I’ve been lucky enough to meet a number of founders and fund managers over the years. Many of which I probably have no business of meeting and getting to know. And I count myself fortunate every day to have the opportunities to do so.
Nevertheless, and as an FYI, all of this is completely anecdotal. Maybe at some point I’ll find data to support this. Hell, maybe there’s already data on this. But as is the perk of this blog, I get to write about just things on my mind.
Per some recent conversations with friends, having already shared with them, thought I’d share the below. Some telltale signs I’ve noticed in founders and fund managers that are world-class before the rest of the world knows it:
Highly responsive. It’s insane to think about this given their busy lives. But the folks I’ve been lucky to invest in and (gosh darn it) passed on who’ve gone on to create hundreds if not thousands of jobs respond remarkably fast. Sometimes within minutes of me sending them a message/email. But on average before half the day is over. I will say I’m personally slipping here a bit as of late. But I guess, that just means I’m not world-class by my own definition. Many seem to be night owls, at least when they’re still hustling. I’m not personally sure if they’re working deep into the night, but at least, they’re responding to me at 2AM, and I’m trying to figure out what they’re doing then.
They exercise in the morning, or have a morning routine that they do every day without fail, even when on vacation. It could be writing, journaling, making that morning cup of espresso just right, or making breakfast for their kids EVERY morning. It’s ritualistic, so that they perform just as well on the first meeting of their day as they do their last.
Operationally disciplined. They’re really good at saying no. They set clear boundaries. Often times, boundaries that most people have not heard of. And many, even after hearing them, may find bizarre or strange. But in an odd way, they make a lot of sense if you give them the time of day. I was calling a friend recently on this, and he was sharing that he’s not the kind of friend that most people want. He doesn’t show up at birthday parties or celebrations. He also doesn’t post to socials regularly to congratulate friends on promotions or otherwise. But he aimed to be, and ends up being the first call friends make when shit hits the fan. And because of that practice, he can be laser focused on his priorities every day.
They’re really good at using analogies. In many ways, it’s the classic 7-year old test or the grandma test. They’re extremely high context individuals in a lot of different disciplines. And if I were to define it (not original, but I forget the attribution, might be Tim Urban), high context individuals are those that are well-versed on a given subject. Low context folks are those are out of the loop. For example, a PhD in neuroscience is high context on how different reward systems affect dopamine, but possibly low context on Marvel Cinematic Universe lore. And when someone is high context in not just one area but in a lot of areas — in other words, people might call them polymaths, or at the very least, well-read — it’s easy for them to pull analogies in ways that best help relay what they want to say to the other person’s ears. Like a crypto founder (probably one might be able to guess who) who once described to me one-way hash functions as putting fruits in a blender. Or Josh Wolfe who describes the battle of ethics in a company a battle between intentions and incentives. Or that society is a constant battle between deception and detection.
They ask really good questions. Questions you’ve likely never heard asked before. And many can get to proficiency on any subject quite quickly. Largely, probably because of how they think and how they eventually arrive at an answer.
Words are used intentionally and with specificity, and rarely, if ever, use amorphous terms and superlative adjectives. Like success, community, unique, compelling, unfair advantage, best, better, and so on. And if they do, they are quick to define what they personally mean when they use those words.
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.
Raida Daouk started her career in banking before moving to the investment team of BY Venture Partner, a venture fund with offices in Beirut and Abu Dhabi. She quickly climbed the ranks within the company and ultimately became a Venture Partner.
Recognizing a void in the market for personalized venture consulting services, Raida established Amkan Advisory, a boutique consultancy firm specializing in assisting family offices and high-net-worth individuals in identifying venture funds that align with their specific strategies. Given that first-time fund managers often possess the most aligned incentives with their investors, she understood the significant value they bring to the venture capital landscape. However, Raida also understood the reluctance of family offices to commit capital to relatively unproven managers. By curating a portfolio of carefully selected funds, she aims to mitigate the perceived risk associated with investing in first-time managers while still accessing the high-growth potential of emerging ventures.
Amkan Ventures emerged to offer LPs access to emerging managers beyond their direct reach. Focusing on small Funds I and II led by ambitious managers with a conviction-driven approach, the firm prioritizes delivering returns and nurturing opportunities in the venture arena.
Amkan Ventures’ first close occurred in April 2024, with one investment already made in a $30M fund I out of NY and one more about to be announced.
Raida currently serves on the Selection Committees of RAISE Global and The Bridge Platform.
[00:00] Intro [02:45] The impact of biology on Raida’s career [06:24] If Raida were to teach a founder psychology course [08:42] Raida’s definition of “running through walls” [10:16] Similarities and differences between founders and fund managers [11:36] What does GP-thesis fit look like? [14:38] How Raida got to a yes on Nebular Ventures? [20:35] The personas of different kinds of references [26:05] The one question that Raida always asks during reference calls [28:31] Is there such a thing as too many references? [31:57] What if you don’t have a network of references as an LP? [35:26] How does one set up the venture arm of a family office? [40:28] What is the GCC? [43:58] The best way to build relationships in the GCC [47:54] The origin story of Amkan Ventures [52:19] How did Raida build a strong understanding of the foodtech space? [53:58] Where did Amkan’s name come from? [58:26] What fund is in Raida’s anti-portfolio? [1:00:30] What’s Raida’s take on solo GPs? [1:03:10] How does your mindset change as an LP if you had evergreen capital? [1:06:58] Thank you to Alchemist Accelerator for sponsoring! [1:07:59] If you enjoyed this episode, it would mean a lot if you could share this with one other friend!
“It’s always best to start the relationship when there is no ask.” – Raida Daouk
“The average length of a VC fund is double that of a typical American marriage. So VC splits – divorce – is much more likely than getting hit by a bus.” – Raida Daouk
“The more constraints you have, the more conviction you will have in each manager.” – Raida Daouk
These days I’ve been spending a lot of time thinking about succession and key person risks. Definitely influenced by a number of conversations I’ve had with a partnership I invested in who broke up and LPs who take the long-term perspective on investing in funds.
When I say long-term, I mean when those LPs invest in a firm, it’s not just a single check into one fund. They plan to budget out $XX million dollars over the next three funds or so. Or across 9-10 years primarily to invest in this fund manager. We’ve talked about how underwriting a solo GP is actually much easier than underwriting a partnership, at least on the key person risk side of things.
If a solo GP dies, they die, and the firm naturally cannot go on. And any capital reserved for them automatically goes towards net new investments. If a partnership loses a key partner, then it’s this awkward dance to figure out if the remaining partners are worth re-upping on. And a re-underwriting needs to occur.
Before I go any further, let me first define key person risk for the uninitiated. Key person risk is the risk created when a single person leaves or dies that creates meaningful knowledge, brand, or performance loss at the institution. Simply put, when shit hits the fan in a partnership, how volatile will the transition be?
As such, my recent conversations informs much of what I write below. For the purpose of this blogpost, I’ll focus on partnerships as opposed to solo GPs and founders.
All great relationships are battle tested. Battle-hardened. In fact, when I ask a set of co-founders how they resolve disagreements, and they say, they never disagree, I run in the opposite direction fast. So fast that I could be cast as Barry Allen. Maybe. If my acting were better. If two people never disagree, they’re either the same person (which is hard, ’cause even biological twins disagree) or they’ve never truly worked on something together that they would call their life’s purpose.
To me, the formula for battle-hardened relationships has two key variables.
Depth – High stakes
Breadth – Time for the stakes to manifest
High stakes
Even if artificially high stakes. Even if in the moment, all parties involved must truly believe that this is the be all, end all. That there is no Plan B. There’s no going back. That everyone has to see it through. In Hollywood, I believe it’s called the inciting incident. A clear market in time that after a set of events that there is no way one can go back to their old life. Whether it’s the state championships for a sport among high school students, or fighting for survival in the middle of nowhere. For artificially high stakes, one must distort the reality, so that at the minimum they must convince themselves of the gravity of the situation.
Why do high stakes matter? Because only then does one put their all into something. And when you truly care, you hold nothing back. High stakes reveals the character you are. If people can accept and embrace you at your worst, everything else is a cherry on top.
Time for the stakes to manifest
This varies for different people. Sometimes it takes time to care. Other times, it takes time to fully realize what’s at stake. And others still, may never get to that point of realization. For example, in a ball game with four quarters, sometimes it isn’t until the score is neck and neck in the fourth quarter do you give it your all.
In practice
So in practice, I love spending time with folks to talk about their past. Their origin story. And get into the weeds on key inflection points not only in their own lives, but also in the time they’ve gotten to know each other. When did they first work together? When did they realize they were more than just colleagues? At what point did they introduce their families to each other? What was the point of realization?
Most investors focus primarily on length of a relationship, which is definitely valuable information, but without depth, it’s easy to know someone for decades and care very little for their growth and success.
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.
Lisa Cawley is the Managing Director of Screendoor, a highly respected LP of GPs, investing in firm-builders by firm-builders, with a unique model for partnering with allocators to access the emerging manager ecosystem. She’s been covering venture capital for more than a dozen years, since 2010 at Ernst and Young, a private investment firm, and now to Screendoor.
Lisa is a proud graduate of Loyola University Maryland where she’s earned her MBA and MS in Finance, as well as her BBA in Accounting, with a double minor in Information Systems and Spanish. Lisa is a CFA Charterholder and holds a CPA from the State of Maryland. In addition, she’s also a member of Class 29 of the Kauffman Fellows.
[00:00] Intro [03:43] How swimming has influenced Lisa’s life to date [11:16] How does Lisa evaluate competitive spirit in others? [14:36] The importance of understanding LP side letter terms [21:33] Investing as a team AND individual sport [23:45] Screendoor as the LP of GPs [28:43] How does Screendoor align incentives with their GP advisors? [31:05] How do GP advisors get assigned to portfolio managers? [35:09] LP-GP fit [37:46] Generation 1 vs Generation 5 of a family office [43:19] How does firm-building differ from fund-building? [49:09] Reference checking a fund manager’s “unique” value-add [55:24] Which two life lessons would Lisa canonize in a time capsule? [57:36] What was in Lisa’s last OS update? [1:01:23] The different facets of education in Lisa’s life [1:09:09] Final words on being thoughtful as an LP [1:14:05] Post-credit scene [1:25:27] Thank you to Alchemist Accelerator for sponsoring! [1:26:29] If you enjoyed the episode, I’d great appreciate it if you shared it with 1 other person!
“[Swimming, like venture] is both a team and individual sport.” – Lisa Cawley
“If you are governing things from a point of a legal document, whatever that may be and having to refer to that in order to trigger a behavior, that often to me feels emblematic of a transaction, not a relationship.” – Lisa Cawley
“Performance is everybody’s right to continue to do their business in venture.” – Lisa Cawley
“You can be a critic while still helping somebody, and you can be a critic while still giving empathy and doing so with respect.” – Lisa Cawley
But I’m so glad I did. In it, Harry shared a question he likes asking “If we were hiring someone underneath me to support him, what skills would they have?” In many ways, it’s the same as another question Doug Leone shared on his podcast as well. What three adjectives would you use to describe your sibling?
It comes down to simple purpose of trying to ask about someone’s weakness without asking them “what’s your weakness?” Why does it matter? When you’re too forward with your question, say the weakness one, recipients always end up finding ways to explain their “weakness” as a byproduct of their strength, or not really sharing a true weakness. “I’m too honest.” “I work too hard.” And so on.
While the above set of questions may not work for everyone, and probably even less so now that Harry and Doug shared it in a public arena, I can’t help but appreciate the linguistic gymnastics to find the right combination of words that gets one the answer they want. Nevertheless, I’m sure there are many more on this planet who still have yet to be exposed to those questions.
Similarly, I find it to be a damn good question to ask when doing references on potential investments. The truth is every founder or GP one invests in will have weaknesses. And that’s okay. Everyone’s a human. But in reference calls, there are two hurdles that one most overcome in their diligence:
Getting the reference to share an honest assessment of the person they know. This is especially hard when these are on-list references. In other words, references that the person being diligenced is providing themselves. Naturally, this list is full of people who are almost guaranteed to say positive things about said individual. Besides, there is absolutely no incentive to badmouth another person. Neither do most people aim to do so.
How high on the priority list is this person’s weakness? Can I get conviction on this deal even if I were to accept this weakness? Does it matter as much in a Fund I? Fund II? Fund III? If they need to hire someone to fundraise for them, is that a question of ability or network? And how crucial is it not only to the firm’s survival, but also their outperformance? If they need to hire someone to manage their calendar, that may be lower on the priority list of risks for most LPs.
Nevertheless, I find Harry’s question a great one to ask former colleagues, occasionally portfolio or anti-portfolio founders.
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.
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.
Evan currently serves as Head of Venture Capital Investments and Research for Integra Global Advisors, a multi-family office. Prior to Integra, Evan served as Senior Manager of Data Science for Anheuser-Busch InBev where he oversaw data science and strategy for the US marketing organization. Prior to Anheuser-Busch, Evan spent two years as a Management Consultant at Marketing Management Analytics and held a technical role at Amazon. Evan earned an MS in Computer Science with a concentration in machine learning from Georgia Tech and studied computational and applied mathematics at the City University of New York and finance and psychology at the University of Miami.
[00:00] Intro [03:27] What are the mechanics of a great cold email? [07:54] Evan’s background in sports marketing [10:54] The kinds of data to ignore as an LP [13:01] Portability and replicability of track record [19:57] How much thesis drift is too much? [22:37] What happens when a partner isn’t pulling their weight? [29:35] Why does Evan have two bachelor degrees? [34:38] Why study quantum mechanics in applied math? [38:25] Evan’s journey to Integra [45:21] Buy vs Build at a fund-of-funds [47:40] Questions to ask when choosing which vendor to work with [51:24] How Evan thinks about operational diligence [58:30] Setting up an information policy in your firm [1:01:39] Valuation policy at a hedge fund vs VC fund [1:11:12] Why doesn’t Integra have strict mandates for geographies to invest in? [1:21:20] The fallacy with LPs overweighing DPI in 2020-2021 [1:27:15] Evan’s greatest life lesson [1:28:14] Evan’s favorite kosher restaurants in NYC [1:32:07] “Post-credit scene” [1:34:24] Thank you to Alchemist Accelerator for sponsoring! [1:35:25] If you liked this episode, it would mean a lot if you left a like and shared this episode with one friend!
“It’s important to be data-informed, not data-driven.” – Evan Finkel
“Not only does [an investment] have to be the best in that geography, it actually has to be better than the incremental dollar we could put in any other geography.” – Evan Finkel
“The way we think about VC is both on an absolute and a relative basis. On an absolute basis, we have to be able to underwrite a manager to 3X net or better, or ideally 4X net or better. Because otherwise the lockup doesn’t make sense. It doesn’t make sense to lock up your money for 10, 12, or 15 years with pretty limited distributions. In order to be able to consider a VC fund for our portfolio, we have to be able to underwrite it to at least 3X, but ideally 4X or better.
“But then there’s also a relative component. We’re not looking for the best relative managers. Understanding whether this is a really good year or weak year… You might be the best manager of a given vintage, but in absolute terms, you actually might not be quite as impressive. […] It helps us contextualize the performance of a given manager.” – Evan Finkel
“DPI generated in a chaotic environment is sort of similar to TVPI generated in a chaotic environment. It’s great it happened, but let’s contextualize it properly and don’t overweight DPI when you’re evaluating managers.” – Evan Finkel
“In venture, we don’t look at IRR at all because manipulating IRR is far too easy with the timing of capital calls, credit lines, and various other levers that can be pulled by the GP.” – Evan Finkel
Ian Park is a Partner at Primer Sazze, a firm dedicated to investing in ambitious talent across East Asia and North America. Prior to Primer Sazze, he was a venture capital allocator at Korea Investment Corporation (KIC), one of the largest sovereign wealth institutions in the world, where he focused on investments into venture managers and founders. He’s also amassed a fervent following of AI, VC, and LP fans over the years through writing his newsletter and his YouTube channel. Prior to KIC, he’s built his investing repertoire at VMG Partners and Bertram Capital after leaving the world of consulting.
Ian studied mathematics and economics at University of Minnesota and earned his master’s degree in economics at Boston College. He’s also got his master’s in computer and information technology from University of Pennsylvania as well.
[00:00] Intro [02:26] From Boston to SF [10:58] How does Ian diligence a GP’s ability to source? [13:37] The three things Ian looks for in emerging managers [17:04] Best practices on sharing insights [26:37] A typical week at KIC and conversations with GPs [30:42] How to best approach co-investment opportunities as an LP [33:38] How does Ian get to conviction on a direct deal [39:19] What funds should you invest in if you prioritize co-investments? [43:23] What does Ian look for in a Fund II/III that’s not TVPI, DPI, or IRR? [47:26] Relationship management best practices with GPs [53:30] The good, bad, and ugly at a sovereign wealth fund [1:00:00] What is Ian investing in at Primer Sazze? [1:10:20] What has Ian learned over the years as a content creator? [1:16:57] Thank you to Alchemist Accelerator for sponsoring! [1:17:57] If you liked the episode, would greatly appreciate a like and a share!
“Regression is trying to figure out why this happened, and machine learning is more about what’s going to happen.” – Ian Park
“The three things I’m looking for in emerging managers are first, information; second, network; third, it’s more about co-investments.” – Ian Park
“VCs should publish their thoughts as soon as possible – be it on YouTube or be it on a blog. You have to tell people what you think, and you have to claim that’s your idea too, so you can get some credit.” – Ian Park
“My rule of thumb is five years for 1X [DPI] for PE funds, and seven years for VC funds.” – Ian Park
Inspired by John Felix in our recent episode together, as LPs, we often get pitches where GPs claim they’re an N of 1. That they’re the only team in the venture world who has something. Usually it’s the fact that they have brand-name co-investors. Or they run a community. Or they have an operating background, like John says below. And it isn’t that unlike the world of founders pitching VCs.
The truth is most “unfair advantages” are more commonplace than one might think. Even after one hears 50 GP pitches, one can get a pretty good grasp of the overlap.
For the purpose of this blogpost, the goal is to help the emerging LP who has yet to get to 50-100 pitches. And for the GP who hasn’t seen that many other pitches to know what the rest of the market is like. Obviously, the world of venture shifts all the time. What’s unique today is commonplace tomorrow.
For the sake of this post, and to make sure I’m not using some words too liberally, let’s define a few terms I will use quite often in this blogpost:
Product: A fully differentiated edge that an emerging manager/firm has. In other words, a must-have, if the firm is to succeed.
Feature: A partially differentiated edge, if at all, an edge. In many cases, this may just be table stakes to be an emerging manager today. In other words, a nice-to-have or expected-to-have.
Networks
Product
Feature
Differentiated community (high/consistent frequency of engagement)
Alumni network (school or company)
Downstream investors that prioritize your signals
In-person events
Keeper test
Virtual events
Co-investors
Networks, in many ways, are synonymous with your ability to source. It’s the difference in a lot of ways from co-investing versus investing before anyone else (versus investing after everyone else). The latter of which is least desirable for an LP looking for pure-play venture and risk capital.
The quickest check is simply an examination of numbers. LinkedIn or Twitter followers. Newsletter subscribers. Podcast subscribers. Community members. While it’s helpful context, it’s also simply not enough.
Here’s a simple case study. Someone who has 5,000 followers on LinkedIn with hundreds of people engaging with their content in a meaningful way is usually more interesting than beat someone who has 20,000 followers on LinkedIn, who only has 10s of engagements. Even better if one generates a substantial amount of deal flow with their content alone.
One thing that is hard to evaluate without doing an incredible amount of diligence is your founder network referring other founders to you. From one angle, it’s table stakes. From another, true referral flywheels are powerful. In the former, purely having it on your pitch deck without additional depth makes that section of the deck easily skippable.
One of my favorite culture tests is Netflix’s Keeper test. That if a team member were to get laid off or fired, would you fight to keep them or be relieved? The best folks, you would fight to keep. And as such, one of my favorite questions during diligence to ask the breakout / top founders in each GPs’ portfolios is: If, gun to head, you had to fire all your investors from your cap table and only keep three, which three would you keep and why?
Do note I differentiate breakout and top founders. They’re not mutually exclusive, but sometimes you can be brilliant and do everything right and things still might not work out. But smart people will keep at it and start a new company. And maybe it was a smaller exit the first time, but the second or third time, their business may really take off. Of course, sometimes I don’t have the same amount of time to diligence each GP as an LP with a team, so I generally ask the question: If all of your portfolio founders were to drop what they’re currently doing regardless of outcome, and start a new business, who are the top 2-3 people you would back again without hesitation?
At the end of the day, for networks, it’s all about attention. It’s not about who you know, but about how well you know them AND who you know that TRUSTS what you know. In an era, where there is more and more noise and information everywhere, a wealth of information leads to a poverty of attention. But if you have a strong foothold on founders’ and/or investors’ attention in one way or another, you have something special.
Experience/expertise
Product
Feature
Early hire at a unicorn company + Grew a key metric by many multiples
Hired top operators who’ve gone on to change the world
Experience at a larger firm where you didn’t lead rounds / fight for deals
Independent board member
Experience only matters here where there are clear differentiations that you’ve seen and can recognize excellence. In a broader sense, having an operating background is unfortunately table stakes. As John mentioned, any generalities are.
While strong experiences help you source, its main draw is that it impacts the way you pick and win deals. Only those who have experience recognizing excellence (working with or hiring) know the quality in which A-players operate. Others can only imagine what that may look like. That’s why if you’re going to brag that you’re a Xoogler (or insert any other alumni), LPs are going to care which vintage you were at Google. A 2003 Xoogler is more likely to have that discerning eye than a 2023 Xoogler. The same is true for schools. Being a college dropout from a Harvard and Stanford is different from dropping out of college at a two-year program. Not that there’s anything wrong with the latter, but you must find other ways to stand out if so.
Given a large pool of noise when it comes to titles, it’s for that reason I love questions like: “What did you do in your last role that no one else with that title has done?”
Additionally, when it comes to references, positive AND negative references are always better than neutral references. Even better is that you stay top of mind for your founders regularly. A loose proxy, while not perfect, is roughly 2-3 shoutouts per year in your founders’ monthly updates. It takes a willingness to be helpful and for the founders to recognize that you’ve been helpful.
Process
Product
Feature
Response time/speed
Some generic outline of an investment process
Evidence of a prepared mind
Doing diligence
Asking questions during diligence most others don’t know how to
Yes, response time (or speed in getting back to a founder, or anyone for that matter) is a superpower. It’s remarkably simple, but incredibly hard to execute at scale. By the time, you get to hundreds of emails per week, near impossible, without a robust process. One of my favs to this day happens to be Blake Robbins’ email workflow who’s now at Benchmark.
Now I’m not saying one should rush into a deal, or skip diligence, but making sure people aren’t ghosted in the process matter immensely. As my buddy Ian Park puts it, it’s better for a founder or an LP to know that a GP is working on it than to not feel heard.
You’ve probably heard of the “prepared mind.” The idea that one proactively looks for solutions for a given problem as a function of their lived experiences, research, and analyses over the years.
Its origin probably goes as far back as Louis Pasteur, but I first heard it popularized in venture by the folks at Accel. Anyone can say they have a prepared mind. From an LP’s perspective, we can’t prove that you do or don’t have it outside of you just saying it in a pitch meeting. That’s why a trail of breadcrumbs matter so much. Most people describe it as a function of their track record or past operating experiences. Unfortunately, there may be a large attribution to hindsight bias or revisionist’s history. Being brutally honest with yourself of what was intentional and what was lucky or accidental is a level of intellectual honesty I’ve seen many LPs really appreciate. As an example, I’d really recommend you hearing what Martin Tobias has to say on that topic.
But the best way to illustrate a prepared mind is easier than one thinks. But it also requires starting today. Content. Yes, you can tweet and post on social media or podcast. But I’d probably rank long-form content at the top.
Public long-form writing (or production in general) is arduous. The first draft is rarely perfect. Usually far from it. With the attentive eye and the cautious mind, you go back to the draft again and again until it makes sense. Sometimes, you may even get third parties to comment and revise. Long-form is like beating and refining iron until it’s ready to be made into a blade. And once it’s out, it is encased in amber. A clear record of preparation.
In closing
Pat Grady had a great line on the Invest Like the Best podcast recently. “If your value prop is unique, you should be a price setter not a price taker, meaning your gross margins should be really good. A compelling value prop is a comment on high operating margins. You shouldn’t need to spend a lot on sales and marketing. So the metrics to highlight would be good new ARR/S&M, LTV:CAC ratios, payback periods, or percent of organic to paid growth.”
In a similar way, as a venture firm, if your value prop is truly unique, you’re a price setter. You can win greater ownership and set valuation/cap prices. If your value prop is compelling, the quality of your sourcing engine should be second to none, not just from being present online, but from the super-connectors in the industry, be it other investors, top-tier founders, or subject-matter experts.
Of course, all of the above examples are only ones that recently came to mind. The purpose of this blog is for creative construction and destruction. So if you have any other examples yourself, do let me know, and I can retroactively add to this post.
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.
Dave McClure has been a Silicon Valley entrepreneur and investor for over 25 years. He has invested in hundreds of startups around the world, including 10+ IPOs and 40+ unicorns (Credit Karma, Twilio, SendGrid, Lyft, The RealReal, Talkdesk, Grab, Intercom, Canva, Udemy, Lucid, GitLab, Reddit, Stripe, Bukalapak).
Prior to launching PVC in 2019, he was the founding partner of 500 Startups, a global VC firm with $1B AUM that has invested in over 2,500 companies and 5,000 founders across 75 countries. Dave created 20 VC funds under the 500 brand and invested in 20 other VC funds around the world.
Dave began his investing career at Founders Fund where he made seed-stage investments in 40 companies, resulting in 4 unicorns and 3 IPOs. He led the Credit Karma seed round in 2009 (acq INTU, over 400X return). His $3M portfolio returned more than $200M (~65X) in under 10 years.
Before he became an investor, Dave was Director of Marketing at PayPal from 2001-2004. He was also the founder/CEO of Aslan Computing, acquired by Servinet in 1998. Dave graduated from the Johns Hopkins University (BS, Engineering / Applied Mathematics).
[00:00] Intro [03:37] How did Narnia inspire the start of Dave’s entrepreneurship? [08:32] On the brink of bankruptcy [11:42] The lesson Dave took away from his first acquisition [13:19] What did Dave do that no one else did as a marketing director? [16:06] What do most people fail to appreciate about secondaries? [22:31] The 3 bucket method for secondaries [28:46] How much do fund returners matter for secondaries? [33:01] When do LPs typically think about selling fund secondaries? [42:04] What are two questions that Dave asks to see if a portfolio is good for a secondary? [46:10] Why is it complicated if a GP wants to buy an LP’s stake? [55:03] When do most funds return 1X? 2-3X? [57:13] Underwriting VC vs PE secondaries [1:01:49] How do institutional LPs react to VC secondaries? [1:07:01] The founding story of Practical VC [1:15:36] Closing Josh Kopelman in Fund I [1:18:47] How often does the PayPal Mafia get together? [1:23:49] What’s the most expensive lessons Dave learned over the years? [1:27:38] Thank you to Alchemist Accelerator for sponsoring! [1:28:29] If you enjoyed the episode, would deeply appreciate you sharing with one other friend!
Axios’ Dan Primack recently wrote a great update on the shifting tides of institutional LPs allocating to venture. Smaller LPs often need liquidity, given limited capital inflows. And unfortunately, cannot afford to play the long game. Those with access to additional sources of capital, as well as aren’t constrained by mandatory capital outflows, tend to have deeper desires to continue allocating to venture.
In conversations with a number of LPs who write $3-10M checks, many have learned first-hand venture’s J-curve. Something these emerging LPs have underestimated in the last few years. As such, a number of foreign LPs are holding back. Moreover, there are looming concerns of currency risk. For instance, US-based LPs who have historically invested in funds domiciled outside of the US, are now accounting for currency depreciation. Ranging from 20-30%. Which means, what normally would have been a 4X net fund based in, say, Japan, is now underwritten as a 3X net. And a 10X would be an 8X.
Early liquidity is nice. But any DPI in the first few years is almost never meaningful and often gets recycled back into the fund to make new investments.
With VC being underwritten to 15-year time horizons, as a GP, you need LPs who can afford that time horizon. Yes, most funds have 10-year fund terms, with the two-year extension. But if the 2008-2012 vintages have taught us anything, it’s that GPs will ask for extensions beyond that. Simply since the best companies stay private longer. Airbnb was private for 12 years. Klaviyo, 11 years. Reddit, 19 years.
Of course, some of these companies are outliers. But the average tech company still stays private for 9-10 years. Assuming venture’s three-year deployment period, the last (hopefully great) investment out of a fund may take till Year 13 to finally achieve a large exit, not including the lock-up period too. That’s not accounting for a growing number of funds pitching four to five-year deployment periods. Excluding emerging market funds, where emerging market companies go public faster.
Moreover, companies need double the revenue they needed back in 2018 to go public. Shoutout to Tomasz Tunguz for the graphic.
To make things even more spicy, an interesting trend right now is where we see VC firms moving into PE, and PE moving into VC. At the same time, you have some large institutions who are now investing across multiple asset classes, including public markets. Consequentially, an interesting discussion commences. Should private investors hold public assets?
I was fortunate to be in an LP discussion group recently where we debated that exact question. The general consensus was no. VCs are paid to be private market investors, not public markets. Where their expertise does not lend itself well to watching market movements closely. The only exceptions are crossover funds who build out specific public markets teams. And so when an LP invests, they know exactly what they’re getting themselves into. The expectation is to return the capital back to the LPs right after the lock-up period.
But if the narrative ever changes, prepare for an even longer haul. Good thing, most LPs also agree that evergreen funds don’t make sense for venture either. But that’s a discussion for another day.
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
