, I’m here at Alchemist Accelerator.
I truly love early-stage programs. The earlier the better.
Instacart’s recent IPO is a clear example of venture returns compared to the public market equivalent as a function of stage. The earlier you invest, the more alpha you generate to your most liquid comparable.
It’s the difference between a market maker and a market taker. A price maker and a price taker.
Though admittedly, one day, this too may become saturated, just like how venture capital went from 50-60 funds in ’07 and ’08 to now over 4000 in 2023. Do fact check me on exact numbers, but I believe I’m directionally accurate.
Let me give a more concrete example. Harvard is a phenomenal institution. And there’s a Wikipedia page full of breakout Harvard alums. But as an LP, if 50% of your managers, despite having different theses, all have half their portfolio as Harvard alums, then you as the LP are overexposed to the same underlying asset. The same is true for Stanford. Or seed or Series A funds investing in YC founders. All great institutions, but you’re not getting your buck’s worth of diversification.
The only caveat here is if you’re not looking for diversification. After all, the best performing fund would be the fund that invested a 100% of their fund in Google at the seed round. AND holding it till today. Realistically, they will have had to distribute on IPO.
The question is are you a fisher? Or are you a digger? One requires a fishing rod; the other a shovel. The latter requires more work, but you’re more likely to be the first to gold. Like Eniac was for mobile. Or Lux to deep tech.
So how do you know you’re fishing in someone else’s pond?
Easy. Your deal flow includes someone’s else’s brand. Whether that’s Sequoia or YC or SBIR. It’s not your own. You don’t own that pipeline. A lot of people have access to it. It’s no longer about proprietary deal flow, but about proprietary access to deals to borrow a framing from the amazing Beezer.
If your deal flow pipeline looks something like the graph below, you probably don’t have a sourcing advantage.
Now that’s not to say there aren’t a lot of nonobvious companies coming out of YC or these startup accelerators. Airbnb, Sendbird, Twitch (the last of which Ravi who I work with here at Alchemist happened to be one of the first institutional investor for, so have heard some of these stories), and more were all non-obvious coming out of YC. And have also seen the same for companies coming out of Techstars, 500, and Alchemist, where I call home now. But that’s a picking advantage, not a sourcing one.
The flip side is, how do you know you’re excavating your own pond?
I’ll preface by saying having your own Slack or Discord “community” is not enough. Or having your own podcast.
I put community in quotes simply because having XXX members in a large group chat isn’t indicative that their presence is really there. Is their seat warm or cold?
I love using a stadium analogy. Imagine you sold a couple thousand season tickets to a team. You can name whatever sport it is. Football (yes, the rough American kind). Soccer. Basketball. Baseball. You name it. But despite all the tickets you sell, a solid percentage of your seats each game is empty. Can you really say that your team has fans? All you did was sell a couple of cold seats.
You can make the same analogy with likes or comments on Instagram. Which seems to be a problem these days, when an influencer with a couple thousand likes per post starts hosting their fan meetups, only to realize they rented out an empty hall. In case, you’re wondering for the IG example, it’s due to bots.
All that said, I like to think about excavation in the lens of competition for attention. Everyone only has 24 hours in a day. 7 days in a week. 365 days in a year. And as someone who is expecting any level of engagement from others, you are fighting for attention with every other product, person, and habit out there.
Perks of being a consumer investor, I think about this a lot. But in the same way, having an unfair sourcing advantage is the same.
Is the greatest source of your deals tuning into you at least four of the seven calendar days in a week? Or if you have a professional audience (i.e. only product people, or only execs), are they engaging at least 3 workdays per week or 8 workdays per month? Are they spending more time reading/listening/engaging with you than with their best friend?
If you have a community, do you have solid product-market fit? Is your daily active to monthly active over 50%? You don’t need a massive audience, but for the people who are primary sources of your deal flow, are you top of mind? As Andrew Chensays, at that point, “it’s part of a daily habit.”
Is it easy for them to share your content, what you’re doing, who you are with others? Does sharing you or your content generate dopamine and social capital for them? Do you embody something aspirational? Is your viral coefficient greater than 0.5? Even better if it’s 1, then you’re ready to go viral.
And do people stick around? Do the seats stay warm? Is your community self-propagating? Is your content evergreen? Or do you produce content at a voracious pace that it doesn’t have to be? Do you live rent free in people’s brain?
And once you do invest, are you the weapon in the arsenal of choice? For instance, 65% of Signalfire’s portfolio use their platform weekly to learn and get advice. But more on the winning side in a future essay.
In closing
To truly have a sourcing advantage, you need to be building your own platform that is impressionable and regularly take mind space from the founder audience. But if you don’t, that’s okay. You just need to be really good at picking and winning.
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.
All cards on the table, I love conferences. It’s a great exchange of ideas. And every once in a while, you meet some really cool people. In fact, I’ve met quite a few of my now-great friends via large events. And hell, I love swag! Like, frickin’ love them! Arguably too much so.
I also love events, and have deep respect for not only the magnitude, the effort, but also the creativity that goes into making great events great. And if you’re a regular fan of this humble piece of internet real estate, you’ve seen me write about it. If not, would recommend searching up “social experiment”, “community”, or “events” in the righthand side bar. But I digress.
So, all of this transpired, when a founder asked me publicly in a Slack community, “Is TechCrunch Disrupt worth going to, to meet investors?”
I love TC, and all it stands for! But if you’re looking to raise and meet VCs who’ll be interested in listening to you pitch, your bang for buck is better elsewhere. Not saying it’s not possible, but if you’re not on stage, it’s just a lot of wasted effort. Why?
VCs who are there are not looking there for deal flow, at least the good ones who have great pipelines.
‘Cause most people who are there are looking for investors as well. You’re not getting as much facetime with the right people as you would like. The ones you wanna get in front of are always the most popular ones.
On the flip side…
Why I think TC (or similar) is worth attending?
Conversion. Conferences should not be top of funnel for you. ‘Cause if it is, you’re one step too late. Maybe two steps. Use it as a conversion tool. Set up Zooms with investors prior. Then use IRL time to convert them into fans or reinforce why you’re awesome. I mean, have you ever been to a networking event where strangers intro themselves to you and you forget their name within 5 seconds? The same is true for most investors unless you have a story that’ll make you go viral. If that’s the case, then you really don’t need conferences anyway. (Unless you’re on stage.)
Hosting your own event/happy hour/fireside chat. Better to be a host of even a small intimate 6-8 person dinner than to be a participant. Participants are for the most part, forgettable. As a host, you’ll be able to live rent-free in someone’s mind for at least a few weeks.
Or purely for fun. Then yes, go have fun. Everything else is a cherry on top. Did I mention conference swag is usually really awesome?
In closing
Do I personally go to conferences?
No. Usually. This doesn’t have any bearing to a conference’s quality. In fact, I think events like Saastr’s, Upfront’s, All-In, just to name a few are very well-organized.
I’m just too busy.
I enjoy intimate conversations more. I’m an introvert, what can I say.
I like letting my creativity run wild by hosting my own.
So if you’re a founder fundraising, hopefully the above might be some helpful context when you are next at a crossroads in relation to event attendance. And yes, I find the above to be true if you’re an emerging manager fundraising as well.
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 fundraising season again. For founders. And for investors.
It may have been a product of the content I’ve been writing and the events I’ve been hosting. It could also be a product of my job title. But in the last few months, I’ve met a great deal of fund managers — from Fund I to Fund XIII. With a strong skew to the right. In other words, vastly Fund I through III.
And given the current market, there is the same pressing question from all: How should I pitch my fund?
And subsequent to that, who should I talk to? Or can you intro me to any LPs?
And in all these conversations, I’m reminded of a great piece Jason Lemkin once wrote on hiring the right VP of Marketing. I won’t go too much into depth since I’ve written about it here. But if you have a spare five minutes, I highly recommend the read. As such, the framework I share with fund managers is:
Fund I and II, it’s all about lead generation.
Fund III and IV, it’s about product marketing. The product is the fund. The product is the partners’ decision making.
Fund V and onwards, it’s all about brand marketing.
I’ll elaborate.
Now I’ll preface with most emerging funds won’t have the capacity to bring on an investor relations person, so the onus lies with the founding partners themselves.
Lead generation
Barely anyone knows you exist. You need to be out there. You’re pre-product-market fit. And you need to sell why you are the best sub-$50 million fund to return three times your LPs’ money back. Five times if you’re pre-seed or seed. LPs are looking for GP-thesis fit. But more importantly for you, this looks very much like a sales game, not a marketing game.
Generating demand where there is none is key. How do you best tell a story no one’s heard of?
You have to break an arm and a leg to close LPs outside of your initial friends and family. You have to show you care. Or as Mark Suster recently said (quoting Zig Ziglar), “People don’t care how much you know until they know how much you care.”
You’re going to events. Trade-show equivalents. You’re hosting your own. Your asking co-investors to be your LPs. You’re asking for LP intros to largely high net-worth individuals, who’ll be your beachhead “customers” before you prove the promise you’re selling capital allocators. And just as much as they’re looking for the right people to marry for the next 10 years or 20 years (latter if you’re working together for at least three funds), you need to qualify them as well. And while yes, it’s important to keep your funnel wide, you need to have a strong idea of who’s a good fit and who isn’t from the very beginning. If it helps, here are some of my favorite pre-qualifying questions.
You’ve now gotten to a stage where your strategy is known. Founders and LPs self-select themselves into investing in you or not. For instance, if you know you can win on a diversified strategy betting with portfolio sizes north of 50, all the LPs that look for concentrated portfolios or strong reserve strategies will turn the cheek.
You’ve built a strategy off of the scare tissue from Fund I. Now you’re selling that strategy. Are you fishing in ponds that other GPs are not? In other words, is it differentiated? And how?
It’s an interesting exercise but it’s usually not the first thing you think of, but the third. When you really dig into your fund’s soul. Why do founders come for you? Why will they choose you over all the other 4000 VC fund options out there? Equally as helpful to do a “Why did you choose me” survey with your founders.
The big question for LPs now is: Is this repeatable?
Why? Your initial LPs for Fund I, maybe II, are smaller checkwriters, given the size of most Fund I’s and II’s. A lot of them know, even innately, that as you scale in assets under management, you will eventually graduate from their check size. But starting from Fund III, and maybe even Fund II, you’re targeting sophisticated and larger LPs, who are looking to build that 20+ year relationship. And for them repeatability and consistency is important.
Brand marketing
When you’ve finally settled into your quartile, which usually takes at least 6-7 years of track record, you’re now focused on largely selling the returns on your previous fund. Your product works. For some funds, they diversify into other product offerings, or bring on new partners to manage new verticals and initiatives.
Just like a Super Bowl ad needs to be played at least seven times or in the marketing world the 7-11-4 strategy (you need at least seven hours of interaction, 11 touchpoints, and in four separate locations) before one remembers and hopefully buys your product, you’re trying to help LPs keep you top of mind. Again not hard and fast rules, but a useful reference point of just how much work it takes to stay top of mind.
That could mean a focus on content — a newsletter, podcast, great/frequent LP updates, social media and so on. Or great AGMs (annual general meetings). And hosting events. Or being that awesome co-investor that pops up other emerging managers’ pitch decks. Strong communication is key — either directly or indirectly — so that when you raise your next fund, your LPs are ready and have pre-allocated to re-up in your fund.
In closing
Now the purpose of all this segmentation isn’t to just be snotty about it, but that the focus for pitching and closing LPs varies per the number of your fund. Don’t try to do everything at the same time. It’s not worth it, and neither do you have the resources, time or bandwidth. Stick to one strategy and get really good at it.
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.
I’ve had multiple conversations with emerging managers currently fundraising over the past few weeks, and the common theme, outside of the usual no’s, seems to be that larger LPs are saying, “If you were raising a larger fund, we would invest.”
And so there’s this catch 22 in the market right now. In one Fund I GP’s words, “either raise a larger fund and be told by the large checks that they don’t do Fund I’s. Or do a smaller fund, and be told by the high quality LPs that they’re too small.”
As a note, for the uninitiated, most large, seasoned LPs usually don’t want their check to be more than 10% of the fund. Why? Too much exposure in a single asset. And the need to diversify. Every year, there are really 20 great companies that are made. Or on the higher end, as Allocate’s Samir Kajirecently wrote, “30-50 companies drive the majority of returns.” Your goal as an LP, is to get as much exposure to those as possible. And they rarely all come out of just 1-2 funds.
If LPs are open to taking up more than 10% of the fund, they usually come with rather aggressive terms. For instance, investing into the GP stake, as opposed the to the LP. That’s a conversation for another day though.
As such, I’ve seen many a manager play both angles. They call it the “toggle.” If we raise a target of $10M fund, we’ll only do pre-seed. We’ll also have no reserves. If we raise a $25M fund, we’ll have 20% reserves and more seed checks. But if we’re able to close a $50M fund, we’ll have 33% reserves and do 50% pre-seed and 50% seed. The deltas between some fund managers’ targets and caps have grown as wide as the Grand Canyon. I was chatting with a Fund I GP yesterday who had a $10M target with $40M cap. Still relatively reasonable. Another GP raising their Fund I two weeks ago told me he had a $15M target and $70M cap. Far less reasonable. In fact, I might even say, a $15M fund and a $70M fund are two completely different strategies.
So begs the question, as a Fund I or II GP, is it worth raising a larger fund to possibly close large LPs or staying disciplined in your pre-product-market fit fund?
Spoiler alert… I don’t have the silver bullet. So if you’re looking for one, this blogpost isn’t worth your time.
But if you’re not, here’s how I’ve been thinking about it.
The short answer is really, whoever’s willing to give you money. Not the most sophisticated answer, but if you know large LPs well and they’re willing to invest in you, go bigger. Otherwise, you need to consider a more grassroots approach.
If you have a strong, portable, relevant track record that’s either returned good distributions already OR that has persisted for at least 6-7 years, larger LPs may be more open to investing in you. If not, you may need to play the numbers game with smaller LPs, that are liquidity-constrained as of now. And for that, you either take smaller checks, or prove you are the best option for their $250K LP check, that it somehow outcompetes the S&P, 3-year treasury bonds (because of interest rates), real estate and so on.
Also, remember that LPs are always nice in meeting #1. I’ve heard of very few instances where they’re not. A lot are just in exploratory mode. No pressure to commit. You will also need a great barometer of what nice looks like and what kindness looks like. Otherwise, you will waste a lot of time.
What does that mean? It is easier for a large LP to tell you “I will invest if your fund was bigger” than to tell you “No.” It’s the equivalent of VCs telling founders, “You’re too early for me.” And the same as recruiters and hiring managers telling job candidates “We have a highly competitive pool, and while we loved meeting you and you’re great…” There might be some truth to it, but a lot of smokes and mirrors, and a fear to offend people. I get it. We’re all people.
Just don’t lie to yourself.
Taking the hard road, which will be true for the vast majority of managers raising now, is to keep the fund size small and disciplined. Aim for a minimum viable fund. And deploy.
The minimum viable fund
Simply put, what is the minimum you need to execute your strategy? To set yourself up to raise a larger fund 1-2 funds from now?
What assumptions are you trying to prove?
What does your ideal Fund III look like? And What does fund-market fit look like to you? Be as detailed as you can. It could be that you’re getting four high quality deals per quarter. And that you have $30-40M to deploy per senior partner. That you’re leading rounds for target post-money valuations between $10-20M. That you have early DPI from Fund I by then. And so on.
Then work backwards. If that’s what Fund III looks like, what does Fund II look like? What does Fund I look like? As you’re backcasting, to borrow a Mike Maples Jr. term, each fund when you work backwards in time is focused on testing 1-2 key assumptions that you and LPs need to get conviction on. Assumptions that require data.
I’ll give an example of one kind of assumption. Your ability to win allocation.
If Fund III is where you lead pre-seed and seed rounds and have strong ownership targets, then Fund II is where you have to test if founders and other downstream investors will let you take pro rata for more than one round. And, if you can win or negotiate for that pro rata. It all comes down to, will a founder pick you over another awesome, possibly brand-name VC? And if so, why?
Some LPs prefer co-investment opportunities. And while it is helpful for them to go direct, part of the reason for it, is even if your fund can’t execute on the pro rata, just the ability to negotiate that is powerful for the day you need to lead. And if that’s Fund II, Fund I may be, can you win allocation in hot rounds and/or can you discover non-obvious companies before they become obvious?
Let’s say your Fund I is focused on the latter. You’re probably investing on $5-10M post-money valuations, and you’re going to try to maintain 5% ownership till the A-round. That’s $250-500K checks. $250K would be your base check, trying to get at least 30 shots on goal. That’s a $9-10M minimum viable fund, hoping for more than a 2% outlier rate in the generalist market, or north of a 10% outlier rate in bio, hard sciences, healthcare, or deep tech space.
Any less than 30 companies, you’re going for the hyper-concentrated portfolio and it’s a lot more about ownership and the greater the pressure, you need to pick well. But the goal is to get to a 3x net minimum for your fund by the time you get to a Fund III.
I heard from LPs with more miles on their odometer that once upon a time, it was normal for GPs to give undeployed capital back to their LPs. Circa 2002-2005 vintage funds. Where GPs don’t execute on 50% of their capital calls. But we don’t live in that era anymore. For better or worse.
Some LPs don’t even want their capital back early because then they need to pay taxes AND find another asset that compounds at the same or better rate your fund currently is. Say 25% IRR or CAGR. That’s hard. Because minus the inflated marks of the last 5 years, 25% is a hard benchmark to hit for the vast majority of funds.
So sometimes to be the best fiduciary, that means raising a small fund today (easier to return too) to set you best up for tomorrow.
The questions to ask
If you are in the midst of conversation and trying to court a large LP, do ask the following:
Have you invested in an emerging manager in the last two years? — If not, you’re unlikely to be their first. If you’re not seeing demonstrable progress from intro to partnership meeting to diligence within three meetings, move on. If they did so, 20 years ago, doesn’t count. That means investing in emerging managers is not top of mind for them.
What is your minimum check size? And how often, if ever do you deviate from it? If so, why was the last time you did so? — Multiply this number by 10. If it’s greater than your fund size, you might find more success elsewhere.
What is the typical process look like? — Find out what their process is and see if you’re progressing forward. If not, very clear they may not be interested.
(If the person you are talking to does seem to really like you) What are the questions you’re being asking in your investment committee? — Figure out the bottlenecks as soon as you can. And determine if that’s something you can solve for in the near future or not. If it’s track record, you realistically can’t.
What is the thing you hated most in the last few years? — Understand their red flags early on in the process. And cross your fingers, it’s not something that’s relevant to you or your fund. If it is, move on.
Of course, the above, while useful pre-qualifying questions, are mentioned in broad strokes. Your mileage may vary. Have there been examples of large LPs betting on small funds? Yes. But far and few in between. But don’t expect you will change many minds.
In closing
Fundraising is all about momentum and time you’re in market. You can theoretically spend six months trying to close one large LP, but your time might be better spent closing smaller checks in the beginning from people who believe in you and strong referenceable names. And if you so choose, come back to the large LP in the second half of your fundraise.
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.
