E370 | Carmen Alfonso Rico (Cocoa Ventures) & Evan Finkel (Integra Global Advisors): Managing the personal relationship vs. business relationship

28:21It's just the not calling the shots that just has a huge impact into the raising of fund two or fund three. And I just don't know if LPs are really aware of like that dance. I want to add sort of two very brief points here, right? So I think one also is that there are not insignificant number of LPs that sort of rely on distributions from a fund to sort of re-up into the next fund. I'm not saying whether that's a good or bad strategy, but obviously over the last couple of years, that's become very challenging, right? So if your expectation was, well, I'm going to have early DPI and then I could roll that into your next fund.

28:59And now that DPI is not happening as an LP, it becomes challenging if that's sort of your strategy for re-upping. The other one is that, you know, if you're a GP and you go to your LPs and you swear sort of like up, down and center that, you know, we're going to be on a four-year investment period, right? Or we're going to be on a three-year investment period. And then you come back to market two years later, that LP might not have budgeted for you to come back, right? They may say, well, I know that you're, you know, based on three or four years, you're going to come back to market in, you know, 2027.

29:27Well, if you actually come back to market in 2025, right, they may not have sort of a budgeted allocation for you at that point. And that does create challenges. What are your recommendations, Evan, to GPs to make sure they align better with LPs during the investment period to make sure that, okay, there's the biggest opportunity or biggest chance at least? So I think it really comes down to communication, right? I mean, I think, you know, your quarterly LP communications are obviously a very good time to sort of talk about the good things that are happening in the portfolio. But they're also a time to sort of level set, right?

30:01And I don't mean that every quarter you need to sort of like level set, but, you know, semi-annually, right? Or at least at your AGM, right? Lay out very clearly, like here were our assumptions at the beginning, right? Here's how we're tracking. And here's what that means, right? It's not just, oh, we thought we'd be, you know, 80 % deployed at this point and we're only 60, right? Or we thought we'd be, you know, 25 % and we're really 50, right? But take that next step and say, and what that means is, we thought we'd be done with all of our checks by the end of 2025. It turns out we're actually going to have two more quarters of checks, or we're actually going to be coming to market three quarters earlier than we thought.

30:39Because the more you communicate this and the earlier you communicate it, the better your LPs can plan. I mean, I think that's true. If you're a GP, right, in a portfolio company says, by the way, you know, we thought we were going to come to market, you know, for our series A in 18 months is actually going to be 12 months now. That's really helpful as a GP, right, to figure out, do I have prorata? Should I save it? You know, do I have to put together an SPV? So, you know, again, if you're a GP and you would appreciate if a portfolio company did something for you, do it for your LPs, right? I mean, I think it really is.

31:10It's a little bit piffy, right? But it's not meaningfully more complicated than that. Yeah. I actually, to this point, I'm far from, you know, being an example of anything, but one slide that I did from the very beginning of Cocoa that worked wonders was to Evan's point, like saying what we said we would be doing with like the key KPIs of the file, where we actually stand, right? and why and what are like the key takeaways and that like every LP from like absolutely love so if that's helpful that's like a very good way to condense that clear communication and expectations management. Carmen I think COCOA when you announced was a huge story everyone spoke of spoke about COCOA a lot of people knew Carmen a lot of people knew Anthony already and then now we all also know that Kokoa 2 is going to be just Carmen and Evan you've you've committed to Carmen's funds so yeah he's not yet this gamer forever no no it's okay I'm we're I mean I'll just say this is no but we can say he's small and it's okay snapshot in time we're in the middle of due diligence I mean that's really yeah exactly and that's okay he's still my friend we We should keep this in and then we should make the note to the audience that this was an assumption of friendship being a business relationship.

32:31Exactly. And I'm very happy that we're running those in parallel. Yeah. No, we're doing due diligence. I mean, I think like any other fund, we're doing due diligence. And yeah. And to every GP, I'll say it's a great due diligence. So that's fine. I appreciate that. Thank you. So my question is, so you're now in deep due diligence with Evan, and I'd love to ask you to just reflect a bit, both of you, on how do you deal with this situation, both as a GP and how do you tell the narrative? What are the absolute do's and don'ts? What do LPs ask you? And then to Evan, what do you look for? What do you look to understand?

33:15100%. So I'll give a bit of context. And I think the reason why Cocoa 1 was Anthony and I and Cocoa 2 is me and Anthony is doing his own fintech fund is that somewhere along the lines early in Cocoa 1, relatively early, Anthony and I realized that we wanted to build different funds. and also that we were different type of investors. He's a fintech investor and he thrives in fintech expertise and wants to build a brand around fintech. And I'm a generalist investor and Cocoa's brand stands for collaboration as in-house VC generalist. And I think these things can happen. And we see it all the time with founders in startups that people grow in different ways and you need to try things to realize it's not for you.

34:08And so I think like my biggest sort of tip or kind of reflection on this is you need to articulate ways for that to be able to be solved in a constructive way, right? And this comes to your point on that to answer your question. I think that requires clear communication, both and respect both between the two partners that decide to like draft or a way to take separate paths and also with LPs. And so Anthony and I worked together very closely together. We got to all the agreements, the full agreement just by ourselves during a few months. And we obviously involved advisors to make sure that everything was compliant and by the book.

34:53But it was our agreement born out of, again, mutual respect to what we each wanted to do and to make sure that we could preserve the value that we had built together. And then our second obsession was to make sure that we control the messaging. Because to your point, it is very different. As we did it, we spoke to every portfolio company together and one-on-one. And we spoke to the LPs together and one-on-one. and explain something that, again, is very natural, which is two people grow in different ways and want to do different things. And this is a very long-term business. You don't want to be stuck for 20 years on something you don't want to do or something that's not making you thrive.

35:34And everybody understood that. So as long as you are clear on communication, clear on expectations, and then the third pillar, do not add complexity. So like our agreement meant that it was very simple, that there was not going to be any complexity in running Cocoa. There's zero complexity for Anthony on his own. And we're both free to go and build our own way. And everybody was very, very supportive. But you just need to be honest and transparent and manage expectations. And so that's on the existing. Now, on the new ones, to be honest, it hasn't been, I don't think, a big thing for either Anthony and I.

36:10If anything, like a little bit of a win in the sense that we managed to preserve the value created and set the conditions to build more value. So I've been very honest to everybody that it wasn't an easy process. Like, and Cocoa, having Cocoa at existential risk for me personally was like one of the hardest things I've gone through. But once everything got sorted and got sorted the way we managed to sort it, it's a positive to us at least rather than a negative. Also because Anthony and I and Nobby is there, we've managed to keep our relationship as well pretty intact and are very close friends and support each other.

36:46just everybody in their own home because that's where we wanted to be i think i met with anthony probably in person the day after or so where you'd done your whole string of uh calls i at least i remember yeah that must have been some very intense days yeah we you don't want to see our our agenda that day but it was literally like every portfolio company also because to the point of controlling the message like we didn't want it to be leaked right and we wanted to tell our story our own way. So we had it completely scheduled, like portfolio first. We were like minimizing that. Portfolio first, then the three institutional LPs, then all LPs, and then a LinkedIn post.

37:24And it was like, yeah, we both will remember that. Yeah. And I do think it's cool that you picked portfolio first. When Anthony said that, I was like, what the fuck? All of it. And it was a lot of companies, right? Cocoa by then had like 22 two companies or something. So it was a lot of like chats, but we just wanted to make sure that everybody felt safe and felt informed. And it felt like that we cared because that decision wasn't reckless or it wasn't careless. And we're very clear on the responsibility that we have with portfolio when they take our money and with LPs when we take their money.

38:01And that doesn't mean we needed to continue building together for 20 years if we didn't want to, but it certainly meant we needed to do it in a certain way. Did you do a call with every single LP or did you offer a call to every single LP? So what we did was we had the institutionals was one-on-one called and then because we have many small long tail like tech entrepreneurs and everything we organize a call with all of them together and then we follow up with LinkedIn and we offer each LP then after it was all communicated if they wanted one-on-one and many took it and we had those calls for the next few days remaining.

38:36But it would have been impossible to do every LP on the same day. And so we grouped the smaller ones, we grouped them and then offer them one-on-one once the news were out. Very cool. Okay, Evan, now to you, your comments. What do you do as an LP when you're a potential incoming LP looking at a breakup from fund one to fund two? Yeah, I mean, you know, I think the context sort of matters, right? Why and how and what, you know, it matters. You know, I think something we've learned over time is we always felt like there was value to having sort of multiple GPs, you know, in a fund, like, you know, iron sharpens iron, having multiple sets of eyes, prosecuting a deal.

39:17Over time, I think that view has changed a little and we're certainly more open to the solo GPs. And I think a big part of that is because when you're underwriting GPs, right, of course, there's like the formal sort of underwriting, right? But then there's trying to understand the psychology, right? And it's not just, it's the psychology of the individuals. And then it's this interaction term, right? So there's another LP that I'm quite friendly with. And we actually want to teach a course. We're helping Stanford or NYU or Columbia. We'll let us teach like an MBA course, like on underwriting, like GP psychology, because I think it's like a huge piece, right?

39:54It's not just the individuals, but it's really the interaction term. And so a lot of times where this actually comes up is a very different case, which is like, oh, it's a fun one. Two people are going to work together. They did like two angel investments together, but they never really worked together. And you're like, well, I like you as individuals. I don't know that this actually works like as a partnership. And that's obviously the much more common case, right? Where two people are starting a firm, it's a fun one. And you're like, how is this going to work? And sometimes it does. And other times people realize it's not going to work.

40:23No harm, no foul, right? I mean, I think the responsible thing to do if you realize something is not working is to make a change, right? And sometimes it's hard, you know, default sort of like just raise a phone to and pretend that everything is fine is in some ways a lot easier, right? I mean, it's much harder to publicly sort of say we made a mistake and we need to go in separate directions. You know, and I think what we did and would do in the future, right, is just to get an understanding of how did this happen? Why did it happen? Right? Are these two normal people who just it didn't make sense for them to continue working together?

40:57Or is there something much deeper, right? Or there's some sort of underlying problem? Assuming that there's nothing of the latter, then we're happy to allocate to one or both of the managers, right? I mean, in some ways, it's advantageous as an LP because you're getting sort of like a pure distillation of strategy, right? Like Anthony could do what he really believes in in the way that he thinks is absolutely best without any constraints. and Carmen can do exactly what she thinks is the best without any constraints, right? And so in some ways as an LP, you might be better off, right? Because neither person has to make any trade-offs or have any constraints imposed upon them.

41:35They know exactly what the strategy is that they want to execute. They can do that. And so as an LP, again, barring some sort of headline-worthy story, I don't think it's really an issue at all. And you know what's so interesting? And again, there's never like one way of doing things and different LPs also have different models and different theses. But one thing that we were very surprised about, because we didn't see that one coming, was that some existing but also very sophisticated, non-existing kind of U.S. investors that do a lot of small funds, made a point to both Anthony and I, not related to me or him, that they were more bullish or that they had evolved their thesis on solo GPs because of the risk of founder relationship versus their return, right?

42:20And I think that when you have a 400 million fund, there's a big question on whether can one person deploy this. But when you have a$20 million fund, there's less of a question that somebody can deploy it over three to four years, whereas a founder relationship is always going to have a risk, right? And I am not married to the solo GP model. I'm married to business needs. I'll do whatever Cocoa needs. So it's not defending the model, but it was a surprising argument to me, which was the risk, kind of the ROI of that founder relationship risk, which is there because of the psychology and the human nature versus how needed is it to deploy a certain fund size.

42:57And so that was really interesting to me. Yeah, I think that's for sure true, right? If you had a $250 million fund, right? And then you decided to go your separate ways and you wanted to each raise sort of$250 million separately. I think there are certain questions that get asked that just don't get asked right at$20 million or$25 million. Because I think intuitively, it feels like one person can sort of deploy that. And as an LP, again, I don't think it's necessarily a bad thing, right? I mean, I think there's some level of maturity that you recognize into people who sort of do this. I think how they handle it and how the news sort of breaks, right, says a lot about their character, right?

43:32And can be either like a positive for them, which I think it was in this case, or it could be a negative, right? If it's not handled well. And then as an LP, you get like two, right? Extremely motivated people, frankly, who both want to prove that they can do it by themselves. And you get like a much purer distillation of strategy, right? So as an LP, I don't think it's a bad thing. The other piece here, which is not something you asked about, and hopefully won't be the case with Carmen and Anthony, But it is true that if you look at VC funds, right, not every partner always performs quite as well as all the other partners.

44:06And so there are cases where, you know, if a partner leaves or the partnership breaks up, you may actually be better off as an LP because you may back one partner, not the other. Right. Or you may say the strategy fits my thesis better than the other thesis. And so, yeah, it's not obvious as an LP that this is a bad thing. This is a very interesting point because actually I need full transparency given that we're like no masks, no filter here. And this has to do with the overall assessing performance of funds, especially going from fund one to fund two when it's so early. But I was a bit worried that I would have to get into discussions with LPs around like, oh, these are my companies and these are performing and these are Anthony.

44:44And to be honest, it is pretty similar. It was more I was worried about that sort of kind of rabbit hole. And I haven't. So credit to LPs on that. I haven't had to single out mine and Anthony's and then have somebody sort of comparing with 16 months whole Imperial, which one was better. So in that, it's been quite constructive. I think people have wanted to understand the investment thesis behind and everything, but it hasn't been kind of a fight or a battle in between like Anthony's companies and mine. And that has led to, I think, more constructive discussions than otherwise would have thought.

45:24Yeah. Also, I give you guys a lot of credit. I mean, I think that, you know, this could be its own episode. Right. But succession planning in VC is really, really complicated, even when it's going well. Right. Like even when things are going well and frankly, when things are going well, it actually sometimes becomes more complicated, I think. But it's obvious. Right. There are a lot of cases like you look at the Israeli tech ecosystem, you know, the sort of first generation of Israeli VC funds. They did a pretty poor job in our opinion of succession planning. And what happened was that actually spurred like a whole second and third generation.

45:56Right. Of like associates or principals. Right. Or junior partners who realized they were never going to get to sort of the peak. Right. And so they went out and started their own funds. And that actually turned out to be amazing. I think you're seeing that in Europe in a lot of ways where there are certain people who have started funds because they just realize, you know, if I'm going to do this, it's going to have to be on my own because there's just not enough room in the partnership. And that's one case of succession planning. But another is having the hard conversations that I think Anthony and Carmen had to have and say, does this make sense for us?

46:31Does it make sense for our LPs? Who are we doing this for? Why do we want to be doing this for another 10 or 12 or 15 years? And if the answer is no, then I think sometimes you have to take hard decisions. It's easier, again, to just sort of like let inertia carry you through a fund two or a fund three. But I think this is a bigger case of succession planning. But I think in BC, this is super important. You always have to be assessing. Well, if you take your fiduciary responsibility seriously, you always have to be assessing like what's best for, you know, everybody, all the stakeholders involved, right, that I have a responsibility towards.

47:04Sometimes that means you keep going. And sometimes it means you have to say, let's take stock and figure out, you know, how or what a path looks like to go forward. And so I think to Anthony and Carmen's credit, right, it would have been much easier, probably to just sort of like default to doing the same thing, right? They could have worked in two separate offices, done two separate things, right? And just like, nobody would have known, right but i think they took a hard decision and as an lp you have to give them credit for that and as an lp again i don't think it's a bad thing i think it's a it's a net positive so yeah i mean i respect that they did that a lot because it would have been easier to not do that one thing i thought about when you were speaking evan i really think that in mentor it's easier to dilute talent the gp talent than it is to scale the gp talent for that reason very often walking this path is the smarter path.

47:56If you can break up a fund, maybe it's better to do so. So I'm curious, how do you deal with it, right? Because you write checks to emerging managers, right? And you're supporting sort of the ecosystem here. How do you identify though, like when a manager leaves, right? Whether they left and there's something of substance that they're bringing with them to their new shop or whether the performance, the halo around them, right? Is because they had a big brand name and that's what walked the deals up to their desk. and that's how they wind up being good investors. It's not so different as it is anything, so to say, or any GP underwriting, whether it's a breakout GP from another fund or it's a new one, you know, because you don't break out of a great firm to do your own fund unless it's because you've got something special around you.

48:47And for that reason, it's diligencing that just as with anyone not coming from another fund or coming together to form one. So for that reason, I don't think you're going to look at the individual and you're going to say, is there gravity around this person? And if there is, then it's likely, much more likely that it's going to be a great success than if there's not. Some people work better in a big engine because they don't have that gravity around them. I think it's incredibly hard to be a good solo GP if you don't have gravitational pull around your individual person. Then you're probably better off inside a big machine because you're a better analyst and you're better, not as an analyst role, but you're better at that side of the business.

49:35Sure. But there are definitely personalities. Carmen is a prototypical example here, right? Carmen exudes energy. Everyone knows her. She lives in the arena. and enjoys it. And for that reason, anyone can see that. And it's very easy to also then understand, okay, Cocoa can be built as a very strong brand. But if you're this guy, you know, behind the computer, figuring out all the great numbers and with a super smart thesis, but you actually don't really like being out there, it's much harder to build it. And you don't care about brand. I don't think venture lives on brands. Even the brands that people don't know, They have brands in small ecosystems.

50:18And then that is where they have been very meticulous in building what they have around them. It's like a business of access, right? And so you need to have some sort of edge to get that access. So it's funny you say that, just because I originally, before Saul from Montreux was kind enough to introduce us, I actually somehow wound up on the Cocoa website at one point. And you sort of read through the pitch deck that they have where they sort of pitched founders, right? And there's like, whatever it was, 15 slides, basically like, here's who we are, here's what we do. And it's all like bubble dumb colored, right?

50:50And you're like, I don't really know anything about these people. I'm like, but like, we got to have a conversation, right? Like, I don't know how or what or why, like, I don't know that we're going to invest, right? But I'm like, there's something, there's some sort of gravitas that must exist for a person who like, or people who put this out there. Yeah, the chocolate, the whole thing, right? Like, and so I had actually reached out to Carmen ahead of that. And then Saul was kind enough to make the intro. And yeah, I mean, I think to the point before, right, like the brand synergy between Carmen and Coca-Cola, you know, I wouldn't even call it brand synergy, right?

51:28Because it implies that there's some sort of like two separate things that like have to be used together. Like there's just like oneness, right? Between like Carmen and Coca-Cola. And I think it makes a ton of sense. Like I really do. Right. And I think, again, for Anthony to go out and do his own thing, right? I think that there's a lot more synergy between what he's doing now and him as a person and his belt and shum, right? And just his general interest in BC. And so, yeah, look, I mean, I think you're right about the gravitas. And that's actually what drew me to Cocoa originally. And we certainly wouldn't be having this conversation, right?

52:01Or I wouldn't have the relationship that I have with Anthony, right? If it weren't for that gravitas. And so you definitely do feel it. But you're right. I mean, sometimes, you know, there's a person who's amazing within a bigger shop and they go launch their own fund and you're like there's something i like here but there's also something fundamentally that just is not going to work like as a as a solo gp right or in a small place but other times yeah there's somebody is only going to work right as a solo gp or within the smaller shop because that that's how that uh you know it's just the personality thing in some cases i should just say because we've mentioned anthony so many times uh we have recorded the episode at this time when we're recording this we have recorded the episode with anthony announcing rerail uh at the time this goes out rerail will have been published oh so we can talk publicly about it okay yeah i didn't know i was like anthony's mind like you know right i'm like whatever anthony is working on yeah me too i was like wait okay no okay that's good to know i can guarantee that since we're looking at 23rd of september now i can guarantee that by the time This is ready to go.

53:06We'll have Anthony. Great. Okay. Yeah, I don't want to blow up his spot. Yeah, exactly. You were like. I think we're three people here who loves Anthony very dearly. So very happy to give a shout out just here in this episode. As we're midway through 55 minutes, so two-thirds probably more. I want to go to another topic, which is management fees and carry. Since we have two sides of the table that speak very honestly and transparently, I love to dive into that topic with the both of you. Maybe Evan, since you're on the LP side, everyone can imagine how exciting it is to hear from you. What do you think about the whole conundrum around, must it be 2 %?

53:51Could it not just be 2.5 % because I'm actually trying to build a platform? And how about that carry? Could I have so that it goes to 3x or 4x if I achieve something before year 3 or 4? So look, I mean, first principles here, right? One, like as a firm, we are long-term greedy, not short-term greedy. Two, we are not opposed to people getting paid what they are worth. In fact, we very much support people being paid what they're worth or commensurate with the value that they create. But we think that there should be incentive alignment between sort of value creation and compensation, right? And so I think there's a lot to unpack, right?

54:33So we'll just break it up here, right? Management fees, right? And then carry, right? Because they obviously are sort of two separate mechanisms. Management fees, right? The big things I think that LPs are talking about right now is sort of front-loading of fees, right? And how much can sort of be front-loaded and how much is sort of reasonable to front-load. And then sort of to like, what's the overall fee burden, right? So if I just like add up over the life of the fund, how much of the fund is actually going into fees, and not just management fees, right? But ding, ding, ding, bonus fees, like fund setup fees, right, which could be another half million or a million dollars lopped off the top of the fund, right, or a few hundred thousand dollars.

55:11And so, you know, I think from an LP perspective, we would like there to be more alignment, right? And so you should be able to take management fees, because you need to run a business, you need to pay yourself and your employees, you need to build a brand, you need to build the fund. But the reality is, if there are management fees that you don't actually need, so maybe you want to do 3 % in the first year or the second year, or you want to do 2.5%, if it turns out that you actually don't need all that money, it wouldn't be the worst thing in the world to put it back into the fund and recycle it and create a little bit more investable capital.

55:47I think the other piece is, at some point, it feels like the business model is broken. And I don't know exactly what that point is, but if you have to front load your fees and then you're going to raise again in two years and front load those fees and then front load again, and you're taking setup fees off the top and all this other stuff, at some point it just feels like maybe it's not about building the business so much as needing to have a better business model and figure out what is the actual, what is the goal here? What do I really need? How does this work? I just comment on that because I do think you're absolutely right, the business model is broken in the sense that two and 20 works beautifully for a specific fund size.

56:28But when you are coming down to 20 million euro fund sizes, 15 gets hard. That's where I think it makes a ton of sense to say, okay, let's, the only reason you really stay in the nomenclature of two and a half percent and so on is because you got to stick with what's somewhat vanilla. You know, the problem with that is that, and as somebody who runs a$17 million fund, so they're almost two opposed forces, and I'll explain how I think of solving it at Cocoa. But on one side, I agree, like, you know, the nominal or absolute amount of 2 % over 17 million is like very, very small to actually run the operations of a fund, right?

57:09On the other hand, and this is why, so Cocoa, we've kept it at 2%, but we front load. to be able to run the operations. Now, having said that, I also don't want to increase the fees. And I'm also very, very, very careful with what I put as fund costs because every bit that goes as fees is money I cannot invest. And I need fees to survive, like to operate, but I'm not making money on fees. I'm making money on carry, i.e. on returns. So the more money there is to invest, the more chances I have to make higher returns to get more carry. And so if I were to do the 2.5, like it actually does impact my chances to like make more money in the long term and to like give more returns to LPs.

57:53So it's a little bit of a tricky thing in which I am like front loading for sure, but keeping that 20%, like over 10 year period constant so that I maximize the amount of money I have to invest. I think that's the challenge, right? Is that there is a point again, where like the 2 % stops making sense and you say, okay, obviously, right, people are, their incentive structures change, right? And people are just getting nice and wealthy off management fees. And they're not really incented to generate carry, which means they're not intended to generate performance for their LPs. And so yeah, I mean, I think that there's a balance, right?

58:32We're sort of, we're taking this thing and this, when we get to carry, this will be much more sort of relevant, but, you know, the two and 20 model is really like a hedge fund model, right? And so the way that hedge funds work, right, with a two in 20 model is sure, they're taking the 2 % management fee. Although now, right, hedge funds are passing through fees and some of the bigger pod shops are really right, three, four, five, 6%, right? And so there's no inherent reason why you have 2%, right? It's sort of like a historical quirk. And the same thing with carry, right? So hedge funds charge 20 % carry, but they charge it at the end of every year, right?

59:08Not at the end of a fund cycle because they're just open-ended and they also have a high watermark, right? So if you're a hedge fund and you actually have poor performance in one year, you can't charge your 20 % carry, right? Until you get above sort of your high watermark. And so the fact that we just like took this thing and plopped it into venture and we used it when venture funds were 25 or 50 or a hundred million dollars, right? Or when you were like a mega fund, if you raised like 250 and now we just assume it's appropriate when the range of fund sizes is increased. I mean, I get why people do it.

59:41Again, there's a lot of inertia here and it works really, really well for most GPs. So they're not really particularly incentive to change it. But I don't know that there's any reason if you were starting VC from scratch, this is the model you'd land on. Yeah, I was just searching a bit online here because I remember seeing such a beautiful steer. So to say where you can see what happens as you scale AUM versus if you stay with a low AUM but just keep banging out high-performance funds, you've got to be an incredibly good fund manager. Yeah. I get why people raise more money, right? It is. It's easier.

1:00:20100%. There's this piece from Rex in the US. He does that math, and I don't recall the exact numbers, but basically it's like you would need to consistently return like 5x funds of i'm making up the numbers but like 20 million in order to catch up on the fees that you would be getting if you do like a few hundred million funds so 100 it's easy because you can i think it's fair to say that if you're a successful fund manager and you do want to scale You can increase your fund size at least 2x every fund up until you hit 250 or so. So if you just add, obviously you have to add personnel, also other partners and so on.

1:01:08But if that's the game you want to play as a founding GP, there is a playbook to do it. And it's definitely executable, so to say, especially in Europe, I'd say, because we have very large LPs that cannot do the small tickets. So you're kind of like, you actually either want to be 25 and small, or you want to be 100 plus. There's many that it's a bit difficult to come in with a 2 million and so on for many. Yeah, so very difficult to keep a high performing asset class when the core dynamic around how the GP is remunerated is distortionary. We've discussed this with Evan a lot of times. I mean, to me, as you said, it's all about alignment of incentives.

1:01:59And I have a slight obsession around win-win situations that might prove very stupid a few years from now, but that it is very core to how I operate. But it's all, again, about being honest with what you're optimizing for, right? And as long as because, so I guess there are LPs that also have different incentives. And it depends on where the money comes from. Is it your own money? Are you managing third party money? depends on the timeline that you have to make money. Like many, and some LPs want to put money to work and then certain sizes of funds are needed to allow people to put money to work and they will be willing to trade off on returns.

1:02:39And then there are other LPs whose check is one to 2 million because it's their own family office money and they're optimizing for returns. So I guess it's like all about being very clear. What are your incentives? What are mine? Are they aligned? Are they not aligned? And as long as you are doing that, there are many roads to heaven or to hell. Well, there's definitely in venture, there's more roads to hell for sure. Yeah, exactly. Let's talk Kerry. Tell us your take on the 20 % Kerry. I mean, I guess in the interest of having a productive discussion, let's just assume that 20 % is going to be the default for a while, right?

1:03:19And we're not going to rewrite the structure. You know, again, we want people to be incentivized to create value. And we are very much in favor of people being compensated commensurate with that value. So if you say, for instance, that, you know, sort of default is, you know, I get 20 % carry. And if I do, you know, if I do better than 3x net, I should get 30 % carry or 25 % carry. Cool. Totally on board with that. But hey, if you do less than 10, if you do less than 2x, maybe you should get 10 % carry, right? Like if you're saying that like you're so skilled, right, that you sort of created additional value and you should be compensated for that, totally fine, right?

1:04:00But if you're, if you have anti-skill, right, and you're actually like value destructive, or you like you massively underperform the market, like, shouldn't the scale sort of like, you know, favor you when you create a lot of excess value, and then maybe give you less compensation when you be able to create value for your LPs. That's the hurdle rate, right? It's not so high, right? It's like 1.2. Yeah, 1.2, 1.3. I actually don't disagree with that, by the way. If I make LPs money, I want to make money. If I don't make LPs money, I'm not making money. And in that, the same way that I can say I certainly have super carry, and if I overperform because I don't make money on fees, I might as well make money on carry if I've made money to LPs.

1:04:45I don't disagree with that. with, again, looking at alignment of incentives. And I might be kicked out of the VC community, but I think there are very few things that you can say against that argument, right? If we think about, again, alignment of incentives and if there's a super carry, there might be an anti-carry or like a bad carry kind of. Quick question on, and this is, again, curiosity from MGP to LP. What about like European and American waterfalls? Because this is a discussion that has been popping up lately. Most funds in Europe have European waterfall. Public institutions have a lot to say in this because they restrict that.

1:05:24But more and more, GPs are sort of pushing for like an American waterfall. Yeah, I mean, I think it's a little bit complicated because, you know, with an American waterfall, right, that sort of works, I think, reasonably well in private equity. or like maybe in very late stage venture, right? Where you tend to have like a much more concentrated portfolio and your risk of failure or your perceived risk of failure is lower and each investment sort of stands on its own. I think when you're building a portfolio, particularly a portfolio of sort of like early stage investments, right? Where the risk of failure is relatively high and you're basically banking on sort of one or two outsized outcomes to generate.

1:06:11you know, all the returns for the fund, right, or several multiples of the fund size in terms of returns. That seems to me to sort of lend itself toward a European style waterfall. As an LP, one should be skeptical when GPs decide that they suddenly know a lot about waterfall structures and have very informed opinions about this, right? And so yeah, I mean, I think it makes sense to use it in early stage venture, in particular, to use a European style waterfall. I think it just creates better incentive structures. And I think it's a better reflection of what sort of an early-stage venture portfolio looks like and how it develops over time, right?

1:06:49Whereas I think, again, in private equity, or maybe you can make the argument like in sort of like growth equity IPO type venture investing, maybe an American equity, an American waterfall makes sense. But yeah, I think in early-stage venture, it's really hard for me to understand why as an LP you should be in favor of a switch from a European to an American style waterfall. Could you, Evan, just for the audience that are not super familiar with the differences between US waterfalls and European waterfalls, could you? Sure. I have them in front of me as well, so let me know if I need to come to your assistance.

1:07:23A European waterfall, I think, is basically what people envision when they think about carrying a venture fund, right? So essentially, you take a whole portfolio view. you as a GP don't start getting carry until like the entirety of the fund size has been returned one X to L fees. Whereas an American style waterfall sort of looks at every individual deal as its own fund. And carry is basically generated not on a fund basis, but sort of on a deal by deal basis. And again, I think that works better in private equity where you have a bunch of like operating companies and, you know, they all might be doing very different things and portfolio strategy might look a little bit different.

1:08:02Whereas in a venture fund where, again, one or two companies are likely to generate the entirety of the returns in the fund, looking at things from a portfolio view, which is a European-style waterfall, I think makes a lot more sense. American-style waterfall, again, is deal by deal. And so that makes sense when you have a very concentrated private equity-style fund or maybe like a growth equity fund. But early-stage venture, to me, as an LP, you should really be taking the whole fund view. And the GP shouldn't be getting carry until they return the size of the fund matches the size of an individual investment.

1:08:35Can you tell me how many US funds do you know typically that run with the US waterfall? Is that practically all of them also in the very small? No. So I think I don't have a sort of historical speech to give on why they're called American and European style waterfalls. but I don't think it's true that like American funds, early stage venture funds typically have like an American style waterfall. I think it's, it's generally the case that early stage VC funds, regardless of where they're located, use a European style waterfall. I mean, there are some exceptions, right? But, but in general, I think the way the industry has evolved has been European style waterfalls.

1:09:12And so that's why as an LP, you know, if a GP suddenly has very strong opinions about why they need to switch to an American style waterfall, I would be concerned right about incentive structures. The two GPs might not be the best match if one thinks that all the fintech investments should generate returns only for him. And the generalist thought that all the non-fintech should go only to her. No, that's part of it, right? Like if you're a GP... Here I'm conjuring up an example that is not true about Cocoa. Definitely not. Yeah, we are very equal in sharing that. But it might have been, had you stayed in the, in the, in, in Coca-Cola too, but, but decided to split, you would have probably gone that route because you would have said, well, we actually are pursuing two different strategies.

1:10:01Yeah. I mean, I think that's part of the problem, right? Is like, if you're a GP and there are multiple GPs in the fund, at least nominally, you're all sort of incentive. You're all incented to do the right things for the fund. Again, it doesn't always work out like that. But if there's a European style waterfall, everybody has sort of skin in the game, right? As again, is at least nominally incented to make the right decisions for the fund. If you have an American style waterfall, some of those incentives start to break away, right? And you just, you as an LP, I don't think benefit from that, right?

1:10:34So very basic example, right? If there are a couple of GPs in a fund, European style waterfall, if I'm an investment committee and I don't think my partner is doing a good deal, I have a lot of incentives to speak up, right? Because that capital is going, you know, that capital is going to go down the drain. We're going to have to do enough good deals to make up for that, right? Whereas American style waterfall, you know, maybe I don't care, right? Because it's like, oh, it's my deal. My deal did amazing. I can point to that. And so, yeah, I don't think that's a great, I don't think it's a great outcome for L fees.

1:11:03All right, Carmen, Evan, enough about fees. I want to just ask you a bit because we're all work in progress. I keep saying that to everyone. I've just fucking been at a self-development retreat. Screaming into the void. So tell me, guys, I know the two of you have strong positions here, and that's also probably part of why you're both being so honest and forthcoming about everything, recognizing that we are all work in progress. I'd love to ask you to just take it from here. Tell me a bit about why this topic is so important to you. Okay, I might get myself into a lot of trouble. This is like a dangerous, but I think like we very rarely have like forums, like GPs, LPs, in which we can like be honest.

1:11:49And to your earlier question on gamesmanship, we're not playing like games and that we can really like talk about the things that LPs do that are really hard for GPs and the things that GPs do that are really hard for LPs. because I sort of always start from the point that we're all good people. We're all really working very hard, as you said, and like trying very hard. And if we kind of raise the awareness about the impact that certain things we do have in each other, we probably like can improve and like, you know, grow better together and like grow the ecosystem together. And so I think that they're like wonderful, brilliant LPs who I admire and respect.

1:12:30I'm going to say some things good LPs do because that's also great to raise awareness on like the great things. And it's like taking the time to do the work and look deeper into companies. Like even if that takes long DT, as Evan was saying, like we're in deep DT, but like it is a thoughtful like DT, that like is great. Take the time to give feedback, right? And explain why, because passing is always going to be okay. Business is business, but like why that makes us like better as GPs. I've even had LPs who passed and made interest to other LPs that invested. I mean, how amazing is that? And LPs that stand by your side, they're thick and thin.

1:13:11When Anthony and I said that we were taking separate paths and we had LPs supporting both of us and the ones that believe in you and put their name on brand. So the world is full of wonderful LPs, but things that I've experienced and others have experienced that again i don't think there's bad intent but i have a tricky like a pretty damaging sometimes impact on the pieces like one committing and then not honoring your commitment and this hasn't happened to me but it has happened to like many people i know or it hasn't happened to me yet ignoring capital goals like that has happened to us and having to be very close to default than LP and just like how mindful we're all running businesses.

1:13:59We just talked about fees. Like we run a very tight ship. All these things are highly like disrupting. And so, I mean, I have one, but maybe around the commitment and the capital calls, Evan, if you want to like, kind of give the LP side of things and then we can flag others. Yeah. Very much my view and not the house view, I think here. I think that GP should be a lot more bold about sort of publicly naming and shaming Alpizzo of bad behavior. And frankly, I think founders should be a lot bolder about naming and shaming GPs of bad behavior, right? Like some of what we've learned over the last couple of years, right, is that there's a need to sort of clean out the ecosystem like in certain ways, right?

1:14:40And that's to be clear, right, that's like mostly in the sense of a lot of people raised fund ones, right, like in 2020 or 2021, and they couldn't raise a fund too, right? Like in the last 12 or 18 months. And so that's one form of cleaning out the ecosystem. But another is just rooting out bad behavior, right? I don't think there's a place to make a commitment and then to renege on it. And I think if you're a founder who has to experience that, I get why it's very hard to go out and name and shame people because ultimately you're going to have to raise more money in the future. And so it's really, really tough.

1:15:16And I get why as a GP, again, and you're less inclined to do that. But I would say from a GP perspective, I don't think there's as much of a disincentive to do that as there is if you're a founder. And so, yeah, if you're a GP and you feel like some LP, like, you know, not just that they hurt your feelings, right? But really, they did something that was untold. I think that you should feel okay about naming and jamming them. But to my point earlier, right, you should just be aware as a GP that LPs feel like you're doing the same thing to them. when you change the terms of like the LPA, right? Between like the first closing and the final closing, right?

1:15:54So I do think there's sort of like people in glass houses shouldn't throw stones element to this, right? Where if you're a GP and you feel like LPs are certain LPs or an LP has done something to you that's not right, you should feel empowered to sort of like talk about that publicly, but you should just make sure that your own house is in order first and that you're not doing those types of things, right? So it's a GPs. On the naming and shaming part, I would only say that I always advise against doing that because it's just so... Now my son is joining us on the podcast. Come on in. Come on in.

1:16:34I always think it's so difficult or dangerous to do that because you don't know exactly the context. You don't... And so oftentimes you have an institution that you comment on more than the individual, but it was actually one individual. And I think it's very difficult, especially in our game where, because people do take what we say here as advice. And that's why I think it's important to say. And LP land is so hushed business for many. many LPs really like their quiet and for that reason the last thing you want to do is create any feeling around your fund that what you do here is is not private or might not be private so for that reason I I think I would strongly advise not to do it I agree it's tricky and there is a reason why GPs don't do it right because they're afraid like but the reality to be honest I think there are two levels like GPs talk the same way founders talk like and so there is and to your point and there's i think there are cases and cases and like there you you need it's always hard to know exactly the context because none of us was there but i do think that on a one-on-one basis people share those stories right so like if you we know the fans and we know the individuals that haven't honored their commitments because some the same way we share lps and we help each other make interest of this we warn each other and we reference.

1:18:07As I GP, you should always reference the LPs that are going to come into your... There are definitely prominent LPs in the ecosystem that I have told many about when they ask, what do you think about? Then I said, well, these are the good things, but this is also what I hear from many that you should be aware of. And then you just make up your mind, right? But you know the risks because I think like some of these things, and we can go on to another one that's hard for GPs, but it's not like existential, like ghosting. Okay, fine. But like this committing, I'm not honoring that commitment. I'm not attending a capital call that can actually kill a fund on the expectations.

1:18:43I think like in that, if LBs are just - That is like, you just cannot do that. Right. But unfortunately people - That is sifted frontline news. Wait, but that's the thing, right? I'm not saying that people, like as a GP, you get to go on LinkedIn, right? And like just word vomit out all of your feelings about every LP. But I do think that there are forums, right, where you could talk about this, where you spread the word, right? And it's helpful to other GPs. And I do think there has been some progress on this issue, right? I've seen recently some talk about what I'll sort of call like fake family offices, right?

1:19:22Which are like institutions that don't really exist, right? Or they're like, yeah, so there are, right? And I I have not done a GPLP event where you didn't have to weed out quite a few of those. Yeah. So I think that there's been much more awareness that that's a problem and it's a waste of time or situations where people act like they're interested in investing and then you spend a bunch of time with them and they're like, we love what you're doing. So here's a contract. We'll charge you 2 % to be a placement agent for you and we'll go find you some LBs. So I do think there's much more awareness of GPs and much more discussion about that.

1:19:57Obviously, yes, there are lines, right? and there are certain things that you just you have to find the appropriate time and place and format. But I do think that it doesn't help anybody in the ecosystem if there are legitimate bad actors and they don't get, legitimately bad actors, and they don't get rooted out from the ecosystem. It doesn't help LPs either, right? Because to my earlier point, they're wonderful, LPs. And when you've got this... Thank you, that warms my heart. Honestly, they are people... And fundraising is like a sort of roller coaster of emotions because you meet these incredible people, you have brilliant conversations, they support you, that feeling of having their trust, and then you meet other kind of type of humans or institutions.

1:20:40But I think the challenge here, because by the way, I guess every founder listening to this is sort of smiling and thinking, oh, like, you know, because they experienced that with VCs as well. This is why fundraising, I think, is a great kind of source of empathy for GPs. But the reality is that because of how the VC founder market evolved and the competition that was created and the FOMO, the market sort of forced bad actors out more or prevented bad actions because it sort of just caused a disadvantage to you in your access. And that is the one thing that you can't afford as a VC, right? whereas in the LPGP market because there's way less FOMO I think like the market doesn't necessarily and always self-correct certain behaviors and again not always a bad intent but the thing is that on one side you have that and the other and again we've spoken about you know large funds with like I that might have IR personnel and that's a different thing but when you think about emerging managers like this is our life and we're literally putting everything we have, like all the time, our financial future, everything to make it work.

1:21:54And so a lot of these things do have a lot of like a huge rational financial impact, but also emotional. And if people would be aware of that, maybe they would do less of that. And that's why I think it's with no naming in this case, but it is important to call it out that to your point, Evan, if you have eight meetings with somebody to then tell them that you don't invest in their fund size, I mean, their fun size was the same. Like eight meetings before, you might take one, you might take two, but be respectful of the time and of like, you know, what everybody's putting into what they're doing.

1:22:28Ghosting. I understand you need time to make up your mind, but it makes no sense to take months to reply. And what even makes less sense is to then actually call, ask for a favor or an intro and ignore that there's like an outstanding decision to be made. And the interesting thing is I've asked like five, six GPs about this. Everybody has mentioned this. And it's just, let's just have more like clear communication. Let's respect each other's line of business and try to grow together and be constructive because it's just really unproductive. You mentioned sort of like LPs not meeting capital calls.

1:23:05So, you know, from my perspective as an LP, right? I think that GP should be much more proactive about defaulting LPs. Like if you send out a capital call and an LP ignores you, in my mind, the next communication is like a demand letter from a lawyer. And if they don't need it in 10 days, you should just default them. Now, I don't want to say it's an absolute rule in the sense that you may have an LP, you know they have some funky personal circumstances or that they're generally like they've never done this before and maybe they're on vacation, maybe they missed an email. So I'm not saying you always have to fire the legal gun at them.

1:23:41But in general, if I'm an LP and there are other LPs who are ignoring capital calls, that's actually a big problem for me as an LP because it means that you are spending time, not investing, but you're chasing down other LPs to meet capital calls. You have to call more capital, which means that my capital is just sitting in a bank account waiting because you just need a backup amount because you're worried that some LPs are not going to meet their capital calls. So it's actually disadvantageous for me as an LP for GPs to not be more aggressive about, again, just punishing bad actors who are not meeting capital calls.

1:24:17I guess the question for you though is what this ain't meaning thing. There are of course cases where an LP should have known or maybe does know and they're just wasting somebody's time or they're ghosting. But don't you feel like sometimes there's just this weird dance where both the LP and the GP know this is not going to happen but neither one of them wants to have the tough conversation right the lp doesn't want to break up with the gp the gp is really desperate for money everybody knows it's not going to work the gp is like dripping them like every three months and it's like yeah sure let's get another call to come in on that evan one consideration as an lp about taking a third meeting or whatever or a catch-up call is what does this signal when what you you know you like the person and you think that you've actually been quite clear that, you know, we're going to wait until we know more or now is not the time.

1:25:13But, you know, you keep getting those requests for, shall we have a catch up call? I'm in Denmark. Well, I'd love to, but please don't think that because I'd love to see you for lunch. I'm going to invest. I'm committing. Right. Nothing has changed since the last time when I told you. Don't throw it at me in, you know, in two months that, well but we've had four meetings now yeah well you asked for three of them right you came to my house and knocked on my door like yeah i let you in right i let you in so this is the great thing of this conversation also of showing the two perspectives right because also gps might not be aware that they're doing that bit and to me it's very like with founders it's like we experience that with founders as well so we understand like how of course slash like a discomfort in that dynamic can be so in that sense it's like also for lp read the signs right like if you ask for a meeting and they like but my point here is here's the difference like you ask for a meeting and they don't reply that i have a little respect for you ask for a meeting and you say hey i'm not in town and you don't suggest to have a call read the signs yeah like clearly not interested right and so i think it's more about let's all grow up and be transparent, be honest.

1:26:25There's not a problem. It's like, I'm not going to invest perfect. Great. But it's just, and the same with GPs. Just to add on a comment, I think Chris Wade has said it so well, so many times on our podcast as well. Ask the LP the exploratory questions instead of just going into pitch mode. And here's my update. And let me tell you, Like, if you just asked, give me time in our 30-minute catch-up call to tell you that right now we're not investing in this sector because we've just allocated to, you know, but you never get to, you know, give them that context because you're like right into a big sales meeting.

1:27:08Very true. And also do the work, right? Like as a GP, I mean, like if you're talking to an endowment that their minimum check is 25 million and your fund is 20, well, unlikely that that's going to work, right? So yes, and on every side of the, to me, things that have worked well as a GP is build the relationships early. Like a GP mentor told me once you're always fundraising and as disheartening as that myself, I think that that is correct. To be transparent to our point earlier, like this is a long-term relationship. You want to be comfortable in your own home. Like it's exhausting to have to hide stuff.

1:27:47Respect the LP's planning. The same way that I say, look, ghosting is not okay. don't make a massive request on august 20th get it and don't reply thank you like the same also lps have their time they have many fans too that they're in their portfolio they have dd is other fans that they're doing they have a life so also respect that you there you're not the only thing that they're like looking at that i i agree with and then read the signs to your point i know it's a no and that's okay let's move on learn from it and move on so i think those like being also honest with yourself as a GP on where is the opportunity and where isn't is a very important part.

1:28:23But also on the LP side, be mindful that the people you have in front are really putting everything like that they have and that deserves some sort of respect. And even if that doesn't inspire respect, just be mindful they talk. And so if you're like running or want to build a long-term LP business, like it is, and this is not to like um make evans ear ring but it is very different if i intro evan and i say he's my favorite lp and he's even at cocoa yeah then if like somebody asks me about x and i'm like oh like we almost had to default him or her because it was impossible like and again it's also a business of access right there's no competition there's no fomo but you want to get into the best funds and the best funds are going to be able to choose and you don't want to not to be chosen because of previous behavior.

1:29:13Yeah, absolutely. Guys, we have been through only about half of the topics that we wanted to cover. We've gone over, I think, with 20 minutes or so. Would you be up for rescheduling another podcast episode where we get to cover the rest of these topics with as much fire as today, maybe without my son? Let's do it. I mean, your son can join if he wants to, that's fine. Of course, and the dog. Hola, hola. Especially, Andreas, I think that's a great idea because especially one that is very kind of key that we didn't get to was like, how do LPs assess performance? And that is so confusing for our GPE that that would be amazing to get Evans, like no filter insights.

1:30:00Yeah, let's do it. Okay, no filter. Let me tell you, no filter, Evan, no filter, Carmen, no filter, Andreas. We will be doing another podcast episode right here talking about the proper role of government institutions, how LPs assess fund performance from fund one to fund two and three and onwards, maybe even. And then I think we need to cover more of these absolute no-go behavior from both GPs and LPs. You're like, I knew you would want that. Awesome. Yeah, let's rock and roll. Let's do it. Everyone, thank you so much for tuning into this episode. I enjoyed it thoroughly. So did my son. To those who have had video on, you'll know exactly why I say that because he has been joining us in this last segment of the conversation.

1:30:46Carmen Evans, thank you so much for having us. Thank you for having us and giving us the mic. Thank you. Bye, Eva. Thanks, Andreas. Bye, Carmen. Here's a few words from our beloved sponsor. Introducing the Cult Tech Summit, a two-day celebration of culture and technology. Carefully selected startups, unique workshops, lectures, theater shows, investment opportunities, and more. At Cult Tech Association, we enrich culture with technology because we think culture is essential for human growth. That's why we want to make it accessible to everyone. Invest with us, found with us, make art with us, and come to the Cult Tech Summit.

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