Are LPs Open For Business? What Does it Take to Raise a Fund Today? How Has What LPs Want…

Thank you so much for having me. It’s awesome to be in your new office.

Well, I’m Beezer. So I manage Sapphire Partners, which is the LP strategy of Sapphire. And we invest in early stage venture funds, US, Europe, and Israel.

I would say really understand the importance of the power law, which I know sounds like a bit of a nitty gritty. And I’d gotten this advice from other LPs, which is the difference of having a power law defining company portfolio and the experience of that for the GP along with the entrepreneur, really changes the understanding of how venture works. And you really just can’t onesie twosies it to outperformance. It’s hard to walk that until you really feel it. And then you see these activities, you see the companies taking off, you see the difference in what it looks like to have that kind of a power driver in your portfolio.

You think of a growth stage portfolio, it’s not that one doesn’t wanna have a power law company and have it return a 100 x and be two to three times your your fund. It’s just much harder when you have a large fund. So a lot of those funds end up having a number of exits then end up adding up to driving performance. In a early stage fund, we’ve yet to see a fund that’s returned three or more x that does not have a company that’s returned at least one time the fund.

And that’s what I mean by, like, you can’t do the single and base hits like, oh, I got a two x on this deal. I got a three x on that deal. Those are all great to add to the portfolio. But if you don’t have a fund returner or a couple half fund returners, we haven’t seen a fund that’s hit outperformance.

LPs are like snowflakes. No two are the same. So some people do like diversification. I know some LPs that specifically look at the overlaps or the lack of overlaps between their managers, and what they really are trying to do is they cover the seed market for exactly this point. And they wanna make sure if they catch something, it happens. And then what the LP does is sort of a look through on the math and says, well, what if I’m putting x dollars into this fund and they’re putting y dollars into this company, what needs to be true for those companies to be productive on my side?

And I know other people that say, hey, I think this area is really interesting, so I’m fine if I’ve got two or three managers that invest in the same area and even in the same company because if they hit one, it’s it’s gonna be that much more productive. And it really comes down to how the LP wants to build their portfolio.

Well, we just do early stage. So we’ve which in our definition, that means we started out originally with Series A. We’ve now moved down into Seed and Pre Seed. So within that area, we then look at what is the overall underlying distribution of companies that we have. We are proud venture geeks, and we do publish some of our findings. So last year, we ran our consumer enterprise report. And enterprise does tend to have more consistency of exits, but you get the big spikes in the consumer one.

So if you a Coinbase spikes, for example, you don’t get 10 of those at the same time historically, but you will get just more enterprise exits but lower typically exit size. Like, yes. And consumer But consumer can too. If you again, if you do look at the returns, you consider the Facebooks, the Coinbases, but they are fewer and far between. What we saw in 2020 to 2022, again, you have the Coinbase, you had a couple more. If you got out when Peloton stock was high, like, there were ways of making money, but it’s not as consistent as the enterprise.

So we do want both in our portfolio, but we’re conscious of the exit dynamics.

I understand his point. I think from a very specific LP GP perspective, it’s sort defined on when you get out of the investment. We have managers that would have potentially sold into some of those later rounds because if they could sell I’m making up the numbers, but 10 or 25% of their ownership and return a fund or half a fund and still hold some for the upside and then potentially distribute the stock when it’s high. Again, have to wait for a lockup, and there’s all these parameters that might not make it possible.

But you can make money on those deals. Absolutely.

I think LPs are being more selective in making new investments, but they they’re absolutely making new investments. All the data’s not in yet, but it doesn’t look like the volume of dollars being invested this year into funds is anywhere near like last year. Last year was a peak, so that’s not wildly surprising, but they’re still making investments.

I think it’s kind of all tied together. Right? If the entrepreneurs are slowing down their fundraising so that they can produce the metrics necessary to convince a GP to invest, then the GP is gonna call less capital and then deploy their funds slower. And then LPs are gonna be slower. We saw numbers about, like, twelve to eighteen months, which is historically atypical. Right? Usually, it’s three years. So if now they’re lengthening back out to three years, yes, there’s fewer funds being raised. And I think there’s a lot of we can get into this or not, of people trying to figure out what is the health of the underlying companies.

What’s really going on? And there’s so many things going about why LPs are slowing down. A lot of LPs also pre spent future budgets, if that makes any sense. Like, if you were raising a fund every eighteen months and I thought you were raising every three years, I had two choices. Either I pull from future year budgets or I reduce my check so that I stay consistent in my deployment even if you’re raising faster, or I end up spending money or committing money earlier than I anticipated.

And then right now, given what’s going on in the markets, a lot of LPs are feeling liquidity strains. I wouldn’t say a crunch, but there’s different demands on those dollars.

Because you also what you have at the same time is not only is people that are, say, existing established venture investors know that it can take ten years for an exit to happen. Like, that’s not a surprise. But if you’ve built a portfolio and you’ve got publics and privates and other areas, you can manage your liquidity by taking money from other places as it comes in. But if the exit markets are generally shut for everybody, you’re not getting your private equities necessarily distributing capital. So you can’t use that to make your capital calls either.

And you don’t wanna sell your stock when it’s down if that’s not part of your strategy. So there’s just a lot of varying things going on that are hitting budgets. And a lot of LPs that manage, you know, endowments or foundations have a annual budget that they have to spend money on, right, for whatever their business is. So they still need to figure out how to make those payments.

Correct. So I’ve sat through multiple investment committee sessions with larger funds. So larger LPs managing multiple funds who are looking at, well, how do you manage this? You also have liquidity profiles that you have to keep. Like, you can’t be too illiquid because it violates their rules. And just where are you gonna, you know, clip your coupon, so to speak?

So it’s hard to give a common answer. I do know when a lot of endowments started looking at the Yale model and being willing to go very long on that, they shifted to that. And maybe some people are rethinking it. I do know there are some managers, some LPs sorry, when I say managers, who are like, we’re just gonna have to pause for a bit while it rebalances, which also has its own dangers. I mean, there is a very long history of looking at venture returns, which says if you’re not in the market, you just don’t know how to call the exit.

So you have to be consistent about committing. But if you have a bunch of existing managers who are still putting money in the ground, you could probably skip a year and still have money going in, just not be re upping or making new investments.

Correct. That is one of the concerns.

Everybody has to decide. Some people just make it work with a smaller check, or they take it from somewhere else. Some LPs will say, we believe we can get back in later. Some LPs have to exit.

Jason thinks it’s back half of next year. I think

love how much you love your mother.

It’s gonna be tough. I mean, people will probably have to keep tightening their belts. I mean, we’ve seen this before. It took a number of years post 2,000. It did take about three years to correct and for venture to come back in, and there was just a lot less money being committed to funds. And so you’ll see a winnowing out. But you also, as a fund manager Yep. If you wanted to wait an extra two years before you raised, you can. But you can still manage your portfolio and wait till it develops and then come back.

Yes. We are seeing that coming together in the market. I think the challenge is exactly what you said. Somebody wants the 80% discount, and the person selling might not wanna sell at an 80% discount. So I think the market is still hasn’t fully connected. I think we’re seeing some the tip of the iceberg. And if the market doesn’t come back, there could be a lot more. And that is when, to your point about when endowments and foundations and other LPs have to make some really hard choices about what they keep in their portfolio and what they don’t.

Well, that is a tough question. Can we start with an easier one? No.

some will. And but, again, to the point of it, if you can sell 10 or 20% let’s say you got in what was OpenAI’s first round, but it was not a 100,000,000,000. Right? Isn’t it? No. So whatever was some some smaller number. Yeah. And if you could then sell in the $100,000,000,000 round and 50 extra money, 20 extra money, that doesn’t sound any different from what we’ve said in the past, which is people sell into these high rounds and make money. That’s not illogical. It’s like anything on Twitter.

If people say, hold on to your winners, there’s usually a sub bullet that’s not making its way out on Twitter. But like so I think originally when a lot of that language was stated, it was because people were selling dramatically earlier. I’m gonna make up numbers. But let’s say 200,000,000 or 400,000,000 versus 10,000,000,000 or 5,000,000,000 or even a billion. But the idea of taking some money off the table, those two are not diametrically opposed. And I’ve heard LPs that used to say, hold on to all your winners all the time are now saying, well, I I meant that.

But in context, there are times when it could be useful.

I think if you went back to 2018, it wouldn’t be that wildly different. I think what we saw was that the whole world kind of got caught up in this idea of you have to play the game on the field in 2020 and 2021. And I think LPs can be just as susceptible as GPs are. I mean, we are all at the end of the day human. I think today, you wanna see what you’ve always wanted to see in the past, but people released a bit on the aperture around it, which is you wanna see people that are gonna be getting into great companies, good fiduciaries, and managing their team.

I don’t think it’s actually different. I just think back when it was sort of this big run up in the when we’re in the bull market, it looked like there were a lot more nodes in areas that could be very productive, and people went for it because there’s a lot of FOMO, LPs and GPs alike. And now on the other side of that, a lot of it looks like there was a lot of momentum, and it may or may not convert. And now people are reconsidering, well, if in down markets, do I wanna reconsider how I’m doing this and what the same three buckets, but maybe I need to be a bit more astute about what they mean to me.

If you’re an institutional LP coming into a fund one, I’m gonna caveat this and say most of the institutional LPs I know that do fund ones tend to do spinouts. And then the LP base is usually more institutional than the fund one that’s coming up out of Angeles, just to draw a comparison. So I think those institutional fund ones from day one will have a much easier time raising fund two because most LPs who’ve been in the venture business for a while know that there is only so much you can show in two to three years of work.

Yep. So barring something going really awry, a change in strategy, a breakdown in team, whatever, something really falling apart, they will do fund two because you just will not have enough data to know unless until fund three.

Correct. So you might see some more wobbles, but I would say, even for some of those funds, I’ve seen other LPs come in to fill it, or they’re taking down their fund size. So there’s ways of managing that is my point. I’m seeing more fund threes and fund fours where this is coming up as a conversation because you do have a bit more data, and you’re trying to think through the pacing of it.

We already are. I’m just looking at the early stage, but the growth has been very You’re seeing it in early. Correct. From a 100 to 50, say. Not quite that dramatic, but maybe it’s not two fifty. Maybe it’s one fifty. Because the the math kinda goes two ways, which is if the round sizes are getting a little bit more decreased or they can go earlier, they can find other ways. I think people are pulling it in.

Depends on where you’re shopping and who you are. I don’t need to detail this. I mean, all of the good journalists are out there detailing all the large growth funds and their changes in sizes for us. So those are those are known and out there.

Yes. I hear the same thing. I hear a lot from LPs. I would like to be able to write a $2,025,000,000 dollar check. I wanna be able to grow it over time. I want somebody who’s up and coming, so not too large and potentially whatever comes up with a large platform, too big of a fund size or maybe it’s too diffused or maybe it’s too many strategies for their taste. But I don’t wanna take a ton of risk on not knowing if they can’t pick. That’s Goldilocks.

I mean, it’s lovely. We like that too. Right? There’s all sorts of positive things there. But if you weren’t in them earlier, it’s hard to sometimes to get in then because the existing LPs are thinking the same thing. Totally. Right? So there’s a little bit of timing muddle on that, and then there aren’t that many. A lot of the folks that were in that size have grown up into bigger funds. And so unless they to your point, unless they wanna have their fund size or whatever, 40% lower, I don’t know if they’d go back out and raise that because they also have people in their firm that want to build their careers and want to invest capital.

So if you could decrease your fund size, that has material impact on what your investing team is doing.

There is a class of LPs that need to write very large checks. Those are vehicles that work for that fund size. We also have to understand I mean, I know you get this, but it’s I think sometimes other folks forget that LPs are not in the same business of risk taking the way that GPs are. You’re trying to preserve capital at some level for all the various reasons. So there is a logic to if you need to write a 100 or a 150,000,000 check and you want some alpha, but you don’t wanna risk losing it, why the larger vehicles can be a place to put your money.

Yes. The seven percent interest rate market is playing with it a little bit, but we have a magic wand and take that out of the equation. That was that way of looking at it. If I’m an LP that has to write a $100,000,000 sized check, unless you wanna be a 100% of a fund, like, you just you can’t do it. It’s really hard.

Oh, so we’ve done reference calls with CEOs that pitch us their fund in the same I mean, it’s

We haven’t seen it yet. And I really don’t wish the death of micro funds. We are big believers in the power of small vehicles, and it can work. I think also what you have in the market today, a number of VCs who have built really replete LP programs. They’ve made investments in 50 plus VCs. And granted, these are deal sourcing strategies. They aren’t necessarily launching that. Like,

I don’t know. I think it’s hard. Right? I don’t know. We’ll have to wait and see how many deals come out of it that they find really useful. I mean, back in the day, like, Sequoia scout program was very famous for them. But I do think one of the upsides to that, regardless of whether or not it’s working out for the VC doing that program, a lot more smaller funds have been able to be stood up because they have them. I’ve seen decks where really all of the LP capitals come from other venture funds or other venture people as Sure.

Other as individuals or off the funds dollars, and they’re now in business. We saw decks in the beginning, and it was notable that one or two people be like, oh, look. Marc Andreessen is an LP. And then you get your thirtieth deck that has Marc as an example, but there’s many others. And it no longer is the same signal that it was before. But still to your point about the death of micro funds, like, there’s just a lot more ways of starting a fund now, which is great.

I think I used to have a less nuanced view on that. And you would think, yes, pick a wonderful endowment that is a great name and is a great portfolio. You’d say if they invested, obviously, it’s a great fund. But you have to understand why it works in their portfolio versus our portfolio. And so it’s not necessarily playing the same role. And so you have to dig a little deeper and say, well, who are they and why are they doing this?

Correct. No. No. It’s it’s a thing. I’m not saying it’s not a thing. We just do our own work and wanna have our own opinions. A lot of the other LPs are doing ventures to the earlier conversation against a myriad of things they’re doing. And they don’t, with some exceptions, have huge teams. So you people have to pick ways of making decisions. And if they know if they co invest with whatever endowment or foundation frequently, they probably know them as people. Like, there’s definitely folks that refer us deals that we co invest with.

And you’re like, oh, I know how they process. I know how they think. That at least gives me some level of understanding versus somebody who when you call them and you say, why’d you invest in this fund? And they say, oh, I’m only here for the direct deals. I don’t care about the return as much. It’s not that it doesn’t matter. It’s just they’re not doing it for the fund return. They’re trying to write a 30 or $50,000,000 direct check. We might like the same fund, but we’re liking it for different reasons.

There is so there’s the whole myth or not myth of the persistency bias in venture. Right? When you’re with 20 VC, if you get these wonderful companies, other entrepreneurs can be like, oh, Harry’s a great investor. He’s got these wonderful other entrepreneurs that I know, these great companies that I know, and so they’ll bring you deal flow. And then LPs see that, and they say, oh, Harry has this great deal flow. It might not be proprietary deal flow, but it’s proprietary access. And then the LPs wanna join the party.

And they come, and then that gives you capital to keep going and running your business. And even though everyone always has a caveat of past performance does not guarantee future, there does seem to be and there’s been a zillion people studying this, so I can’t quote them all, but trying to figure out, is there a persistency bias in returns? Again, people have disputed it. People believe in it. You have to pick your side of the table. But enough people invest believing that once you get that flywheel going of the best entrepreneurs coming to you, that they will persist.

And that’s why the LPs then also wanna work with the same managers in that. So you just need to sort of figure out a way to get that going. Yeah. And it takes a little bit of time. I mean, it’s not gonna happen. It’s not that it can’t. It’s just very hard to do in your first fund cycle because there’s just not enough time.

Well, you just talked about the attitude around parallel much better than I did. And, yes, I don’t disagree with you. I remember I used to work at DFJ many years ago, and somebody’s had his perspective on Tim Draper. They just said he he sees fear very differently than the average person. He’s the risk master. He’s the risk master. And it just but it was the really nice framing of your point about how do you take risk, and what’s your appetite for risk and how do you think about it.

And it’s yes. When you’re swinging for the fences, going back to what I said before, it is incredibly hard to be an early stage fund that has outperformance without a couple fund returners. You have to shoot for outperformance. You can’t be like, oh, my TAM’s five and I’m gonna get all of it. Like, That might work in private equity. It might work at growth stage. It does not work if you’re trying to drive for outperformance in your fund.

Oh, it’s such a good topic. You can do it. You can certainly do it on a smaller fund. You have to then have a very high hit rate. Or I should say this way, the companies that exit have to exit even bigger vis a vis your fund size. So a lot of those funds that have the small When we

40? 45? We’ve yet to run the math and see a fund that’s gone over 50,000,000 that doesn’t have to start having some trade off between ownership and and AUM. I mean, again, like, you can get a Coinbase in your fund, and then, yeah, it moves the dial even if you have a $100,000,000 fund. Right? But But it actually doesn’t. But my point is

you Well, if you have a 50,000,000,000, exit.

I don’t disagree. We run I know this sounds so boring. Investing in a fund is art and science, and the science part cleans the deck very but the heart the art is very hard on the people. Right? That’s a people business, so you have to go and spend time. But on the math of it, we just underwrite a Series A fund to a three x and C to a five x. And you just look at what the numbers line up at, and you say, okay. So given the ownership and given the AUM, what needs to be true to return the fund one time or half a time?

And then you say, okay. Let’s say the number is 2,000,000,000. How many $2,000,000,000 x’s do you think you’re gonna get in your fund? And you can tell me what you think. And then, again, history is not always the same. But you look at this and you say, okay. To your point, you go back and you look at some very strong performing funds and you say, how many did they have and what was the percentage of their companies? And you apply that math, and again, like the future could be different.

But you realize just how hard it is. It’s really hard.

I think there are ways of saying it that LPs can understand. That we have managers who are very good at showing us like, hey, here’s the ones that we have questions on. They could turn it around. You never know. Here’s the metrics. Like, you just go through the metrics and you talk about it, what’s going on with the teams, and you know where they’re at. And venture is a risk business. Like, you’re not you don’t go into early stage and expect every company to work. And one of the weird things about the market from the last 2020 to 2022, we did not, as an industry, have the loss ratios, even probably back earlier, that one would expect in venture.

Like, you just had all these companies getting funded so they could continue to try. And then it even became more relevant actually for the GPs to be able talk about what was going on in the company. And now there’s it’s clear if product market fit’s been hit or if companies have just a ton of money and might spend time trying to find it.

The only other time that would be equivalent would be about 99 and 2,000, and I don’t know if there was the volume of funds in the market then. So and an absolute number, he’s probably right. It’s entirely possible.

Well, I know a lot of LPs that will ask their managers and then go back home and take another 20 to 25% off the top. Because there’s things that nobody knows. And then sometimes you’re just we’re just all wrong and something turns around like AI happens and some companies become rocket ships because they’ve managed to do something with AI that that works in the market and other companies not. The AI intelligence software has just so changed the market and what people are looking for that their companies now seem out of date.

And it was really strong, but the customers aren’t buying the same way because the product doesn’t compete as effectively.

Well, everybody shares it. But if what you’re asking is do people value their companies differently? Yes. If you’re an LP that has a existing book of venture business and you’ve got over different times, you will a 100% see that people will value their companies differently.

Well, overvalue is a relative term. I mean, I think if they ask the question, I think one of the things that GPs forget is that they can ask the LPs what they think. And you’ll learn incredibly interesting information like, no. Your colleague, they might not. I do know I do know the auditor. For us. I know. I don’t know. They might not. But I’m saying, like, you could ask your LPs and say, are you seeing these companies being held differently? And I would like to think the LPs would

Well, then I heard stories, and this is a story, so put it under the rumor and hearsay bucket. But that last year, the end of twenty twenty two when the auditors were getting involved, they were telling GPs to talk to each other to try to figure out how to value things. Because if you weren’t close enough to a public comp, you had to value it off of, like, the last raise, which is a logical method. But if a company had raised three times in 2021 and was, you know, a 100 x multiple on revenue and the company hadn’t grown that much, it raises a lot of questions.

So let me ask you a question. Was it a seed manager or a Series A manager that had the highest holding?

Oh, okay. That dis disputes my theory. Because a lot of times, seed managers, they only might have information rights by the time a series b or c comes up, so they might not have all the information that someone in the boardroom has.

Well, let me tell you another thing. LPs, some get paid on DPI, some get paid on TVPI. Meaning that how they’re holding their portfolio is relevant to how they are viewed, not just for their personal paycheck, but how they might be measured by an external US News and World Report and other things. There’s a whole push pull in the market.

Potentially, but I’m not sure what the magic wand will be that’ll change that.

Well, back in the old days of venture, TVPI didn’t rock it up in one year as quickly as it is now. So a lot of these systems were put in place when things were a little bit more prosaic in how they managed along. TVPI used to be a pretty decent signal, not perfect, to see what what DPI was coming. That, I would think, the Eric Paley’s point, got a little broken recently because it was just very hard. If your company has raised three times in a year and is now worth 10,000,000,000 and you’re a 50,000,000 seed fund, that’s a huge change.

Yeah. Right? And up and down. And so there was a number of LPs that were telling their managers, just don’t mark it up, like or mark it up a little bit. Like, be really conservative. But it’s hard to then argue to the auditors, you can’t mark it to the last round if it was, like, two months ago because the auditors will say typically, they’re like, use the most recent last round if it’s in the last six months.

Totally. My most benevolent answer is a lot of these things were probably put in place when TVPI and DPI were not so dissimilar, and so these things made more sense. And now we just the last few years made it look really just a lot more confused.

I think depending on who you are as an LP, the fund size can drive some misalignment. Right? To your point about much larger funds and what they’re trying to do and how they’re trying to create returns and financial stability. But that also comes with and this has been discussed on Twitter ad nauseam. If it comes with a lot of management fee and if you are able to work in a fund and make millions of dollars per year in management fee, that’s very different from an LP who’s needs the money back to fund whatever it is they’re trying to fund with it.

I agree. I think there’s no one size fits all. And I definitely think for emerging managers, the management fee and the GP commit need to be looked at in a business case. Like, what are they using it for? We’ve had some funds in our program where I’m a little worried they can’t pay their rent because you’re like, there’s no way this management fee can pay for it. So it doesn’t surprise me when smaller funds have a 2.5 management fee because you just have fewer dollars. What you typically as an LP like to see is as you layer the funds, the fees come down or you stop pulling fees on some vehicles.

But again, it’s always in the context of what is the fund trying to do? How many people are there? What are the cost structure? And to your point about GP commit, yes, it has been an unnecessary barrier to entry for too many.

I agree. But then you need to be leading and getting what we’re seeing is leading and getting low 10 nine to 11 to 12% ownership.

But many people raise bigger funds and have 5% ownership. You end up with the, like, well, then now you need this very large exits, which I wish everyone gets. Like, there’s no button there’s no shortage of wishing this works, but it just historically you’re like, well, you’re gonna have an incredible batting average. And, we we want that to be true. That would be lovely. History would argue that’s very unlikely.

I think there’s been many conversations with LP suggesting GPs slow their role. If a fund came to you in the beginning and said, we’re gonna do an annual raise, I know some funds will say this, and the LPs understand it, and they sign up for it, then they understand. They sign up for it. Cool. Yeah. So I see that happening. I see a lot of other funds saying, you know, this is gonna be a two to four year raise, or the LPs are like, hey. We’d like to see a bit more traction in your companies.

Could you delay your fundraising or just slow it down and see what happens? Give it another six months. Like, getting through this market to our earlier conversation is not gonna be necessarily easy and seeing how it rolls. I think those conversations are happening. You don’t get fired for buying IBM. I’m using Chris Duvos’ line, so I just wanna give credit when I’m stealing some of these words. No. No. Was not gonna say I tweet it every day. No. He talks about is someone someone sort of investing the capital that they’re really a manager of, or are you sort of an employee of a firm?

And you need to manage the business. So he’s not saying they’re not making thoughtful decisions, but it’s a different viewpoint if you’re like, oh, I’m gonna be here for three years. Do know the average CIO is like a five year tenure? I actually thought there was, like, fifteen years. But, no, a friend of mine was like, oh, no. It’s three to five years. I’m not picking on those individuals. But I’m saying if you’re then in the stack and you’re working for a firm and you’re deploying capital as an LP, you’re taking you might be taking a different risk appetite than if you’re someone who’s like, hey, listen.

We’re gonna go find the next amazing fund, we’re gonna be with them for a long time. And this is a very different mentality.

It’s delicate. We should have good reasons to start with. That is, like, the first principles of it. And then you share your you share your thinking. You say, here’s what needs to be true for us to be able to come back, and we wanna come back. We’ve shown people TVPI charts and say we have to choose based on productivity. And it’s not that we don’t believe in you. It’s just taking longer. Or some people graduate out of our program because they get launched, for example. Right?

So we’ll do merging and establish. But if you’re gonna go on and raise a $1,500,000,000 fund or something that’s outside of our program Yeah. I mean, we think that’s great that they’ve grown up and done that, but that’s not in our program.

I don’t know if they’re saying this to their GPs, but you hear a lot of people having concerns that they’re now gonna ride the TVPI all the way back down. To your point, you can manufacture some distributions. Right? Like, can find if a company is not working, I think managers are now I’m having more conversations with more managers who are like, hey. We’re just gonna try to find some soft landing for these companies. It’s just not gonna work, which we’ve been expecting for years to my point about loss ratio.

So that doesn’t wildly surprise us. But you’re not gonna three x your fund that way. Right? You’ll retain more than zero, but it’ll it’ll kinda creates fodder on the bottom. You can’t force a company to go public.

I really do think these conversations are happening either with the GPs or amongst the LPs. I hear people talking about it. And just sort of understanding why the manager did or didn’t, and is that is there a cogent reason? Whatever that reason is that makes sense. Like, there is there there are definitely times when there are small floats. And if you sell, it could be detrimental to the company. There are other times where it sort of gets at the, are you a fiduciary in the kind of way that I wanna be associated?

And people will make choices. And then there are always gonna be some managers that have that kind of LP pull that people will just keep working with. I think that list is getting smaller, and I think the names are switching around. Which names are the hottest? Well, I’m gonna give a shout out. PitchBook just did a new ranking for the for based on I’m not sure what metrics they pulled. It was like capital calls versus distributions, and I don’t know how they knew this, but Union Square had the first and the third spot.

So shout out to them.

Okay. I’m gonna kinda 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 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 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.

I wish the LPA was better. That’s such a small little The LPA was better? 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 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. What would you guys

The 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 a an easy business to pop up. And it can be, but then that’s a smaller business, and it’s not necessarily gonna become a long enduring firm.

It’s not

And that’s just one fund.

Let’s be clear. That’s one fund. Yeah. Yeah. I find it actually a bit mind boggling that people I mean, if you wanna have a pop up business, do something direct because even then, it’s not sure. Like, go a job can be four or five years. You can try different things, right, with the way compensation equity structures work. But becoming a GP, like, yeah, it is. You assume you’re not doing off angel list, 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 services business.

Ugh. This kills me. So I passed on the initialized fund one because we had just launched yes. I know. I know. It was bad. Do know? Was 300 and I know. I know. No. Trust me. I know. But we were Series A, and we were looking for 75 to $200,000,000 fund sizes, and they were sub 10 in seats. So it was outside of scope, but I I get it. But it was outside of scope. So it’s it’s a Way outside of scope. It was a we were early, so doing a do a couple of things being super exceptions early on.

But to the point of I’m gonna quote Nikhil from your last podcast with him from Footwork. Exception should be made for exceptional people. And, yes, to this day, that always sticks in my head.

We’ve 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 wanna do direct investments.

I just don’t think that’s where you’re gonna get the long term performance.

If it’s seed, we’re gonna try to underwrite to a five x.

There’s so many fewer of those than people thought. So few. Appreciate because TVPI looked bonkers. Yeah. 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 hard.

Oh, 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.

That’s 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 three x.

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 we’ve got the law of large numbers coming in at fund one. There’s so many smaller funds.

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 wanna 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%. So it’s not a slam dunk. But even if you get to That doesn’t surprise me as much. Doesn’t surprise me as much. What I think is also interesting is just if you play out one 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.

Back in the day, if 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. Hey. I 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, you know, 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 wanna keep going. There’s a positive side of that, which is it’s good. Roger. 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 fifteen years per fund, I mean, this is like a body of work for thirty, forty years. That is a long time to do one job. People should be allowed to stop.

I think you have to ask each ones. I’m always surprised at the different view the different viewpoints around the room on any given opportunity fund. I know some people that do it 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 wanna support you. I’m not so excited about this other vehicle, but I wanna 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 gonna be that kind of long term.

I would suspect for at least the next twelve months. To the extent that people feel pressure to raise, they’re gonna try to be more LP aligned. And if folks don’t wanna do it, there’s a couple in the market now. SUSE very publicly tweeted about changing it’s not an opportunity fund per se, but changing out their 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. Is this the new normal? Is this return to old?

I think this feels a bit more traditional venture, which doesn’t feel terrible to me. I think the industry is still healthy. I think it’s going to 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. Back half of ’24. You’re right. And it’s 2025. At some point, it will come back up. That’s broken clock. Me, can we write twice a time a day?

I love my works. I do have to say. I mean They’re very comfortable.

Yes. So we were very excited. We announced this about two weeks ago that we’ve taken over the early stage venture fund mandate for And what this means so 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 health care, some venture. And going forward, they’d 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 gonna 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 adds additive to our existing programs. So the answer is yes. We’re deploying more.

Doing this? No. This is my this is I know it sounds this more

Yes.

So I started at Sapphire twelve 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 wanna do? I used to kinda think I wanted to be secretary of state. That is so never ever ever happening. We tossed that idea out when I was about 24.

movies. Great in the movies. I thought Madame Albert whatever. Edit out the names. I thought it was a fascinating position for the US government. But now no. Like that was 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 love working with early stage managers, the emerging and the established.

Oh, thank you for your friendship, and thank you for having me.