John Felix is the Head of Emerging Managers at Allocate where he leads manager diligence and product innovation within the emerging manager ecosystem. Prior to joining Allocate, John worked at Bowdoin College’s Office of Investments, helping to invest the $2.8 billion endowment across all asset classes, focusing on venture capital. Prior to Bowdoin, John worked at Edgehill Endowment Partners, a $2 billion boutique OCIO. At Edgehill, John was responsible for building out the firm’s venture capital portfolio, sourcing and leading all venture fund commitments. John started his career at Washington University’s Investment Management Company as a member of the small investment team responsible for managing the university’s now $15 billion endowment. John graduated from Washington University in St. Louis with a BSBA in Finance and Entrepreneurship.
[00:00] Intro [02:35] The band that started it all [08:43] How did a band of 3 become a band of 5? [10:39] What bands served as inspiration for John? [13:37] Lessons on building teams and trust [19:48] The mischance that led John into the endowment world [22:34] What John learned under 3 different CIOs [26:20] What does concentration mean for Washington University’s endowment? [33:53] Portfolio construction perspectives at an endowment [36:26] The flaws of GP commits [41:25] How has John’s approach to emerging managers changed over the years? [44:17] What is key person risk? [47:06] One of the biggest challenges emerging managers face [50:45] Balancing over- and under-diligencing an emerging manager [56:28] What are traits that GPs think are unique but actually aren’t? [1:03:36] What makes a great cold email? [1:08:40] As a sports fan, do the highs or lows hit harder? [1:11:53] Thank you to Alchemist Accelerator for sponsoring! [1:12:54] Let me know if you enjoyed this episode with a like, comment or share!
“Being too dogmatic about things or having too black or white views will prohibit a lot of LPs from making really, really good investments.” – John Felix
“The biggest leverage on time you can get is identifying which questions are the need-to-haves versus nice-to-haves and knowing when enough work is enough.” – John Felix
In a late night conversation with my high school friend last week, I picked up a fascinating Japanese phrase from her. Koi no yokan.
The best translation of it that I found was ‘the premonition of love.’ It serves as the antithesis to the notion of love at first sight. It’s love that takes time to grow on you. Slow, but steady. A seemingly acquired, yet inevitable sense of fate. It’s a feeling that begins when you meet someone you’ll eventually fall in love with.
It’s a remarkable concept with no direct English parallel. It sits in rarified air between words like hiraeth, hyggelig, and yūgen. All of which have inextricable meaning behind a seemingly simplistic string of letters. While I’ll leave the afore-mentioned three to your own rabbit holes, as you might imagine, I’ve been having quite a field trip across the linguistic landscape.
Koi no yokan.
It’s a concept that’s often applied to the enamor between humans. This may just be me being a sacrilegious foreigner, but I find the same linguistic beauty with passions.
In many ways, my love for the emerging GP and LP world was the same. If you told me back in college, that I’d want to spend a few decades of my life obsessed over demystifying the space, I’d have called your bluff. Might have even called you bonkers.
And while I’d been hovering like a satellite around the space for a while, it wasn’t till I started writing The Non-Obvious Emerging LP Playbook that I realized there was an inkling of a yearning there. Answers only led to more questions. Each insight I learned was always paired with another punctuated with a question mark. And it honestly was a really fun exercise. I didn’t write that blogpost for anyone else. Just myself. Like a public diary that encapsulated my intellectual expedition in the LP world. Even before I published it, even before any other feedback I got for it, it felt special. All catalyzed by an opportunity to back a first-time fund manager I’d been honored to see grow as the last check in.
At that point, I still had neither committed to the idea of really being a capital allocator nor to the promise of more of such content.
And when that blogpost finally saw daylight, and a number of readers responded in kind, a tenured investor asked if I was going to write a book. It seemed only fitting that a non-fiction 200-page book be the successor to the 12,500 word blogpost. So pen met paper.
I revisited old and forged new relationships off the momentum of the blogpost. And around 80 pages into the manuscript, I ran out of things to write. I didn’t know how to continue. It felt both lacking and comprehensive at the same time. I could add in more examples. Case studies. Or just superfluous language. The equivalent of turning “my dad” into “my wife’s father-in-law.” The latter of which I swore to myself I wouldn’t do.
So I stopped.
Put it aside. And went on with the rest of my life.
But time and time again, I’d find myself staring at the ceiling at night, journaling, or writing on my whiteboard in the shower about the afore-mentioned topics. It became borderline annoying that my mind kept circling back to it and I was doing nothing about it.
So frick that. As I once learned from Max Nussenbaum, who I got to work with sooner after, the fastest way to test out if there’s a market for your ideas AND if one’s interests are sustained across longer periods of time is to just write about it. And I did. Here, here, here, andmore.
At one point, my buddy Erik asked if I was going to start a podcast. At first, I dismissed the idea. Didn’t think I had the skillset or the personality for one. But man, I lost even more sleep in the ensuing weeks after he seeded the idea in my head. And so I started a podcast. (Which holy hell, I can’t wait to show you Season 3 on July 1st)
I realized much later, probably a year after I stopped writing the book, that the reason I couldn’t write anymore, despite asking so many really smart LPs for help, wasn’t that there was nothing more to share, there was still a lot… Hell, even each family office had a strategy so unlike the next. And as the saying goes, if you know one family office, you really only know one family office. So no, it wasn’t because there was nothing else to write. In one world, I could have just written an encyclopedia of strategies. It was that there was so much that had yet to be written, ever, about allocating into emerging managers.
Venture as an asset class was not the Wild West, still an alternative and still risky, but there have been predecessors who’ve productized the practice. But allocating to Fund I’s and II’s without proof of a track record was a horizon most had yet to cross.
Hell, I wrote a LinkedIn post just yesterday on how I think about evaluating Fund I track records without relying on TVPI, DPI, and IRR. And why I think more funds of funds should exist.
Simply put and in summary, there’s a complexity premium on not just venture capital, but specifically on evaluating Fund Is and IIs. And I don’t mean the big firm spinouts who have a portable track record. I mean the real folks who are truly starting to build a firm (not just a fund) for the first time.
I don’t have all the answers. Sure, as hell, I hope to have more in the near future. But I’m ridiculously excited to find answers (and more nuanced questions) — putting science to art — as an emerging LP.
If you couldn’t tell yet… I think I’m in love.
And if you’re interested, I’d love to have you join me on this ride.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
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.
Recently I’ve been hearing a lot of power law this, power law that. And you guessed right, that’s VC and LP talk. Definitely not founder vocabulary. Simply, that 20% of inputs lead to 80% of outputs. For instance, 20% of investments yield 80% of the returns.
Along a similar vein… what about questions? What 20% of questions lead to 80% of answers you need to make a decision? Or help you get 80% of the way to conviction in a deal?
‘Cause really, every question after those delivers only marginal and diminishing returns. And too much so, then you end up just wasting the founder’s or GP’s time. As the late Don Valentineonce said, “[VC] is all about figuring out which questions are the right questions to ask, and since we don’t have a clue what the right answer is, we’re very interested in the process by which the entrepreneur get to the conclusion that he offers.”
While I can’t speak for everyone, here are the questions that help me get to 80% conviction. For emerging GPs.
I’m going to exclude “What is your fund strategy?” Because you should have either asked this at the beginning or found out before the meeting. This question informs if you should even take the meeting in the first place. Is it a fit for what you’re looking for or not? There, as one would expect, you’d be looking into fund size, vertical, portfolio size, and stage largely. Simple, but necessary. At least to not waste anyone’s time from the get go.
Where are you at as a GP by Fund III? What does Fund I and II look like by Fund III?
Discipline. In the first 4 years of a fund, you’re evaluated on nothing else except for the discipline and the prepared mind that you have going in. All the small and early DPI and TVPI mean close to nothing. And it’s far too early for a GP to fall into their respective quartile. In other words, Fund I is selling that promise. The prepared mind. Fund II is selling Fund I’s strategy and discipline. Fund III, you’re selling the returns on Fund I.
Vision. Is this GP thinking about institutionalizing a firm versus just a fund? How are they thinking about creating processes and repeatability into their model? How do they think about succession and talent? And sometimes I go a few steps further. What does Fund V look like? And what does the steady state of your fund strategy look like?
What value do you bring to your portfolio companies?
This is going to help with reference calls and for you to fact check if an investor actually brings that kind of value to their portfolio companies. So, in effect, the question to portfolio companies would be: How has X investor helped you in your journey?
On the flip side, even during those reference calls, I like asking: Would you take their check if they doubled their ownership? And for me to figure out how high can they take their ownership in a company before the check is no longer worth it. There are some investors who are phenomenal $250K pre-seed/seed checks for 2.5-5% ownership (other times less), but not worth their value for $2-3M checks for the same stages. To me, that’s indicative of where the market thinks GP-market fit is at.
I also love the line of questioning that Eric Bahn once taught me. “How would you rate this GP on a scale of 1 to 10?” Oftentimes, founders will give them a rating of 6, 7, 8, or if you’re lucky 9. And the follow up question then becomes, “What would get this investor to a 10?” And that’s where meaty parts are.
Of course, it’s important to do this exercise a few times, especially with the top performers in their portfolio to truly have a decent benchmark. And the ones that didn’t do so well. After all, our brand is made by our winners. And our reputation is made by those that didn’t.
In the trifecta of sourcing, picking, and winning, this is how GPs win deals.
How do you resolve conflict or disagreement in the partnership?
This is really prescient in a partnership. Same as a co-foundership. If someone says, we never disagree, I’m running fast in the other direction. Everyone disagrees and has conflicts. Even twins and best friends do. If you don’t, you either have been sweeping things under the rug or one (or both or all) of you doesn’t care enough to give a shit. Because if you give a damn, you’re gonna have opinions. And not all humans have the same opinions. If everyone does, realistically, we only need one of you.
Hell, Jaclyn Freeman Hester even goes a step further and asks, How would you fire your partner?
Jaclyn on firing partners and team risk
Personally I think that last question yields interesting results and thought exercises, but lower on my totem pole (or higher if you want to be culturally accurate) of questions I need answers to in the initial meetings.
How are you finding companies? How are you building your pipeline?
This is always a question I get to, but especially valuable, when I ask it to spinouts. Building a repeatable and scalable sourcing pipeline is one of the cruxes of being a great fund manager. But in the age when a lot of LPs are shifting their focus to spinouts from top-tier funds, it’s an important reminder that (a) not all spinouts are created equal, and (b) most often, I find spinouts who rely largely on their existing “brand” and “network” without being able to quantify the pillars of it and how it’s repeatable.
For (a), a GP spinning out is evaluated differently than a partner or a junior investment member. A GP is one who manages the LP relationships, and knows intimately the value of what goes in an LPA, on top of her/his investing prowess. And the further you go down the food chain, the less visibility one gets of the end to end process. In many ways, the associates and analysts spinning out need the most help, but are also most willing to hustle.
Which brings me to (b). Most spinouts rely on the infrastructure and brand of their previous firm, and once they’ve left, they lose that brand within a year’s time. Meaning if they don’t find a way or have an existing way to continue to build deal flow, oftentimes, they’ll be left with the leftovers on the venture table. This question, for me, gives me a sense of whether an investor is a lean-in investor or a lean-back investor. The devil’s in the details.
What are the top 3 reasons I shouldn’t invest?
This is a test to see how much self-awareness a founder/GP has. The most dangerous answer is saying “There are no reasons not to invest.” There are always reasons not to. The question is, are you aware of them? And can you prioritize which risks to de-risk first?
In many ways, I think pitching a Fund I as illustrating the minimum viable assumption you need to get to the minimum viable product. And Fund II is getting to the minimum lovable strategy (by founders and other investors in the ecosystem). And with anything that is minimally viable, there are a bunch of holes in it.
Another way to say the above is also, “If halfway through the fund we realize the fund isn’t working, what is the most likely reason why?”
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 may very much be the hill I end up dying on as an angel. I also realize that the title of the blogpost itself is ionically charged. But it’s something I feel strongly about.
Two caveats.
One, this is going to be one of my more strongly worded blogposts. I don’t write many of these. It doesn’t give me joy to “call” people out. If you’re a reader to this blog for the more mild-mannered Cup of Zhou, I’ll see you next week. 🙂
Let’s just say I’m writing this out of frustration after chatting with a founder who hit all the below red flags. But more importantly, frustration at myself for not recognizing the below a mile away when I took the meeting. And the opening 2 questions for that meeting was can you share what you do? and what do you invest in? Both of which are quite evident on my LinkedIn. Moreover the cold outreach came via LinkedIn.
Two, I’m a small check angel. And this may not apply if you write north of a $100K angel check or a $250K LP check. You’re likely also excluded from this hill I’ll die on if you don’t have the network that would alert you on deals on a regular basis.
That said, if you’re a small check investor like me AND you have a decent network, any founder who doesn’t know exactly why they want you on the cap table outside of money is probably not a founder worth your time.
Why?
To them, you’re just another check, and not THE check. Whatever wrapper they put on things, you’re dumb money to them. Now, it’s not about feeling self-important. In fact, don’t delude yourself on your importance. It’s about being valuable, outside of the money. The early stages of company-building are so crucial that you really need all hands rowing in the same direction. Any hands that are idle, or worse, rowing in the opposite direction, is a waste of time, attention and resources.
They don’t know what they want. They don’t know the critical needs of the business. Is it talent? Is it getting to $1M ARR and developing a sales strategy? Is it scaling past product-market fit? Is it finding product-market fit? And because they don’t, they don’t know what they need help in. And any non-surgical answer, including terms relative to broad strokes, is a dud.
And in many ways, because of the above reasons, you’re wasting your dollar. The best founders are surgical and intentional to a fault. They’re also some of the best salespeople in the world. And they will make you feel like you’re the most important person in the world (whether actually true or not, but sometimes, even that doesn’t really matter). Because if they can win you over, they have a great batting average of winning key customers over.
FYI, also probably not worth your time if they:
Say you specialize in XX industry is not enough. Anyone can guess that at a glance at your LinkedIn. Even more so, if you’ve made it explicit.
Spend more time pitching to you than asking you questions to understand your values and what you’re interested in. They’re more interested in what comes out of their mouth than by how much reaches your ears.
Say you’re valuable for intros you can make. LinkedIn doesn’t tell people the strength of your first degree connections. For better or worse, I’m connected with a lot of people. Product of me being a bit too liberal with inbound connections early on. But it doesn’t mean I know them all equally as well. In fact, intros for a founder as an investor are table stakes. You must either be best friends with key decision makers/customers or downstream investors, or it’s really not as useful. And that only comes out if the founder spends time getting to know you, as listed in the second point above.
Ever since I added “Angel investor” to my LinkedIn profile, I’ve received a lot of noise. Quantity of deal flow went up by maybe 10-20 per week (and some weeks where I post something or get tagged in something that gets 5K+ impressions, that inbound deal flow from LinkedIn doubles if not more). But I’d say 95% of that are deals I would never invest in. Either since it’s out of scope, stage, check size, or just type of founder. Which at some point, when I remember to and I’m not typing this on my little 6×3 inch screen, I’ll have to redact that title, “Angel investor.”
Deal flow has become easy. But easy doesn’t mean good. The truth is, I’d rather mean a lot to a few than a little to a lot people.
And by the way, the same is true, if you’re a small check LP.
At the end of the day, as a founder (or emerging GP), it’s about finding your early believers. Those who choose to stand by you not just because everything’s going up and to the right. But those who will stand by you when shit hits the fan.
I was watching the latest episode of Hot Ones (yes, this is my guilty pleasure), where Sean is interviewing Will Smith, and Will shares that there are three kinds of friends in your life that you call at 3AM.
One kind of friend looks at the phone and pretends to be asleep.
A second kind of friend that picks up the phone that makes you feel bad for being in trouble.
And the third kind is putting their pants on while they’re answering the phone.
You want the third kind.
It also harkens back to the same conversationAakar, Ho, Vignesh, and I had two weeks ago. Believing comes from faith. And faith comes not just from where you are today, but where you will go. And that is established on Day 1.
To get early believers, you have to show you care. You have to give (even if it means your time, attention, and/or enthusiasm/interest), before you get. That is as true for investors as it is for customers.
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.
Last week, I was chatting with Maya from Spice Capital. And in part of our conversation, she said that the advice she gives to folks looking to break into VC is that they should study late-stage founders, so that they know what excellence and quality looks like.
And I wholeheartedly agree. To get a bit more surgical, for anyone looking to break into VC, study founders who’ve gotten to at least a Series C round. And not only that, if you can, reach out to founders who’ve hit at least Series C, with 8- to 9-figure ARR from EACH set of vintage years. From the bull run of 2020-2021 to the growth periods of 2012-2019 to the GFC to the dot com boom and crash.
If you were to only take one vintage, you have a skewed view of what “great” looks like. But to sample across the eras allows you to pattern match with a greater and less-biased sample size. And instead of focusing on what changed in each era, focus on what hasn’t changed.
To the average person who’s looking to break into VC without a network, aka 99.9% of the world, myself and Maya included when we first did, cold emails and coffee chat asks will only get you so far. In fact, more often than not, you’ll either be ghosted or rejected. So, get creative.
If it helps, here are some ideas that may kindle the fire:
Start a podcast. I don’t care if you only have an audience of one. Start it. At some point it’ll grow. But giving people a platform to share their advice is better than having one isolated conversation. After all, that’s how Harry Stebbings started.
Or a newsletter or a blog. Vis a vis, Lenny Rachitsky or Packy McCormick. Hell, even a book, like Paige Doherty did. Although the last of which is a lot more work, but tends to be have more evergreen content.
Get into investment banking or tech/management consulting. This isn’t new. But if you get the chance to work with pre-IPO companies and take them public, there is immense value in seeing excellence in play.
Host events. While I personally like intimate dinners, there is also value from hosting large networking events, fireside chats, and panels. Like Maya, or Jonathan Chang, or David Ongchoco.
I reread PG’s blogpost on the cities and ambition recently thanks to a good friend of mine down in San Diego. And in it, there’s a specific phrase that caught my eye, “the quality of eavesdropping.” A phrase that has since worked its way into my own rotation. If I were to tie the above examples thematically together, it’s that the quality of eavesdropping is really high. At events, and in consulting, you’re around the buzz of talent. And the jazz of inspiration. When tuning into a podcast, one is often multitasking. Driving, exercising, walking, cooking, you name it. And one might say it is one of the best forms of passive learning out there.
Meriam Webster defines eavesdropping as the act of secretly listening to something private. George Loewenstein says one of the triggers to curiosity is access to information known to others. Private information, in other words, information with an element of exclusivity, fits just that. And as such, while doing the above is useful and helpful to you, it is just as helpful to everyone else. To a busy individual, that just might make her attendance worth it.
All that said, know that if you forever look to lagging indicators of success, you will always be one step behind. If not more. As long as you are tracking successful founders, their companies and their key talent (early employees or key executives), there will be others who will out-execute you. Their networks are larger. And stronger. Especially in that regard.
As someone young, or someone new to an industry, your best bet is to take market risk, not execution risk. Another perspective that both Maya and I share. Betting on new markets mean you are starting off at the same start line as everyone else is. If you can’t get home field advantage, play in a field no one’s played in before.
So after doing the above, and learning from the best, draw your conclusions. And graduate to a new market. But also, beware of the potholes pattern recognition creates.
If it may help, at least for me, it’s useful to remember that excellence is everywhere. And someone who is both ambitious and has a track record for fulfilling promises, is bound to go far. For the latter, it’s especially important to fulfill promises to oneself. The more impossible it is to that individual at that point in time, the better. Whether it was to be an Olympian, or asking their high school crush to prom. Or as Aram Verdiyan calls it “distance travelled.“
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Beezer Clarkson 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.
Chris Douvos founded Ahoy Capital in 2018 to build an intentionally right-sized firm that could pursue investment excellence while prizing a spirit of partnership with all of its constituencies. A pioneering investor in the micro-VC movement, Chris has been a fixture in venture capital for nearly two decades. Prior to Ahoy Capital, Chris spearheaded investment efforts at Venture Investment Associates, and The Investment Fund for Foundations. He learned the craft of illiquid investing at Princeton University’s endowment. Chris earned his B.A. with Distinction from Yale College in 1994 and an M.B.A. from Yale School of Management in 2001.
You can find Chris and Beezer on their socials here.
[00:00] Intro [03:07] Beezer’s childhood dream [04:29] How Chris was let go from his $4.15 job at Yale [08:09] Concentrated vs diversified portfolios [09:30] First fund that Beezer and Chris invested [11:42] Funds that CD and Beezer passed on and regret [16:07] Favorite term in the LPA? Or not? [19:18] What piece of advice did a GP in their portfolio share with them? [23:15] What’s something that Beezer/CD said to a GP that they regret saying? [28:06] What’s the most interesting fund model they’ve seen to date? [33:20] What fund invested in 2020-2021 inflated valuations that they’ve reupped on? [40:18] Events that they went to once but never again [44:24] Life lessons from CD & Beezer [54:02] The founding story of Open LP [55:02] Thank you to Alchemist Accelerator for sponsoring! [57:58] If you learned something new in this episode, it would mean a lot if you could drop a like, comment or share it with your friends!
Tom Landry (who’s actually the correct attribution for the quote: “A coach is someone who tells you what you don’t want to hear, who has you see what you don’t want to see, so you can be who you have always known you could be.”)
“If you’re overly concentrated, you better be damn good at your job ‘cause you just raised the bar too high.” – Beezer Clarkson
“Conviction drives concentration, and that you should be so concentrated as to be uncomfortable because otherwise you’re de-worsified, not diversified.” – Chris Douvos
“[David Marquardt] said, ‘You know what? You’re a well-trained institutional investor. And your decision was precisely right and exactly wrong.’ And sometimes that happens. In this business, sometimes good decisions have bad outcomes and bad decisions have good outcomes.” – Chris Douvos
“Sometimes I treat GPs like I treat my teenage children which is: Every word out of a teenager’s mouth is probably a lie designed to make them look better or to hide some malfeasance.” – Chris Douvos
“May we be blessed by a weak benchmark.” – David Swensen
“Miller Motorcars doesn’t accept relative performance for least payments on your Lamborghini.” – Chris Douvos (citing hedge fund managers)
“At the end of the day, the return on an asset is a function of the price you paid for it and the capital it consumes.” – Chris Douvos
At the end of last week, an LP told me something quite provocative. That right now in 2024, we’re in a low-risk environment.
And in all fairness, I thought he was completely bonkers. Fear is high. Investments have slowed their pace, especially in the private markets. Markets have really yet to recover. Some believe we’ve hit the bottom and will bounce around the bottom a few times. Others think we’ve yet to see the worst of it. Hell, just yesterday, Eric Bahn tweeted the below:
These articles were published by the same company within hours of each other… pic.twitter.com/k9TPc2Si5a
Wars are raging across the world. Currency is fluctuating on a global scale. Hell, even for the average person, prices are going up at a rate unfamiliar to most people’s memory.
But his next line really made me pause. “You’re right. There’s geopolitical risk, currency risk, market risk, and valuation/pricing risk. And we can identify every single one of them. In fact, the actual risk of investing today is really low, but the perceived risk is really high. Risk is highest when you can’t tell what the risk is. That was 2020 and 2021, when you couldn’t put a finger on what kinds of risk were out there.”
And that really stuck with me. To underscore again, risk is highest when you can’t tell what the risk is.
And so paved way for this blogpost. Albeit, that last line was the punchline.
He later told me that the concept wasn’t original, but that its origin traces its way back to Ken Moelis. Regardless of the attribution, it’s worth doing a double take on.
There’s that famous Peter Drucker line, “You can’t manage what you don’t measure.” And in many ways, it is just as true for risk as it is for tasks and KPIs and OKRs.
The family office for a well-known luxury brand once told me that they like to pay the complexity premium on esoteric alternatives. To them, venture is one of those esoteric alternatives. In addition, they’re also happy to overpay during bull markets. Access to a volatile and nascent asset class, to them, deserves a premium.
But taking a step back, there may be more wisdom to it than I initially thought. In bear markets, when the risk is real and discrete, there is no complexity premium to pay. After all, you can begin to manage what you do measure. On the flip side, in a bull market, where no one really knows who will win or what the macro risks are, a premium can be and often is paid as a bet on a company’s future and insurance against a margin of error that is hard to define.
Of course, one can say that the premium is often hype-driven instead of risk-driven. But really, hype is just long-term risk donned with a new set of clothes. A short-term luxury with a buy-now-pay-later tag that comes in quarterly installments of belt-tightening and regret.
While I personally have always believed that as an investor it’s better to be disciplined and to “dollar cost average” across vintages vis a vis time diversification, there are several great investors who believe price is a trap. At the top of my head, Peter Fenton and Keith Rabois. The latter shared his thoughts earlier this year on why. At least for seed and Series A. That in summary, there is no limit on how much you pay for a great company at the seed and Series A (likely the pre-seed as well) that won’t return you multiple-fold back. And that debates on price really are leading indicators on conviction or lack thereof.
The last part of which I agree to an extent.
All that to say, I think a useful exercise to go through whenever making a major (investment) decision is to take out a notepad and write down all the risks you can think of. If you can think of it, you can probably find a way to hedge against it. On the flip side, if you’re about to make a decision and you can’t think of any risks, that’s probably the biggest risk you’ll take.
As my mom told me since I was a kid, “There’s no such thing as a free lunch.”
But if you do come up with a good list, and the world around you is still scared, and you think there might be something special in the opportunity in front of you, sometimes it pays to be bullish when others are bearish.
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.
First off, my lizard brain that optimizes for immediate gratification thought “A Jerk’s Guide to Being Kind” would be a fun title. Clickbait-y (kinda). Great for SEO. So I used that as my prompt for this public journal entry. 🙂
So, if you didn’t come for a public apology and how I say no, I’ll see you in next week’s blogpost.
Secondly, I was reading Chris Neumann’s blogpost this week, aptly named “The Beginner VC’s Guide to Not Being a Jerk.” And realized, holy frick, I’m a jerk. In it, he describes five things that VCs do that come off as jerkish.
Don’t Use Possessive Adjectives
Don’t Multitask When a Founder is Pitching
Don’t Badmouth Founders
Don’t Mansplain
Don’t Ghost Founders
And of the five above, I know I’m an offender of three of the above. Using possessive adjectives. Multitasking. Ghosting. Probably in that order from most frequent to least frequent. (Sorry, Chris. Sorry to founders I’ve done this to.) The first two I don’t do intentionally, nor do I do the either of them often.
Not sure if it makes too much of a difference, but rather than say “my company” or “our companies,” I do say “our portfolio companies.” Just with one extra word in there. Occasionally, will let it slip when I’m trying to shorten the sentence I’m saying.
I know I’m more prone to multi-task when I’m not the only investor in the room, and definitely when I’m not the primary investor. Again, don’t do it often, but it happens. And I never do so when I’m the only other person in that conversation. 99% of the time I do let the founders and GPs I talk to know that I’m just taking notes of our conversation. Personally don’t use the AI notetakers, but that’s a discussion for another day.
And ghosting. My goal is to get to inbox zero every day. And I really do my best not to ghost. But three things will always happen:
Some email or text always ends up slipping through my inbox. Either it goes in spam, or during certain days, I’m bombarded with hundreds of emails and it slips through the cracks. And I do give every founder and GP who pitch me the right to re-surface past emails if it does slip through.
If the email or message seems like it came out of an automation or mail merge AND I’m not interested, I do let it drop. I read EVERY email for sure. But if that email looks like the same one that you send to every investor, those have been going straight into the archives more and more. That also means that some emails just read like it’s an automated email even if it doesn’t, and it slips through.
There’s a shortlist of people who have abused my old personal policy of responding to every email I get. And so for those people, I’m not sorry if I do ghost you. That said, it’s a pretty short list of people (probably 30-40 people as of now).
And lastly, well, I’ve made founders pitching me cry. Not something to brag about. But in sharing what I thought was honest feedback, I made tears flow.
So, in summary, I’m probably a jerk.
In my mind, a jerk is someone who prioritizes their own beliefs and priorities to the point that they either intentionally ignore or severely de-prioritize others’. Although I try my best not to ignore what other might want or need, but I do often prioritize my own. So to add on to all the above, I’m sharing some situations where my jerkiness comes out and what I say in those moments.
When having tough conversations
I actually learned this while listening to Lenny’s podcast with Matt Mochary. When I need to let someone go. When I need to call a friend out on their bad behavior. Or when my partner and I get into a fight. “Preface hard conversations with: This is going to be a difficult conversation. Are you ready?”
In addition, I also preface with how long I think the discussion will take. “May I have thirty minutes of your undivided attention?” And what the topic will be on. No point in blindsiding the other person.
It helps set the stage. And if the other person needs more time, they have the option to back out. Moreover, all tough conversations are 1:1 conversations. At least for me, even if it relates to many, I start notifying them all on a 1:1 basis.
When trying to leave a conversation at an event
This one also isn’t original. I learnt from a friend of mine who is far more eloquent than I am. Not all conversations at events are created equal. And sometimes, at an event, especially a networking event, my goal is to say hi to the event host or to talk to someone else on the floor. And in between, I may find myself in another serendipitous. Case in point, yesterday, I ended up meeting a founder who sold his last company for $500M exit to a large Fortune 50 company in the parking lot and who was figuring out his next thing. Serendipitous. And super fun, but I was going to be royally late for another event if I stayed chatting in the parking lot.
So, when I need to leave a conversation, instead of excusing myself to go to the bathroom or get more food, I’ve learned to say, “I’d love to ask you one last thing that I’d beat myself up tonight if I didn’t ask before I need to go say hi to XXX.”
One, it timeboxes the next few minutes of the conversation. Two, I’m still interested in the individual and I want them to get the last word before I head out.
For 1:1 conversations
I usually let people know at the very beginning of the conversation that I have a “hard stop” at a specific time. Which 90% of the time is true. Usually another meeting. Or I have just way too much work on my plate that I need to get to.
When turning down a meeting (for now)
I wish I had more time in a day to talk to awesome people. I also wish I had more energy in a day to talk to awesome people. But unfortunately, I only have 24 hours in a day. And well, I’m an introvert. As in, I enjoy writing this blogpost you’re reading right now since 5AM in the morning than telling someone in a live conversation what I will end up writing here.
As such, if I’m interested in meeting at some point, I usually say something to the tune of: “I would love to meet, but if I do so within the next XXX weeks / months, I would have failed in my promise to the people I care about. So if you’ll allow me to be a good friend / family member / supporter of my existing projects and investments, could we revisit this in YYY weeks / months?”
Other times to save everyone’s time, since I won’t find my interest levels gravitating towards said topic, I let people know it just isn’t of interest to me in the foreseeable future, and that their luck may be better elsewhere.
When turning down an investment opportunity
This is actually something that was inspired by one of Jason Calacanis’ podcast episodes. And while there are many things I may not agree with him on, I really like the phrasing he uses to turn down founders who push back against his investment decision. And I’ve added some lines that best fit the way I talk. Which I also included this in my 99 series for investors.
“I always have to accept the possibility that I’m making a mistake. The venture business keeps me humble, but these are the benchmarks that the team and I all believe in.”
In closing
Sometimes I think it’s inevitable to appear as a jerk to some people out there. While one can try to reduce the splash damage, the truth is sometimes what you have to say may not be what the other person wants to hear or see. But as long as you hold yourself to a high degree of integrity and do so in as kind of a way as you can, I think that’s all that really matters.
Often times, I do believe it’s more important to be kind than nice. I hope the above helps.
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.
Jaclyn Freeman Hester is a Partner at Foundry. She joined in 2016 with a passion for supporting the next generation of entrepreneurs and investors. Jaclyn leads direct investments in early-stage companies, often collaborating with Foundry’s partner funds. She loves working closely with founders to solve hard problems and think about the human elements of business. She invests across B2B and consumer companies that exhibit strong end-user empathy and use technology to empower individuals, unlock potential, and improve experiences.
Jaclyn helped launch Foundry’s partner fund strategy, building the portfolio to nearly 50 managers. Bringing her unique GP + LP perspective, Jaclyn has become a go-to sounding board for emerging VCs.
Jaclyn first fell in love with entrepreneurship while earning her JD/MBA at CU Boulder (Go Buffs!). There, she served as Executive Director of Startup Colorado, where she got to know Foundry and the incredible Boulder/Denver startup community the firm helped catalyze. In her brief stint as a practicing attorney, Jaclyn advised clients in M&A transactions and early-stage financings. She also witnessed the founder journey first-hand, working closely with her husband and his family as they built a B2B SaaS company, FareHarbor (acquired by BKNG).
Jaclyn loves the Boulder lifestyle, but her heart will always be on the East Coast, having grown up a New England “beach kid.” She is the proud mother of three humans and three dogs and is a blue-groomer-on-a-sunny-day skier and 9-hole golfer. In her glimpses of free time, you can find Jaclyn enjoying live music, especially at Red Rocks and in Telluride, two of the most magical places in the world.
[00:00] Intro [03:24] The significance of Kara Nortman in Jaclyn’s life [13:59] Lesson on recognizing effort from Dan Scheinman, Board Member at Zoom [18:27] The question to disarm GPs learned from Jonathon Triest at Ludlow Ventures [23:37] The differences between being a board member and an LPAC member [32:04] Turnover within institutional LPs [33:58] The telltale signs of team risk in a partnership [41:25] How to answer “How do you fire your partner?” [44:05] Foundry’s portfolio construction [53:22] What makes Lan Xuezhao at Basis Set so special? [59:59] What does Shark Tank get right about venture? [1:03:37] Jaclyn’s Gorilla Glue story [1:05:51] What keeps Jaclyn humble today? [1:12:11] What will Jaclyn do after Foundry’s last fund? [1:16:28] Jaclyn’s closing thought for LPs [1:18:10] Thank you to Alchemist Accelerator for sponsoring! [1:20:46] If you enjoyed this episode, a like, a comment, a share will go a long way!
I’ve been doing some thinking as of late in and out of the shower. In conversations. In reexamining my own investment thesis. And changing it as a function of scar tissue and tears of joy. As such, sharing a few shower thoughts below that for the below, might be better described as a tweet than in a long-form blogpost.
About founders
A community or 1000 true fans built without big brands and logos is far more impressive than a community built by leveraging someone else’s brands.
20 years of experience is more impressive than 20 one-year experiences for deeply technical problems.
20 one-year experiences is more impressive than 20 years of experience for cultural (consumer) problems.
Great founders don’t delegate understanding. Senior execs aren’t hired until founders themselves prove out the playbook.
In the age of AI, new information is more valuable than remixes of old. Standing out is more important than fitting in. The latter of which will be replaced with by AI given the wealth of data out there. (Ironically, this line is inspired by old conversations plus Sriram Krishnan’s blogpost)
Revenue matters more than traffic for consumer products since AI bots can now mimic simple digital human behavior.
Silicon Valley / SF Bay Area is strong because of the high quality of eavesdropping. There are so many ideas being thrown around in coffee shops. It’s quite easy to stumble across a world-class lesson without paying $2000 for a conference ticket. Things sure have changed since ’08.
About investors
In early stage venture, debates on price is a lagging indicator of conviction, or more so, lack thereof.
Price also matters a lot more for big funds than small funds.
Price also matters more for Series B+ funds.
Will caveat that there’s an ocean of difference between $10M and $25M valuation. But it’s semantics between $10M and $12M valuation. How big your slice of the pie is doesn’t matter if the pie doesn’t grow.
Not saying that it’s correlated, but it does remind me of a Kissinger quote: “The reason that university politics is so vicious is because stakes are so small.”
The reasons Fund I’s and II’s outperform are likely:
Chips on shoulders mean they hustle more to find the best deals. They have to search where big funds aren’t or come in sooner than big funds do.
Small fund size is easier to return than a larger fund size.
Rarely do they have ownership targets (nor do they need significant ownership to return the fund). Meaning they’re collaborative and friendly on the cap table, aka with most other investors, especially big lead investors.
Price matters less. Big funds really have to play the price game a little bit more since (1) likely to be investing in multiple stages with reserves, and price matters more past the Series A than before, and (2) they’re constrained by check size, ownership targets, and therefore price in order to still have a fund returner.
“Judge me on how good my good ideas are, not how bad my bad ideas are.” — Ben Affleck when writing Good Will Hunting. A lot of being a VC is like that. Hell, a lot of being a founder is like that.
We like to cite the power law a lot. Where 20% of our investments account for 80% of our returns. But if we were to apply that line of thinking two more times. Aka 4% (20 x 20%) of our investments account for 64% of our returns. Then 0.8% account for 51.2% of our returns. If you really think about it, if you invest in 100 companies, we see in a lot of great portfolios where a single investment return more than 50% of the historical returns.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
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.
