Building relationships and staying top-of-mind with founders is crucial for accessing great deals in the competitive landscape of venture capital.
Underwriting series A funds to a 3x net multiple and seed funds to a 5x multiple is a common practice for LPs like Sapphire, involving analyzing fund construction and evaluating expected returns based on ownership stakes, valuations, and fund size.
Recycling exit proceeds back into the fund instead of distributing them to LPs allows fund managers to reinvest capital and increase the number of investments, potentially leading to stronger returns over time.
Deep dives
Importance of Proprietary Access to Deals
In the world of venture capital, having proprietary access to great deals is more important than simply having proprietary deal flow. In the past, there may have been some level of proprietary deal flow, but today the landscape has become more porous, with access to deals becoming more competitive. Gaining the trust and interest of entrepreneurs is crucial for securing the best deals, and it goes beyond just having more capital available. Investors need to demonstrate their value and understand the entrepreneur's perspective. Building relationships and staying top-of-mind with founders is a vital factor for accessing great deals.
Understanding Fund Economics and Expected Returns
Underwriting series A funds to a 3x net multiple and seed funds to a 5x multiple is a common practice for LPs like Sapphire. This approach involves analyzing the fund construction and evaluating the expected returns based on factors such as ownership stakes, valuations, and fund size. The goal is to determine the necessary exit valuations and metrics to achieve the desired return multiple. Typically, meaningful distributions and returns may not occur until around year 10 for most funds. Achieving a 1x DPI (distributions to paid-in capital) within the first five years is a positive sign, but it is not a typical expectation. The timing of distributions and overall return metrics can vary depending on the specific fund and market conditions.
Recycling and the Power of Reinvesting Capital
Recycling refers to the practice of reinvesting exit proceeds back into the fund instead of distributing them to LPs. This strategy allows fund managers to reinvest the capital and take additional shots at promising opportunities. By recycling, fund managers can maximize their invested capital, especially in the early stages of the fund's life when management fees are being deducted. This approach increases the number of investments and potential opportunities, increasing the chances of finding successful investments. Recycling helps fund managers maintain a higher level of capital deployment and potentially generate stronger returns over time.
Importance of Effective Communication in the Investment Process
Effective communication plays a pivotal role in the investment process. It is crucial for investors to clearly and convincingly present their investment thesis and arguments, even when facing skepticism. This helps explain why people should care, as investment decisions are not made unilaterally. Establishing open lines of communication with general partners (GPs) is essential, and asking relevant questions in advance fosters better teamwork. Additionally, having multiple team members involved in different aspects of the investment process allows for varied perspectives and ensures continuity in case someone is unavailable.
Portfolio Construction and Allocation Strategy
Sapphire Ventures follows a portfolio construction and allocation strategy that allocates approximately 70% to US funds, 25% to European funds, and 5% to Israeli funds. This approach is based on a combination of science and art, taking into account various factors such as the geographic distribution of venture capital activity and tech centers. The fund's focus on early-stage investments also influences the allocation strategy. Sapphire Ventures constantly evaluates and revisits the allocation percentages to ensure the productive use of invested capital. Additionally, successful recycling of capital and considering reserve allocation help optimize fund performance.
Beezer 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.
You can find Beezer on her socials here:
Twitter: https://twitter.com/beezer232
LinkedIn: https://www.linkedin.com/in/elizabethclarkson/
And huge thanks to this episode's sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters
OUTLINE:
[00:00] Intro
[02:57] Who was Beezer's first mentor?
[06:57] How did Beezer get to work with the founder of eBay?
[10:45] The strength of diverse backgrounds
[14:11] How Hustle Fund convinced Foundry Group to invest in their fund
[15:27] Why should another venture fund exist in this world?
[19:41] What does proprietary "access" to deal flow mean?
[23:53] Superpowers on the Sapphire Partners team
[25:35] How does Sapphire resolve disagreements?
[27:11] Why does entire Sapphire team meet with GPs?
[28:18] A sneak peek into Sapphire investment process
[33:34] What does Sapphire look for in a pitch deck?
[34:58] The art and science behind Sapphire's own portfolio construction
[43:37] How does Sapphire look at fund managers' portfolio construction?
[47:50] Meaningful fund metrics in the first 5-7 years of a VC fund
[52:44] How to think about recycling
[56:15] What keeps Beezer humble?
[58:22] What is an investment opportunity Beezer missed because what she didn't do?
[1:04:03] Thank you to Alchemist Accelerator for sponsoring!
[1:06:39] Legal Disclaimer
Follow David Zhou for more Superclusters content:
For podcast show notes: https://superclusters.co
Follow David Zhou's blog: https://cupofzhou.com
Follow Superclusters on Twitter: https://twitter.com/SuperclustersLP
Follow Superclusters on Instagram: https://instagram.com/super.clusters
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