E327 | Evan Finkel, Integra Global Advisors: Global LP's perspectives, allocation strategy and learnings

25:44And then you look at the valuation markup, right? So as an example, there were people in 2021 who were writing a pre-seed check at X, whatever it was, pick a number. And then six months later, the company basically didn't really make any progress, but they raised the seed rounds at four times the valuation. but the probability of success of the company didn't really change at all. And so if you invested like at seed versus a pre-seed there, right? Like you were paying four times the price, but your probability of success was basically the same, right? And so what we're trying to figure out is like, just from a very kind of like basic math perspective here, right?

26:22Like what's the highest likelihood of success versus like, you know, the valuation that you're paying for, right? And how can we on a probability adjusted basis, like build out like an interesting portfolio like that? And so we feel like all of that collectively, particularly in developed markets like Israel and the US and Europe, that lends itself towards early stage venture, smaller managers. I've seen some interesting data around generals and specialists. I think it depends a little bit. But I think that's how we sort of think about it. Right. Like, you know, we're not we're not saying, OK, the data is is completely determinative, but we think that directionally it's helpful.

27:05I've heard you mention, say this a few times already when you talk about established and emerging ecosystems. Yeah. Not that long ago, Europe was titled an emerging ecosystem. And you've dubbed it three times or two times as an established one. I'd love to ask you about that. How do you see that? Have you seen an inflection over time? Is it just the fact that you're more active in Europe, that you have a more nuanced view of Europe as a whole? I'd love to understand, because even within Europe, we also talk about Eastern Europe versus Western Europe. So it would be cool to get your take. You know, I think there's obviously still work to be done like in Europe.

27:46Right. I mean, I think there are there are there's it's not the US right at this point or it's not not Israel, let's say, in terms of venture ecosystem. them. But I do think that, you know, when we think about the availability of capital from like first angel check to, you know, pre IPO capital, right, when we think about the exit opportunities, right, and sort of the breadth of those exit opportunities, when we think about not only the types of problems that are being solved, right, but the technologies that are available to actually solve those problems, to me, you know, that sort of moves it in the in the develop bucket.

28:21You know, there are other ecosystems that I think have some of those characteristics, right? And, you know, they'll continue to evolve as an ecosystem and societally, right? But for me, I think Europe, given that Europe has, you know, well-established dating back hundreds of years, right? Business tradition, right? And sort of rule of law and, you know, and now you have this capital availability, as I mentioned, and the opportunity for exits and the technology available, right? And the universities and the pipeline of talent. You know, I think to me in combination, you know, I'm reasonably comfortable calling it, you know, an established ecosystem.

28:56Now, again, there's always work to be done, right? But I think broadly speaking, you know, it feels reasonably established. You know, I think if I look at like the biggest gaps to me, right? So one is like the level of government support still that's required, right? Or from some of these large organizations, that are writing, in a lot of cases, these anchor checks. And then two is really getting, I think, some of these European champions. I think there are great European companies, and there are some European champions, but I think increasing that number is going to be important. And then you just get this virtuous cycle.

29:30You have more people who have operating experience. They exit. They become investors. That is pretty rare, I think, in Europe right now. I think the stat is like 8 % or 6 % of VCs have meaningful operating experience or founder experience. I'm not saying that being an operator makes you a good investor. I'm not saying you can't be a good investor if you're not an operator. But I do think that having more operators in the ecosystem where deploying capital is probably not a bad thing. Again, we could figure out what the number is, but 8 % sounds a little low, right? And so that's how I think about it.

30:04To your point also, David, right? Eastern Europe versus Western Europe. Obviously, Western Europe, I think, on the VC side is a little bit more evolved, which is in some ways awesome. In other ways, though, it means there's amazing opportunity. If we look in the Baltics, if we look in Central and Eastern Europe, I think there's really, really amazing opportunity. The Adrienne region, right? So I think there's really a lot of awesome opportunity. but I also think what's nice is that you have this easy flow of people and capital across Europe, and so I think that'll also help some of these emerging regions in Europe skip some of the learning curve, let's say.

30:47You've mentioned a couple of times the dispersion or performance dispersion. Oh, man. Am I being boring repeating the same things over and over? That's a real risk. You're being the opposite. And now I'm going to tear it open. Because I want to ask you, because this is something that I think is the most important thing to get to the core of when it comes to venture. And specifically when it comes to getting new LPs into venture and increasing the appetite for venture. Because obviously if we just didn't have that huge risk of, allocating to a manager that turns out to be crap, then venture would be super interesting.

31:34Sure. But the fact of the matter is that most LPs, someone's backing those managers and those LPs are probably not going to be too happy for too long. Sure. I'd love to ask you, what do you think is the underlying cause of this performance dispersion that we have in venture? Yeah. I mean, I think some of it is just the power lot outcomes. I think the magnitude of the largest outcomes, right, is so much larger than the magnitude of your like average or mean outcome. You know, some of that is just, it's just like baked in, right? I mean, to the math. But, you know, the other piece, I think, is that there's some research, right, that sort of suggests that like, there's pretty good, there's pretty good persistence, like in terms of returns, right?

32:20Like the best founders want to work with the best VC funds and the best VC funds have access to the best founders. And I was about to say that the power law is not randomly distributed, right? And that's important to say because there is a picking skill when it comes to picking funds. And that, how should I put this? It's really a big problem that I think that some Some people don't communicate clearly enough that VC firms tend to settle in a quartile. You then don't know if you're going to be top quartile or you're going to be in the lower half. That can be difficult to project, but you definitely settle in a quartile over, I think it's three funds.

33:14It's after fund three, you tend to then settle in your quartile. Yeah. So I think it's a huge deal, right? I mean, I think like humans are not like good intuitive statisticians like that. That's just the reality of it. Right. And so I think like it's really easy to post on LinkedIn like VC is a power law game, like with a chart like that you just Googled, like cool. But actually understanding what that means and then being willing to take the actions that get you to the part of the power law distribution or give you the highest probability of being in the part of the power law distribution that you want.

33:43That's like those are two separate things. Right. Like, you know, like for the gram is one thing. And then like for the returns is like a totally different thing. And so I think that's really the big challenge. Like people, people kind of know the words to say, but then like you have to take the actions that give you the highest probability of winding up like in that, in that place. You know, and I think this is a big, this is a big problem, right? Because if you, again, if you don't pick the right funds or give yourself the highest probability of picking like the right funds, you're locking up your money for 10 years, right?

34:19And at the end, you're going to get a check back that's maybe the size of your, you know, of your initial investment, less the 20 % of management fees that got taken. So like, you know, you can't be that happy, right? You really have to aggressively work to like increase the probability that you're with the managers that are going to be in the right spot on the distribution. and those managers therefore also have to pick, right, the right companies, right? It's like, there's sort of multiple levers here, right? Like around picking, right? You have to pick the right managers. Those managers are only going to wind up in the right spot on the power law curve if they pick the right companies that wind up on the right spot on the power law curve, right?

34:56And so I think that's really, really important. You know, I think the other thing is like, you're right that managers, you know, two, three, four funds in, right? Like in VC, they sort of settle into a, you know, into a quartile. Except, right, the temptation is always like, what if I add another zero to my fund? Or what if I, you know, what if we expand our strategy a little bit, you know, we're going to do we hear this a lot, right? It's all the same, like, we're just raising a little bit more money, right? Like, everything is the same. But like, we decided to double the size of the fund. And so, you know, at some point that breaks, right?

35:35And so the temptation always for a GP and I get it. Right. But the temptation always is like, we should do more. We should do more sectors, more geographies, more checks, larger checks, you know, more follow-ons, more first checks, larger fund, more management fees, right. All that, all that good stuff. And that's the problem, right. It's like, if you know what you're the best out in the world, just like do it, like just, just crush it and come back to your LPs every year or every other year and be like, here's 5X, here's 3X, here's 4X. Like your LPs will write you checks every single year or every other year if you do that.

36:12The problem is people get tempted, right? Because it's more fun to have more and to do more. And so that plus, and you're a data guy, right? Plus, if you run the math on the carry that you can make on a 20 or 30 or 50 million euro fund and put that up against the management fees and the nominal carry, the value carry you can make on a 3X, 5X sized fund. And once you're in the right networks, money flows. So probably in the beginning, it's easier to hit the right startups and get carry, probably. I think that's fair to state. But then later on, it's probably going to be easier to just increase AUM significantly.

36:59I want to be clear. right? Like I don't begrudge anybody who's like, I can, you know, I can raise 500 million or a billion, whatever the number is. Right. So I'm going to do that because people want to give me that money. Like, I mean, good for you. Really? I'm totally serious. Like if you want to do that, you should, you should do that. But you should just be honest with you. I want to be friends with you and go on your yacht. I'm not going to put money on your fund, but I really love it. That's exactly right. Like, I hope you're collecting your management fees in cash so that you could go buy a yacht and we can go sailing in Croatia.

37:27But, um, but you know, you gotta like, you should just be honest, right? Just say like this fund is targeting 2x net returns over 10 years. And I am targeting one new vacation house every 18 months. Like, just be honest. I don't I'm not I'm not hating on you. Like, it's cool. You could do it. You should. But just be honest about the business you're in, right? And like what you're trying to do. I mean, and then and then it's fine. And then if LPs want to go in and they want to invest, and that's fine with them. Not for us, but sure. You know, but like, just be honest about what you're doing. And they have a big role, right?

38:01And I think maybe in European mentor, that's one of our issues that the funds that are accessible to the small LPs are quite small. And they're also oftentimes not very experienced because we haven't been around for too long. So that means that we have many LPs that start allocating to venture in Europe that then get that bad experience. And they would have been better off doing one of those mega funds that will just give them two or three X. They'll understand venture a bit better. Then they'll build sophistication levels and then they can go out on their own and do some crazy bets. that in Europe is a little bit different or a little bit of a problem that the number of funds that have shown success to the level where they actually can continue doing it they will just raise capital with a 5 million euro minimum or 2 million euro minimum and only do it with people that are sophisticated and value-add, they don't need to go to the random new family office guy that wants to do venture because that's just hand-holding and stuff.

39:19So that is definitely a problem, right? Yeah. I mean, I think this is a problem in the ecosystem in Europe a little bit. I am not at all well-positioned to speak about this, but I know there was a controversy pretty recently around the angel investing threshold in the UK and what level of income you need to be able to angel invest. And there was, you know, I saw some pushback there from people. I know, I'm sure there was, you know, you know. And so I think to me, this is one of those pieces where you say, okay, you know, Europe is probably like an established ecosystem, but there are still things that need to be improved.

39:57You know, look, LP education is hard, right? Because whose responsibility is it, right? It's not really the fund manager responsibility. you know the LPs in a lot of cases don't know what they don't know so I don't I don't know you know that there's like a really systematic way of doing that right I mean I think it's it's a big problem because it falls through the cracks right like people people generally want to be making good investments they want their friends to be making good investments you know if you know they have you know professional contacts right people are trying to do the best that they can But like, how do you actually like educate LPs?

40:33You know, obviously I think what you guys are doing, you know, with podcasts and, you know, a lot of the other stuff you guys are doing in the ecosystem is important. And I think there are other things, other initiatives, you know, that are like that, that are really helpful. The other piece like about VC, right, that doesn't really exist in other asset classes, like, you know, I don't get super like emotional or passionate about like, you know, some private credit loan in our portfolio, right? Or like a piece of real estate. Right. VC has that like emotional piece. Right. Like where else we are investors in relativity space.

41:03Right. They're a company that's 3D printing rockets. They they launched a rocket last year. It was awesome. Like it was awesome. And so, you know, I think people like have that connection with VC. And there's an emotional piece, right? Or people feel really passionate about things. They say, you know what, I want to do what's best for the planet, you know, like, I would like my kids to not have to only go outside at night, you know, and be able to go outside during the day in 20 years, right? And it's like, okay, so therefore, I want to direct my money toward, you know, things that align with my values, right?

41:38And I want to do a bunch of stuff and climate. And that's, that's great. Like if that's what you're, you're sort of orienting your program towards, but I think it's more complicated than that. Right. I mean, I think you do have to, you have to, in a lot of cases, like temper that emotional piece and really look at this as an investment. And that's, you know, that's something we were talking about before, right. With like the, the distinction between like, you know, GPs who are, you know, the GP legal entity, and then like the person, right. Who's actually managing it. You know, there's, there's a difference there.

42:08And I think you really have to, as an LP, be thorough and thoughtful about how you're allocating your capital and figure out why am I doing VC? Is it because it's the best place for my incremental dollar or is it because it feels good? And you know what? Maybe your mandate is do stuff that feels good, but my mandate is returns. And so therefore I have to really be focused on that. Here's a warning to everyone listening. And I forewarned Evan about this because Evan shared with us his three biggest learnings from LP investing. And I took the liberty to make that into a small venture blues that I will now put here for everyone to listen to and laugh at.

42:50And then after that, we will dive deep on his points.

43:20We'll be right back. Don't invest in a fund just cause they came Most LPs don't get it They play a different game in the venture world It's a bumpy road Ups and downs, the story's informed But if you're in it for the long run Take a chance Venture or real estate Just find your stance

43:57venture or real estate just find your stands evan we are having a blast here let's get on to your three biggest learnings you're about to like this part a lot more than i am um yeah champions are not your pals that's how we say it tell us what do you mean by that yeah i mean this one is uh yeah this is fun this is gonna make me a lot of friends um so look i mean i think this is the challenge, right? Like I have friends in VC, you know, Ophelia from Tiny, who's, you know, the reason we're all sitting here today, which, you know, she might be a better friend or a worse friend of yours, depending on how this episode goes.

44:34But, you know, and others, right? Finn from Nebula is an amazing guy. Carmen from Coca-Cola is like a generally great friend of mine, thought partner, you know, and there are others, right? But all those people know, and maybe it's because of my personality, is that when they come to market with their next fund, I'm going to evaluate that fund in the abstract, right? Not because I like or dislike any of them, right? I mean, I think that's the piece that's really key is you can have friends in VC and you could have friends who are VCs and you can even invest with your friends, right? But from our perspective, right, our mandate is delivering returns for our clients.

45:17And so I have to look at this as a fund, right? And say, if I didn't know the GP personally, and I didn't have warm and fuzzy feelings toward them, would I still allocate our client capital? And by the way, like our investment committee doesn't know these people, right? Like they're not friendly. And so therefore, you know, we do get that, of course, like where, you know, we're having a conversation and yeah, sure. I know these people, but nobody else does necessarily. And so I think that helps, right? Because it removes some of that like bias, right? That can creep in even when you try to make sure it doesn't.

45:48And so I think that's super important. But yeah, I mean, I think this is the challenge, right? Like, there are plenty of people in venture who are really nice people. But you're not investing like in this person, right? You're investing in this legal entity, right? And this legal entity is not your friend, right? This legal entity is taking 2 % or 2.5 % or 3 % a year, right? Like, they're only requiring 1 % from the GP. and it's probably in waived management fees and not even in cash, right? Like, it's a 10-year lockup. So if things are not going well, they're not going to be like, hey, here's your money back.

46:21No problem. Like, no harm, no foul, right? They're using credit lines to do all kinds of funky stuff with IRR, right? Like, you know, they have independent auditors who somehow always get to the marks that the GP wants. Like, so, you know, like, those are real things and you have to do due diligence on them, right? And I think it's really the case, like you have to be as an LP, you have to be really deliberate about separating like your personal feelings or personal relationship. If you have one with the person, the lead, you know, the human being from like the general partnership that you're actually investing in, right?

46:59Because you're not investing in that person, you're investing in a legal entity that has a bunch of clauses that are not made because you're friends with the legal entity, right? They're made because it's best for the legal entity. And so, yeah, it's not the most pleasant thing to sort of say to people. And I think, you know, a lot of people have trouble with this in venture because a lot of people are, maybe venture as a lifestyle business, right? Nobody views being in private credit as a lifestyle business, right? Or like, you know, for the AGMs. But in VC, right, people are doing it because you get like a week in Marbella and a week in Porto and a week in London and a week in Helsinki.

47:35And, you know, enjoy your week in Helsinki. And like I said, if you raise a$500 million fund, I want to come to Yacht Week in Croatia with you. But like, I can't invest in your fund, right? And so I think that's really how we think about it. It's like, I would like, all else equal, I'd love to have good relationships with the human beings who are deploying the capital we're investing, right? And if we become friends, and whether it's, you know, more professional, you know, just relationship, and we're passing ideas or intros back and forth, or if we genuinely become friends, amazing. But that cannot be a part of our consideration and shouldn't be part of any healthiest consideration.

48:12I don't need to invest in people who are going to marry my children. We're not going to invest in criminals. But ultimately, do you believe that this legal entity that you are investing in, is this legal entity going to send you three times net your money back in the next 10 years or more? Or are they not? And that's what you have to think about as an LP. And I don't know. I think a lot of people struggle with that. Any learnings as to what you think has allowed you to then keep that mindset and how to navigate? So some of it is definitely personality driven, right? Like my personality is just like I tend to think more in math and data.

48:55And so therefore, like some of that is just personality. you know my wife might say I could it wouldn't hurt if I were more friendly in general and so you know it's I think it's about striking that balance you know the other piece though is like we because we manage assets across all asset classes and because our investment committee is comprised of people who are not just venture people right they're people with expertise and insight into a variety of different asset classes and also importantly because the way that we actually charge our clients is a percentage of assets under management. We actually don't get any incremental benefit from allocating a dollar to venture capital.

49:37And so I have to really believe that this is the best place for a dollar, just like my colleagues have to believe a hedge fund or a private credit fund or a real estate deal is the best place for an incremental dollar. And so because we don't have an incentive to put extra money in VC, unless it really is the best place for that incremental dollar. I think that helps a lot. So I think some of it is like, if you are an institution that's going to start investing in venture, I think it's super important to set up structures so that one, you are not overly incented to invest in venture and that you only do it if it really is the best place for that money.

50:13And two, where you have people who are either ambivalent about venture or don't necessarily have a background in venture, So they can call bullshit on things, right? Because again, there is an emotional component in venture that doesn't exist in other asset classes. And as much as you try to avoid that, I do think it's just helpful to have people who are outside of the venture ecosystem and who can say, hey man, does this really make sense? And they can push you and they can challenge you. And they just bring a different perspective. When I sit on the investment committee and we're talking about a deal that's not in the venture space, my venture experience can give me some sort of perspective.

50:51Right. And I think that's really, really helpful. And it's really about, I think, getting a bunch of smart people with different perspectives around the table who are willing and can sort of like tear apart like what you're trying to do. And the other piece, which is super, super important, and it sounds way easier than it is. This is something my friend Yapa and I talk about a lot is, you know, you really have to try to kill the idea from day one. Like our goal for any investment idea is to kill it. And if I don't kill it and it moves to the process, great, right? But I think a lot of people are like, I like this.

51:25How can I do confirmatory due diligence, right? Rather than trying to actually dive in and figure out what the pieces of the puzzle are. Although, because yes, math is super important and data. But you mentioned one of the people in European venture probably that is most of her personality and network driven, Carmen. How do you, because inherently data will only get you so far. And then it comes to understanding venture, understanding what drives edges and so on. So how do you, when you go down on the specific investment level, how do you kind of weigh data against all the other input? Yeah. I'm imagining the comment section in this podcast.

52:21It's like 12 math nerds being like, yeah, data. And 20 other people being like, no. It's going to be a very popular episode, I can tell. So, yeah. I mean, look, I think that's why I say we're data informed. Right. and not data-driven or we're not making binary go-no-go decisions based on algorithms. I think Carmen's awesome. What she's building at Focoa is great. And I think what we do when we look at a fund like that, just like we look at any other fund, there's always degrees of this, where you say, okay, what can the math tell us? Now, some funds, if you're raising a fund one and you have an angel track record of 10 investments, like the math can only tell me so much, right?

53:05If you are, if you're raising a fund one, but before that you were a partner at a, you know, a CBC, if you led 50 investments, the math can tell me something else. Right. And so I think in every case, right, like let me do the most that I can with the data. And then of course we have to underwrite what's your edge, what's your access, you know, your portfolio companies, you know, how do we think that the strategy is going to work going forward? Is this really like a, you know, a resilient, you know, multi multi fund strategy that we think is interesting. And so the data is a starting point, right?

53:37And the data is helpful. And even when the data is fuzzy, right? I think that's helpful because again, this is not like binary yes, no decision making in general, right? It's more like, Hey, I noticed this pattern that like you guys say you're, you know, you do healthcare and you do fintech and like, I just put your portfolio by healthcare and fintech and like all your healthcare investments, like our forex are better and all your fintech investments were like 2x or worse, like, what are you doing? And sometimes there's a good explanation, in theory. But, you know, in general, like, that's what we're looking at, right?

54:10So it's not like, oh, I noticed x, like, you're dead to me, right? This isn't like Shark Tank. But you know, there is like that, there is that element where you say, okay, I noticed, you know, there are two partners here. And you tell me that every single thing at your investment committee is exactly the same. And the strategy is the same. And everybody's doing the same thing. one partner is doing 5x on the last two funds and one partner is doing 2x, do I want to invest in a fund where 50 % of my money is basically going down the drain? And so I think it's where can I poke and prod and how did the data help me figure out those places?

54:41And then of course, we have to do all the more qualitative stuff. We have to do the reference checks and we have to speak to founders and we have to do all that stuff, but at least let the data guide us as far as it can. And sometimes that's very far. Sometimes it's not as far. You know, and I think that's how we think about it. So like data informed, not like data driven, I would say, or not like algorithmic. So in our little song that we queued just before, we had Wi-Fi mentioned a couple of times. And I was in the connection to sophisticated LPs in quotation marks here. Tell us, what is your beef with Wi-Fi passwords?

55:21definitely put a password on your Wi-Fi. Yeah, look, I think, again, it's like, what are you really focusing on? And are you doing the right things when you're doing due diligence, right? Are you really looking at the right things? You know, we spend a lot of time on investment due diligence. We also spend a lot of time on operational due diligence. I'm not knocking operational due diligence. I think it's extremely important. And in fact, I think it's something that actually like emerging VCs, while frustrating to them, I actually think they appreciate it over time because I think that's an area where you don't know what you don't know, right?

55:55Like when you're an investor at another fund, you sort of say like, I have a strategy, a thesis, now I'm just going to raise my own fund. But you've never really dealt with fundraising generally. You've never dealt with the firm building operational piece. And so I think what we've found is that like operational due diligence is actually something that like long run is really actually value add and appreciated by a lot of managers because it's something that is just not in their wheelhouse naturally, right? But it's super important as you're scaling up your firm to have these processes in place.

56:24You know, to me, you know, the question is, if you're running an 18-month due diligence process as a large multinational institution, are you focusing on the right things? And I've had, you know, more than one, many more than one, you know, GPs tell me like we went through this process. And I felt like I was getting hounded about things that are, you know, not things that, oh, I didn't know, but I recognize their importance, but things that really are not particularly relevant. And so I did have two, two GPs who basically told me that there was an institution that didn't want to invest unless they had a separate guest network on their Wi-Fi and that that network was password protected.

57:08And so that one really stuck out to me because that feels like three degrees away from anything particularly important. And certainly not like a showstopper. You know, we're worried about things like cash controls, right? We make a wire transfer. Like, is that money walking out of the door? Like, who's actually overseeing that money, right? We obviously spend time on valuation policies and background checks and things like that. And I guess if it's all right with you, I'll take a second to just, I guess, a free sort of shout out to myself. If anybody wants, I'm always happy to share like our operational due diligence document that we use.

57:44Because again, I think this is something that's just better for the ecosystem, right? Like if people are doing operational due diligence properly, it helps funds. The question is like, are you doing meaningful operational and investment due diligence? Or are you nitpicking because you feel like that's the appropriate thing to do? Are you happy to have it shared on EUVC? Because then we can put it into the show notes. Oh, yeah, absolutely. Yeah, for sure. Yeah, there's nothing. It's not proprietary. And honestly, if people are like, why are you asking about this? Definitely tell me like, because there are definitely gonna be people like you, you suck, like, don't ask about this.

58:20And they're gonna be other people who are like, what, how come you're not asking about something else? And so for me, like, you know, it's a net positive, like, I want to help other people like do this stuff if I can, because I think it's good for the ecosystem. And if people can come back to me and be like, here's something I think you should be asking about that you're not like, great, like, I'm more than happy to improve our process also. So, yeah, for sure. Happy to share it because I think it's good for the ecosystem. I personally do not care if you have a guest Wi-Fi network with a password.

58:47Others may. So but yeah, look, I think it's really about due diligence, right? Like you have a certain amount of time with a certain number of managers. There are way too many managers in the ecosystem to diligence properly and to invest in. And so, you know, you as an LP have to decide on the best use of your time. And when you're doing due diligence, you have to, I think, be you have to be deliberate about whether the questions you're asking are a good use of your time and whether they're really going to make a difference for you in investing. And I think you have to be respectful of the GP's time.

59:15Right. Like, again, I mean, I think you if you need something because it really is important to your process, you should push for that. But if you're just going on a fishing expedition for fun, you know, I don't think that's I don't think it's really productive for anybody. Do you see a difference in the willingness of GPs to be on the other side of the process based on GOs or maturity of the fund vintage? So it's a fund three versus a fund one. Do you see that at all? Yeah. So it's actually really interesting you say that because I think there are like inflection points, right? So fund one, I think it, you know, generally operational due diligence is going to be a little bit more challenging, right?

59:54Because they just don't have these policies and processes in place in the same way. It might be a solo GP. So therefore, like some of this stuff is not going to be relevant. And fund two, you start to mature a little bit, I think, as a firm. But generally, your LP base hasn't changed all that much. And then I think around fund three, there's this inflection point where it's like, okay, now we're going to really institutionalize our LP base. And we're maybe removing some of the long tail and we're hoping to get some more large institutional LPs to be anchors. And those institutional LPs tend to then demand a higher level of due diligence.

1:00:28So I think it's really like fund one, you know, is is like one sort of level of due diligence. And then somewhere around like fund three, maybe fund four, once the LP base starts to really institutionalize, I see that that shift. And I think that a lot of GPs know around that point that, OK, if I'm bringing on institutions or I think in Europe, we see a lot like there's there seems to be a perception of a lot of European GPs. that like, oh, if I bring on an American LP, like that's really valuable because it's good signal, but also because they will help me in certain ways, like, you know, tell me what's like normal market standard or, you know, like what I could be doing on, you know, whether it's operationally or how I should be thinking about certain things.

1:01:10And so I do think that, you know, in general, there's like an inflection point around fund three or fund four, where I think GPs are really, really open to it because they know if they want to institutionalize their firm, they are going to have to sort of step up, like, you know, their operational processes and some of their investment processes. But I also see in Europe specifically, when a firm decides it's time to try to hunt their first American LP, they tend to become very open to this stuff because there's a perception for better or for worse, or I should say for truth or otherwise, that American LPs have a slightly different standard maybe than European LP is at a comparable stage of the firm.

1:01:50I want to ask you about your last learning, and I will queue it up by saying that our song ended with Take a Chance, Venture Real Estate, Just Find Your Stance. And what you're saying is on top of that, if you're doing venture, just know why the hell you're doing it because it's not necessarily for the returns if you're not betting the right places. We've spoken quite a bit about this, but maybe just sum it up for everyone to hear it crystal clear. Yeah, I mean, look, we obviously have our thesis, which I think is strongly held, sarcastically delivered sometimes to the Andreessen line. But, you know, I think the reality is, right, like, if you are a large LP, you know, diversified LP, just figure out why you're doing venture, right?

1:02:36Try to understand what its role is in your portfolio. and if the role or the likelihood of the outcomes you're going to get are meaningfully diversifying or meaningfully different than other places in your portfolio. If you have access to a private credit manager that's throwing off 12 % or 14 % cash on cash returns every year from now till the sun burns out, or you have real estate deals that are doing 20 % percent net IRRs with quarterly cash distributions. How high does your venture bar have to be to not put your incremental dollar in one of those two things? And so I think that's really how we think about it.

1:03:14Venture is the place where we want to have the possibility for those outsized asymmetric returns. And I believe pretty strongly, and I think the data lends itself to that, that the highest likelihood for that happening is within the bucket of emerging managers and smaller funds in general. And so, yeah, that's what you got to think about, right? If you're planning to get, you know, if you're underwriting your VC to a, you know, a 10 or 12 or 15 % in that IRR, does it make sense to be doing VC? Like, what's the motivation for that, right? And so I think that's really what I think LPs need to think about, particularly diversified LPs, is like, why am I doing venture, right?

1:03:52I mean, there's like this whole volatility laundering piece, that people like. And maybe that's your motivation. But I do think you need to really take a step back, start with the assumption that you shouldn't be doing venture. And then only if you can kill that assumption should you then add venture to your portfolio. And now, the quickfire.

1:04:21Now, I want to ask you, Evan, you're not the oldest guest we've had on the show, but I still want to ask you, what advice would you give in to your own 10 year younger self if you could? yeah um good question so uh yeah uh strap in for sure because the next 10 years are going to be they're going to be pretty crazy um you might want to start stocking up on toilet paper uh that one's not going to make sense for a few years but in 2020 you're really gonna you're gonna give yourself a big pat on the back for that one um also i mentioned before i i'd gone back to school um and plan to do a phd like either quantum mechanics or applied math um Which is honestly not something I'd really thought about doing in my early 20s.

1:05:00But I would definitely tell myself, go do it. Because I think I really would have enjoyed it. The intellectual stimulation and the whole thing. And then I definitely would have advised myself to set up a crypto mining rig in my house. This thing is going to have no practical use, but it's going to create a lot of wealth. And you better start mining it now. So yeah, that's a top three, I think. That is the most stated advice to anyone's senior younger self on this show. Now, Evan, a topic that I think many will look forward to hear from you on is your advice to emerging VCs fundraising. Yeah. Yeah.

1:05:46So I think there's a couple of things, right? Even before the fundraising part, right? I really, this doesn't sound very nice, but I really do want to emphasize it. Like if you are somebody who's thinking about raising a fund, like you really need to look yourself in the mirror and figure out whether you really have a unique and differentiated advantage. I see a lot of slides that are like unparalleled network, right? Unparalleled experience, unparalleled this. Maybe you do, right? Like maybe, maybe you really do have a unique and not a parallel network, right? Because you have a PhD in astrophysics and you worked at CERN and you did your postdoc at the Max Planck Institute, right?

1:06:26And maybe you really do have that unique network. But if you worked in a FANG and went to Stanford, you probably don't. And so, you know, I think you need to take a step back and say, like, what is my, you know, unique and differentiated advantage? And then once you figure out what that is, you need to really step back and then say, no, actually, Is this unique and differentiated? And then you need to ask yourself that question like a bunch more times over a long period of time. And then you need to figure out, like, can I actually articulate this? Right. Because in your head, it might sound really, really good.

1:06:57It might sound really unique. But to an LP, it actually might sound like 20 other pitches that they got in the last three months. Right. And so you really need to if you really believe you have some sort of unique and differentiated advantage, you need to also figure out, like, can I actually articulate this in a way that expresses how different it actually is and how unique it actually is to LP? these. And then the other piece is like, you need to spend a lot of time understanding whether you actually want to be a fund manager, right? I mean, being a fund manager and being an investor are not the same thing at all.

1:07:29Right? Like being a fund manager is a job that is separate and apart from being an investor, right? It involves fundraising, it involves operational and compliance stuff, it involves, you know, investor relations, it involves hiring and firing people, right? There's a lot of stuff that goes on when you're a fund manager. That sounds awesome when you're like, well, now I can charge like 3 % management fees front loaded. And then, you know, I'll raise my next fund in two years. And like, I'll be at Yacht Week with Evan in no time. And that sounds great. But like, the reality is, it is a full time job on top of your full time job of being an investor, right?

1:08:06And it's, it is a lonely place, right? If you're a solo GP, like there are solo GP groups, There are other people, but ultimately, you know, you have to live and die based on the performance of your fund. You know, you may be friends with these people, but you're all trying to raise a limit from a limited pool of capital and the same, the same prospective LPs. And so, you know, there are a lot of challenges there that exist. Like if you are, if you're a fund manager versus if you're just an investor. And so it may be great. There may be an opportunity, but you need to decide, like, do I really want to be a fund manager?

1:08:39It's actually a bit funny because we, I think we get, if not on a daily basis, then on a weekly basis, people saying to us, why aren't you guys raising a fund? Yeah. And it's obviously a conversation Dave and I have recurrently, but it's exactly a conversation that centers around, is this what we want to do now? Right. And so far, you know, the deal flow is there. The access to LP money would also be there. but it's just is this what we want to do right now dave's getting married dave's having his first child i have my two small children uh we have our content business that's scaling and scaling and scaling do we really do we really want to add in like having to post manage a fund right now and raise a fund like no right it's not also it's a huge commitment right it's a huge you said you just said now right like oh what's your you know what would be the advice you'd give to yourself 10 years ago, right?

1:09:34I was, if I had raised the VC fund 10, I mean, I was not going to, right. There was no world that was to happen, but hypothetically, right. If I had raised the fund, a VC fund 10 years ago, I'd probably still be actively managing that fund for another two, three, four years. Right. So do you want to make that commitment for 10, 12, 14 years? That's a very difficult question to answer when you're in your early to mid twenties. And you're thinking about, you know, do I want to be raising a fund, right? It's not just, oh, the investment period sounds fun, right? It's all that other stuff that you have to do.

1:10:06And like those legal commitments you're making for other 10 or 12 years. And so, you know, some people are suited for it. And some people, you know, obviously want to go out and do that. And that's awesome, right? And I think it's great for the ecosystem, we need emerging managers. But I just think, you know, that doesn't mean that you have to be an emerging manager, right? And so I think before you go out and do that as an individual, you know, you really have to decide, you know, do I really like investing or do I want to run a business? And I think those are really two very, very different things.

1:10:37And I think people should really think about that before they go out and actually fundraise. Yeah. And the other piece is, you know, I think you need to be super strategic about this, right? Like, you know, it's fundraising is a full-time job. You know, like I said, you have other friends who are also raising money if you're an emerging manager, right? But ultimately, you guys are competing, right? Because there's only so many LP dollars out there, and there are only so many LPs. And so you really need to be strategic about raising that money and figuring out what your value proposition is and how you communicate that and crystallizing that.

1:11:09And so, yeah, look, I don't envy anybody who's raising a fund right now in particular. I mean, it's obviously really, really hard. But there are some really, really quality people out there who are raising funds, right? And people we're giving money to and will get money to. And so, you know, people need to do it. But the question just is, you know, when somebody's deciding, they need to decide, do I need to do it, right? You know, do you want to, you know, why are you doing it, right? Are you doing it for sort of reasons that make sense or not? So Carmen and I actually spend a lot of time talking about this and we're kicking around some interesting ideas, which I don't know that I can, I'm ready to talk about yet, but maybe I'll have us back on the podcast at some point to talk about this, but we, yeah, there's a bunch of interesting stuff I think that can be done.

1:11:57But ultimately, right, you just need to decide, like if you are somebody who's thinking about this, you need to say, do I want to be a business owner or do I want to invest in startups? Because those are two different things. I want to close this off with your most counterintuitive learning. And that's a provocative one, if anyone hadn't guessed that. There are two, I'd say two things, right? So I think one is like LPs have more access to data than ever, right? Again, you know, shouldn't be doing this algorithmically, but, you know, there is data available and people should be using it. But I think when I, what I see when I speak to other LPs and when I speak to GPs and scoring weak moments and willing to say what they really think, you know, it seems like a lot of LPs really are focused on, you know, who else is investing in the fund, you know, which firms have co-invested with you and sort of which unicorns are in your portfolio.

1:12:43And at least the third one is like somewhat correlated with performance, hopefully, you know, but, you know, I think, you know, LPs, like, I would just, I would always imagine that the larger and more sophisticated institutions, you know, would be doing more, more due diligence and diving in more and utilizing their resources. And what I've just found is that that's not really, that's not really the case. The other piece is, you know, once you actually start reading LPAs, you really start to see how, how much misalignment there is and how many different ways it shows up between GPs and LPs. and then also, you know, between LPs and sort of underlying beneficiaries, right?

1:13:22Because if I'm an LP that works for a pension fund that I make an allocation to a VC fund, by the time the other shoe drops in 10 or 12 years, I'm probably two jobs on, right? And so there's no consequence for what I did for me, but for the people whose money I was managing and deploying, they have to live with those results, right? So, you know, I think increasing alignment, you know, and then just using data, right? Using what's available. Again, you know, don't do things in sort of a binary prescriptive way. But, you know, especially if you're a sophisticated institution, like you have access to all this and you have a lot of leverage, and I think you should use it before you make your allocations, right?

1:13:58Use all the advantage and the resources you have available to you.

1:14:06All right, Evan, I think there's only one way we can close off this episode, and that is by cueing the music. Hit it.

1:14:19The LPs are confused. They care about the Wi-Fi beast. But the investment thesis doesn't make any sense. Don't follow the blind. It's a dollar's defense. Too many sophisticated LPs with no savvy. They worry about Wi-Fi, not about making cash savvy. Don't invest in a fund. Just cause they came Most LPs don't get it They play a different game In the venture world It's a bumpy road Ups and downs The story's a bore But if you're in it For the long run Take a chance Venture or real estate Just find your stance

1:15:16You