Navigating Venture Capital Challenges | 10min snip from The Twenty Minute VC (20VC): Venture Capital | Startup Funding

Speaker 1
I
Speaker 2
think Founders Fund, having a moment in the sun, and then just index consistency of DPI.
Speaker 1
Yes.
Speaker 2
Right. We're going to do a quick fire round. Okay. So what do others not know that you know to be true?
Speaker 1
Okay. I'm going to kind of take a sideways answer to this. I have always really just grates me when people say some things can't be done. I hate being told something's not possible and that you can't do it just because someone hasn't done it before doesn't mean you can't do it. It just means it's harder. You are a case in point on this, right? I mean, what you've been taking to the market with the intermix of media and venture hasn't been done before. People have tried it in different respects but haven't nailed it the way you have it. I'm sure millions of people told you it couldn't be done. It just takes hard work.
Speaker 2
What would you change about the world of LPs? I
Speaker 1
wish the LPA was better. That's such a small little... The LPA was better? Was better. It's so hard to read. It's so complicated. It's so not useful. It's supposed to be a tool to understand how our relationship works. And it's just a big legal pile of documents. But I think some of these things just end up being logjams in the ecosystem. And the point is, that's just not the point. If you get to that place, it's a big mess anyways.
Speaker 2
What would you guys change in the world of managers most? The
Speaker 1
great managers understand this. Who they are as an investor and how they build their firm is so specific to them. And then you have to have that. I really do think there has to be that interplay of the two of them for it to become a great firm. And I think a lot of people don't realize that. And they think it's just an easy business to pop up. And it can be. But then that's a smaller business. And it's not necessarily going to become a long, enduring firm.
Speaker 2
You said pop up. I just think everyone misunderstands just how long this is. Everyone says 10 years. It's
Speaker 1
not
Speaker 2
10 years. It's like 15, 20. And
Speaker 1
that's just one fund. Yeah. Let's be clear. That's one fund. I find it actually a bit mind boggling that people, I mean, if you want to have a pop-up business, do something direct, because even then it's not sure. A job can be four or five years. You can try different things with the way compensation and equity structures work. But becoming a GP, yeah, it is. Assuming you're not doing off Angelus and it's not a small endeavor, if you're trying to bring in other people and other LPs, it's a very wide financial
Speaker 2
services business. What's the biggest manager miss you've had? Oh,
Speaker 1
this kills me. So I passed on the initialized fund one because we had just launched. Yes, I know. I know. It was bad. But the reason-
Speaker 2
300.
Speaker 1
I know. I know. No, trust me. I know. But we were Series A and we were looking for 75 to $200 million fund sizes and they were sub 10 in seats. So it was outside of scope. I get it. It was outside of scope. It was way outside of scope. It was early. So doing a couple of things being super exceptions early on. But to the point of, I'm going to quote Nikhil from your last podcast with him from Footwork, exceptions should be made for exceptional people. And yes, to this day, that always sticks in my head. What's
Speaker 2
the strongest belief you had, which turned out to be wrong? We've
Speaker 1
definitely tested a bunch of hypotheses and different things. And I keep going back to this, but it's so clear in early stage if you're not taking a big swing for the fence, which doesn't mean saying taking like ridiculous, I haven't thought about it risks, right? But you just have a lot of people that think that they can do sort of smaller investments. Like I call the growth equity mindset in a smaller earlier fund, which probably can work in some scenarios and it works for some LPs that want to do direct investments. I just don't think that's where you're going to get the long-term
Speaker 2
performance. If you're investing in a sub $50 million fund, what's a good performance?
Speaker 1
If it's seed, we're going to try to underwrite it to a 5X.
Speaker 2
Because people throw out big numbers. You often hear that, I'm definitely going to be a 10X. You know how freaking hard it is to a 10X. There's
Speaker 1
so many fewer of those than people thought. I appreciate because TVPI looked bonkers. The last few years, people thought it looked different. But I think maybe this is the value of being old. I mean, I've been playing in venture in some form or another since 2000, and I was doing emerging markets in 94 for project finance. And I can tell you it is
Speaker 2
hard. Who's the most consistent DPI returns?
Speaker 1
Oh, well, you'd have to pull into so many different books. But I think the numbers will tell you if you ask different LPs, if you can get three or four funds in a row with strong DPI, that is world class. Usually there's a fund or two which has a tougher time. Like, no surprise, 2021 might be a tough vintage.
Speaker 2
Someone's told me that LPs invest for a banger of a fund, a meh fund, and they're aware that there's going to be a dog fund. That's
Speaker 1
not untrue, because there's sometimes things just mess. But if there's consistency elsewhere, there's consistency of theme, consistency of thinking, consistency of team, just going back and asking different LPs in their portfolios, it's very hard to have three or four funds in a row that'll be called a 3X.
Speaker 2
Unless you really fuck up, do you still have three funds? Does that rule still hold true? Or do you think people are much more fund by fund dependent?
Speaker 1
Oh, to our conversation before, institutional LPs, this is why they don't make a lot of new bets every year is because they're looking for managers they think they can be with over multiple fund cycles. But I can tell you if you want me to digress into graduation rates. We've been looking at data going back to 1995. I was shocked at the breakage. The breakage between fund one and fund two is not every year, but averages out to be about 50%. Well, again, because you've got the law of large numbers coming in at fund one, there's so many smaller funds.
Speaker 2
And the reason for that is because these small fund LPs, often being individuals, don't scale into institutions.
Speaker 1
Yeah. Sometimes people don't realize if I'm making a personal commitment every two or three years, that can be expensive. And you might not understand that. It could be the GP themselves don't really want to do it. What was also sort of heartbreaking was the fund one to fund four on average. Again, these are averages. Some years are better. Some years are worse. It's 17 percent. So it's not a slam dunk. But even if you get to- That doesn't surprise me as much. It doesn't surprise me as much. What I think is also interesting is just if you play out fund one to fund eight, the numbers are terrible because you've got such large breakage in the early years. But even if you get to a fund four, there's still pretty significant breakage going on to other years because then performance can be seen.
Speaker 2
What's a bigger reason for funds to not make it, do you think, from fund one to fund 14 breakage and partnership breakdown or performance? Back
Speaker 1
in the day, you had three years between funds. You're talking about a decade of investing. So I think performance would be able to be being seen. And then tied into that is like strategy and all those things. And then I think team, it's very, very hard to do this because no one documents it. But you could see we ran the numbers on funds that from every year, who is the one that has gone on to raise the most vehicles, core vehicles, not all the other layered. If they went multi-strategy, we didn't track all that. AI was shocked the fund sizes didn't balloon as much as I thought they would because the dollars were going into these other growth vehicles. But you see these funds that got to fund four, five, six, and then never raised another fund. It would have to be some combination of team and track record. Maybe you did so well, you didn't want to keep going. There's a positive side of that, which is it's good. Roger
Speaker 2
Aaron. I
Speaker 1
think we should celebrate more as an industry. Amazing. It's fantastic. And it's great. And I mean, to a point about it's 15 years per fund. I mean, this is like a body of work for 30, 40 years. That is a long time to do one job. People should be allowed to stop.
Speaker 2
Do LPs mind opportunity funds?
Speaker 1
I think you have to ask each one. I'm always surprised at the different viewpoints around the room on any given opportunity fund. I know some people that do it to try to get into the core fund, segue in. They used to be, oh, the other thing we're seeing in this market is people are unstapling their funds because a number of LPs felt dragged into it to the point of, I want to support you. I'm not so excited about this other vehicle, but I want to support you, so I'll write a smaller check. But yes, I think it's a combination of things. I think that's also why fund four to seven has the same challenges. And people also, you have to bring up the next generation and people management. If you're doing deals, who in the firm is also thinking about people management and people training and all these things come into play that is much more about managing a firm than just investing. But you need to do both if you're going to be that kind of long term. Will
Speaker 2
we see Unstate plan continue, do you think?
Speaker 1
pressure to raise. They're going to try to be more LP aligned. And if folks don't want to do it, there's a couple in the market now. SUSE have very publicly tweeted about changing. It's not an opportunity fund per se, but changing out there. I think they had two funds and now they're having three. They're raising independently. So folks are looking at it and talking about it.
Speaker 2
Is this the new normal? Is this return to old? I think
Speaker 1
this feels a bit more traditional venture, which doesn't feel terrible to me. I think the industry is still healthy. I think the world's going through a bit of a rough patch. So this is not a fun time. I think we're bumping along the bottom. I think it should start coming up at some point. I don't know if Jason's right. It's back half of 24. You're right. And it's 2025. At some point, it will come back up. That's a broken
Speaker 2
clock. Like me,
Speaker 1
can we write twice a time a day?
Speaker 2
Listen, if Birkenstock's going public, maybe Jason's right. I
Speaker 1
love my Birks. I do have to say they're very comfortable. There we go. Can you talk to me about the
Speaker 2
news with CalSTRS? We mentioned it before and it's been discussed in obviously the media recently. What does that mean and what changes? Yes.
Speaker 1
So we were very excited. We announced this about two weeks ago that we've taken over the early stage venture fund mandate for CalSTRS and what this means. for folks that aren't familiar with CalSTRS, they're the world's largest educator pension fund in the world, which is pretty cool. And they've been, to their credit, running an emerging manager program now for decades. And back in the day when they started it, it was a mix of private equity, some healthcare, some venture. And going forward, they now picked us to work with them on the early stage venture fund, and they have pivoted to focus on specialized managers and we're their venture specialist, which means we now are going to take their money, which we're very grateful for them trusting us with, and deploy it into US early stage venture funds, emerging. So that's funds one through three, which then is additive to our existing programs. So the answer
Speaker 2
is yes, we're deploying more. 10 years time for Visa. What would you like then? You obviously just launched CalST's new program as well. Doing this?
Speaker 1
No, this is my, this is, I know it sounds. Do you love this more than
Speaker 2
ever? Yes. Why?
Speaker 1
So I started at Sapphire 12 years ago now, and I always thought this is what I wanted to do, but then when you get into the doing of it, no, this is like my life's work. If you said to me, what else do you want to do? I used to kind of think I wanted to be Secretary of State. is so never, ever, ever happening. We tossed that idea out when I was about 24.
Speaker 2
Looked great in the movies. Looked
Speaker 1
great in the movies. I thought Madeline Albrecht, whatever, edit out the names. I thought it was a fascinating position for the U.S. government. But now, no, like I said, that was like when college. And I was like, what could I be? And then I was like, no, this is definitely about the private world. I love it. I love being an LP. I I love working with early stage managers, the emerging, the established.

20VC: Are LPs Open For Business? What Does it Take to Raise a Fund Today? How Has What LPs Want to See in Fund Investments Changed? Why Do LP Incentive Mechanisms Need to Change? Which Funds Will be Hit Hardest with Beezer Clarkson @ Sapphire Partners

The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch

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