E439 | Jim Pulcrano, IMD Business School: Educating LPs and Demystifying the Venture Mindset

0:00It's interesting, but it doesn't make sense. And so I said, put myself in the shoes of the customer. In this case, a typical, very conservative pension fund manager. What would I want to learn and how would I need to learn it? And I'm not going to put more than two or three days into this. How do we do it? And we just work from that. So, OK, let's make sure somebody explains the case for a pension fund to invest in alternative assets. Let's make sure somebody explains the nuts and bolts of how a VC fund works. Let's make sure that we get in there. Why entrepreneurs need capital. You know, let's get down to first principles here.

0:36Let's get into the biases that we might have in making choices of where to invest. Let's put them in front of, you know, say the small amount of information that a GP might have when they have to make choices, even choices as to a second meeting and see how they handle it. Because what we wanted them to do is to both see the upside of venture capital, but also to see the difficulty of GP's job.

1:06Tear down this wall. It's more than just an alliance. This is a union of values. Let's start acting. This show is not investment advice, and the hosts of this episode may be invested in the funds and companies featured. To everyone tuning in today, we're talking to Jim by a nice intro from our good friend, Christian Rangen. And he said, you too should definitely talk. So let's open the podcast by saying, Jim, why should we talk? How did you get into this whole little world of venture capital? So I got into the world of venture capital originally as an entrepreneur. Back before, at least in Europe, we knew what venture capital was.

1:52I joined a startup in Geneva. I became the managing director. It was basically a hobby at that point. And one day I was invited to a meeting of venture capitalists. That's what they called themselves. But really, it was just a bunch of high net worth individuals and private bankers. And they asked me to give a pitch, which, again, I'd never done before. And that's where I started to learn about it. I mean, this is the infancy stage of venture capital in Switzerland. One or two of those people are still around. Yeah. I mean, the co-founders of Index, et cetera. But that was how I got started. And then eventually, on the teaching side, we decided to bring entrepreneurship into our executive MBA and MBA programs.

2:37And I was the obvious person to take that on. Tim, you have done a bunch of work in the educational side and research side of venture in Europe at IMD. You've created the VC asset management program at IMD. Maybe let's start with the obvious question. Why did you feel the need to do that? Why was that important? Well, feel the need. I felt the need for a long time, but it really wasn't central to IMD's teaching. I mean, I was helping relatively senior executives understand the world of entrepreneurship, and that always culminated in them pitching to real Silicon Valley venture capitalists. That was part of the exercise.

3:22But that forced me to start understanding venture capital. But still, IMD's role in teaching venture capital was it didn't fit with our business model. But then one day, a billionaire walks into a bar. That's why I always start this story off. Basically, yeah, a billionaire entrepreneur came to IMD, Swiss guy in the education field, and he was frustrated by the fact that so many Swiss pension funds were unwilling or unable to invest in venture capital funds. And at the time, I remember looking at the numbers and there was like$1.2 trillion in money locked up in pension funds in Switzerland. And only around 1.2 % was actually going into anything alternative, VC, PE, et cetera.

4:10And his belief was, hey, if we educate LPs, they're more likely to consider venture capital as a place to put money. And so that's how we got started. And that's only, no, what's that, two, three years ago. And for me, though, it was just this wonderful opportunity that finally I get to go deep into a topic that I've been playing at the edges with for the last 20-something years. So that's how we got started. super aligned with us and everything we do. So I guess anyone can understand why we had to have a conversation. How do you go about building that program from a curriculum basis, who teaches it, that type of thing?

4:49I know for a fact that Daniel from Speed and Mess, Daniel Capricanore, has come and spoken a few times. But I'd love to hear how do you do this. And Daniel will be with us again in the May program. He's fantastic. Let me put it the way it really happened. First of all, some academics looked at it and said, this is how you build a program. And I remember looking at it thinking, this just does not make sense. It's interesting, but it doesn't make sense. So I said, put myself in the shoes of the customer. In this case, a typical, very conservative pension fund manager. What would I want to learn and how would I need to learn it?

5:28And I'm not going to put more than two or three days into this. How do we do it? And we just work from that. So, okay, let's make sure somebody explains the case for a pension fund to invest in alternative assets. Let's make sure somebody explains the nuts and bolts of how a VC fund works. Let's make sure that we get in there why entrepreneurs need capital. Yeah, let's get down to first principles here. Let's get into the biases that we might have in making choices of where to invest. Let's put them in front of, you know, say the small amount of information that a GP might have when they have to make choices, even choices as to a second meeting and see how they handle it.

6:11Because what we wanted them to do is to both see the upside of venture capital, but also to see the difficulty of a GP's job? Because, and I've said this many times, we saw three potential outcomes. And again, we're not trying to sell venture capital. We are an educational institution. So either the LP, family office, whatever might decide, yes, this is something we want to do. We're going to put money into A or several venture capital funds. And we have a sense of how to choose our GP. B, no, we're not going to do it. We now understand it. We're going to say no to the high potential, but we know why we're saying no.

6:53But third, what I want to make sure is no matter what choice they make of the first or the second, they don't invest directly into startups, that they've understood how difficult it is to do this right. They don't have the benefits of a GP's experience and expertise, and they also don't have the benefit of a GP's portfolio. So at the very least, I want to make sure they don't start just becoming super angels and investing in startups directly. So that's why we did it. And that's how we did it. Can I ask you a bit, because I do think that the world of pension funds and pension fund allocators is not very well understood amongst GPs.

7:34So I'd love to ask you if you could kind of profile them a little bit, profile their thinking, profile their worries when it comes to venture so that we can all get a better understanding. Well, there's a couple of things, and I still don't consider myself an expert on pension funds, but one overriding issue for them is, if you like, the law. I am required by law, and the laws differ across countries, to provide a solid foundation so that people 10, 20, 30 years from now get what they paid into the pension. That drives everything. I have to do it. And mostly that's seen from the point of view of preserving capital rather than growing the capital.

8:19Secondly, most of them have never worked in a startup. They have no idea of how that works. They come very often from an economic background, an economist background. So they're looking at things from a macro point of view. So for them, bonds, public securities, et cetera, are safe bets. as a pension fund manager, all you have to do is stay just a point or two ahead of what the markets are doing, and you've done a great job. Just don't lose money. And you think about it, compared to venture capital, it's exactly the opposite. A venture capitalist is more concerned about how can I get the upside, not how do I avoid the downside?

9:01Whereas a pension fund manager, he's worried about, I have to avoid that downside. I have to. Is that, Jim, also how you would describe the pension funds and sovereign funds and so on that are allocating aggressively to venture? Is that also how they think, but they've just nailed how to manage venture? Well, I think one, yes, they have nailed it. And that takes time. I mean, I don't expect somebody to get it right the first time. But they've also looked at it and said, I have to find some spice out there to keep my fund ahead. I can't just assume that if I put it into the S &P that that's good enough.

9:40Because if it goes down like it is right now, I'm in trouble. So how do I make sure that I've got some alpha built into my portfolio? And doing it appropriately. I think the Yale endowment has some like 14 % into private equity and venture capital. That's a lot. But they've moderate it with the rest of their portfolio. And they've gotten a good return over the last 20 something years. I think it's like 10.4%. Yeah. Anybody would be happy with that. Yeah. Yeah. And in uptimes for venture, they're doing super well. Yes. But that of course moves all the time. Can I ask you a question about the single asset perspective?

10:22Just in Denmark, we had four pension funds together between them. They put 600 million into Northvolt, and that hurts these days. Yes, yes. Could you talk a bit about the perspective on single asset investing? Well, let's see, that goes back to the idea that they should not be doing this directly. You know, and it sounds like they did do it directly. I mean, okay, Northvolt, maybe it was also part of being good citizens with support this potential unicorn. The world needs better batteries, and we need to be independent of China and the United States. Maybe it was all for those kinds of reasons.

11:02But the idea that I, as a pension fund manager, can make good single picks of startups, I think that's ludicrous. I mean, I've been an angel investor. And the number of times I've been wrong is far more than the number of times I've been right. And yet I'm somebody who's in this business every single day. Doing it as single investments, I just think is, let's just call it very risky. And the Northvolt disaster is a very good example of that. I'd love to ask, and I'm really just trying to pull intel out of your mind, right? Because you have a very broad exposure to pension fund managers that are in this interesting place where they are actually looking at venture, which many of us have exposure to pension funds, but the exposure is we're not looking at venture or we're not, you're too small, so I won't take the meeting.

11:57So in that sense, it's quite rare to get this. So I'd love to ask you the arguments that you're seeing that will actually work with a pension fund when it comes to positioning your fund towards them. And what are the things that you're like, just don't go there. It's not like, it doesn't make any sense. So obviously you've got to be on within mandate and so on. But what are the emotions? So for family, oftentimes you'll ask some probing questions to figure out what is the strategic, the motivational mindset here so that you can talk into that with a pension fund. What is the strategy you should deploy in the first 15 minutes of the call to figure out where are these guys when it comes to venture?

12:44Number one is transparency. Remember, a lot of these are public organizations. So they have to be 100 % sure that there's nothing hidden from them. Even if they don't understand everything, they want to know they've got access to the numbers and that nothing is being hidden from them. But secondly, it's performance. I know that it's a power law game. If you're up in that top 20 % of funds that have done well, fortunately for you, but unfortunately for the other 80%, that's what they're going to go for. If you're Sequoia, Index, whatever, you can show that you've done this. Or if you're a former GP of one of these firms, you can show that you've got a record.

13:24And remember, these are people who are thinking in terms of 10, 20, 30 years. They don't need the liquidity that say you or I might need if we were going to put money into a venture capital form. And that's often one of the negatives of venture capital, of course. Your money is locked up for 10 years in a fund. Pension fund managers don't have to think about it. So they should be a natural, but they want to see performance. As always, past performance is not an indicator of future performance, but still, it certainly helps. Yeah. How about the characteristics as to how the pension fund works or things like, can you describe where they all kind of overlap in in the cohorts that you have you can say well they all have they all exhibit this or they all come to me with these thoughts or these frustrations something along those lines yeah one thing first of all maybe not all of them they're not all the same but there is one overall thing that they complain about is the the cost the expense.

14:31So going in and saying, hey, we do the typical two and 20, you just have to accept it. If you're Sequoia, you can do that. If you're a new fund, a hundred million, et cetera, you need to be willing to negotiate so that they can go back to their board and say, hey, we got it at a reasonable cost. Now, the cost is really unimportant if you're going to, if you end up with a couple of unicorns, but still that's what they're going to report this year. So even though their perspective is 10, 20, 30 years out, they still have to be able to explain to their board or to whomever tells them what to do, our cost, our expenses for this kind of investment is in line with what we do with the normal stock market.

15:15So I say that expense side of it is something that a VC firm should be willing to negotiate, especially if you're a new firm, a new fund. And that is what you're seeing from the participants. Interesting. What do you say to them? Do you advise at all on this or do you just? You know, it's like anybody who's negotiating, how much do you want that money? Yeah. And if you can get, I don't know, the pension fund of the city of Zurich into your fund, that might be worth something for you because then it's easier to go to the pension fund of the University of Lausanne. I'm making these things up. But yeah, I mean, just like any entrepreneur who's trying to raise money, who does he have on his cap table that helps him attract other people into his cap table.

15:59Can you share anything about the size of the teams that these guys typically come from, the seniority of the people, this type of thing? Again, it's going to differ between whether it's a private company or a public organization of some sort. Typically, they're fairly senior, but they also have employees. That's our kind of social background in Europe, which I think is a good thing because that way they're thinking in terms of the normal employees. What do they care about? Small, because they have to be lean. They cannot be seen to be spending lots of money on this. So yeah, fairly business-like, at least in the ones I've encountered.

16:39Okay, then let me ask you a second question. And that's about you, because you've, for more than 26 years, you've run the IMD startup competition, and you've had global MBAs and senior executives collaborating with Switzerland-based founders. I'd love to ask you, what are your core learnings from doing this work? We started this because we thought entrepreneurship should be part of our MBA and EMBA programs. And it's not because we're trying to turn them into entrepreneurs, but it's our belief that everybody, even if you're working at a major corporation, should understand the mindset of an entrepreneur.

17:15Because at one point, You'll either be negotiating with one because you're trying to acquire it, acquire their technology, do some kind of deal with them. Or you may have some weird individuals in your own team or your own organization that they're amazing at what they do, but they're strange and they don't act like everybody else. Maybe they're entrepreneurial. And we want people to understand the characteristics of entrepreneurs so they don't crush this entrepreneurial piece of your organization. One of the things we see, and I've seen this year in, year out, is a lot of people go through this exercise with us, which is quite intense.

17:53Some will immediately say, this is it. This is what I'm doing. I'm going to quit my fantastic job with Novartis, ABB, Nestle, whatever, and go do a startup, which scares me. They always say, I don't think you really know what you're getting into. And I usually try to talk them out of it. And if I can't, then I try to help them. But then there's always a substantial portion to say, I'm glad we went through this, but I know I am not a person who should do this. And that in itself is worth the exercise to come out of this saying, OK, this is not me. I shouldn't be anywhere near that kind of thing.

18:29The other thing we see, especially because we take Swiss startups, and the only reason that we're focused on Swiss startups is we want there to be some face-to-face interaction and not just doing this virtual. We take these Swiss startups with us when we go to Silicon Valley. So we're there for seven days. And at the end of the seven days, it's our EMBA students, 40-year-old executives, who pitch these to local venture capitalists. But the interesting thing to see all during the week is our Swiss entrepreneurs who are with us, they're part of the class, as they discover this world, which has, if you like, this giant view of the world, which for a Swiss entrepreneur is just unreal.

19:11And I suspect for most European entrepreneurs, you know, they'll come in and say, this is what we're doing today. And then tomorrow we're going to do 2 % more and then 3 % more. And when they get pushed by the local entrepreneurs or local VCs to say, well, why not do 50 % more? Instead of raising 5 million, why don't you raise 50 million? I don't need to. I don't want to. Or I don't think it's possible. But getting them to think big. and that is one of the most transformative things that we get to. It's not that I'm suggesting that Swiss entrepreneur should go home to Zurich and then try to raise$50 million, but that they start thinking bigger than just, I want a small little company that'll grow little by little by little and maybe one day Google buys me.

19:55And that has been something that's resounded over the years. I have to interject a thing, right, which is European, because it's a very solid narrative that has taken hold around the globe that European entrepreneurs have lower ambitions than our U.S. counterparts. And so what I really think is that we need to be very mindful of the fact that there are some people that are cut out for venture and there are those that are not. And those that are not should not be raising$50 million and they should not have these grand ambitions. They should just be building a great smaller business that will be acquired for a smaller amount or that will never be so.

20:35I tend to think that we're a bit weighing our European entrepreneurs that we all meet all the time against the best of the best that we get to see from the States. But the best of the best in Europe are similar. So I think that there's a bias there that's very dangerous. And I just have to, like I always try and counter the narrative on the podcast here because I think it's so important. And I think that what you're seeing when you're seeing your Swiss entrepreneurs is you're seeing the average entrepreneur, or so to say, because you have a wider split there compared to the top 2 % that end up being venture funded by the best funds.

21:15I agree with you 100%. And also, I'll add in there, my two worlds are Switzerland and Silicon Valley. I would never suggest that we have to copy Silicon Valley or that a Swiss entrepreneur has to do that. But several years ago, we went back and looked and did a survey of the startups that we'd already worked with over the first 15 years of our startup competition. The average success rate, so still alive, was 76%, which is amazing. And you could say, well, Jim, you're just really good at picking startups. I don't think it's that. The other question was the average size of the company at that stage was$5 million.

21:53dollars. And what we could see is that most of them were very content to grow a company that it was profitable and they would just keep going. Maybe they eventually sell it. Maybe they pass it on to their children. And in my opinion, there's absolutely nothing wrong with having a small business until the day that you have a competitor from the United States that raises$100 billion. Then you've got some problems. But even then, should we feel like we're unsuccessful if we don't have 10 Googles a year. And I don't think that's correct. I think we should look at it from the point of view, what are we really good at and where do we fit into the whole value chain of value creation, if you like.

22:32Yeah. And I just think it's so different between whether you're talking about the individual entrepreneur and then you're talking about the ecosystem as a whole. Yeah. You shouldn't stop playing soccer in the weekends just because you're not Ronaldo. Right. Agree. Still have a good time yourself. So I want to ask you something else, which is we had on our on UWC, a guest post by by Eleanor from Newton the other day. And it basically asked the question, can you teach VC? I know just as she she comes to the conclusion that, yes, you can. I'd love to ask you to expand on that view from your perspective.

23:11Well, I spoke to Eleanor a couple of weeks ago. I've even been doing her basic Newton course because I wanted to see what she did. I read that post. So, yes, I think you can teach VC. If I was to say it myself, I would say, I think you can learn VC, how it is taught or how you go about learning it. I think that the nuts and bolts can be taught by courses like hers and others that are out there reading books. I also believe that it's very much an apprenticeship type business. And unfortunately, I don't see a way to speed that up. Little anecdote, I was in China last or a year before last, and we were doing a thing with some senior executives and I brought in some Gen Z Chinese kids.

24:00And one of them, I asked him, and I looked at him, he looked to be about 25, 26 years old. And I said, so what do you do? And he says, I'm a venture capitalist. And I'm thinking, no, you're not. And we did have a corporate venture capitalist in the room, who also is Chinese, and I mentioned the story to him. He says, no, until you've lost$15 million of your LP's money and been through one business cycle, you cannot call yourself a venture capitalist. So you may have the title, but there's a learning here. And maybe that learning is only pattern recognition, but you get good at it. And pattern recognition could be your ability to figure out, is this person across the table from you, the entrepreneur?

24:42Does he or she have what it takes to build a company or not? Is this an idea that can grow or not? So yes, I think it can be taught the nuts and bolts for sure, especially on the fund management side. But the other stuff, I think you'd learn by doing. I wish there was a different way. I'm at an educational institution. I'd like to believe that. I also think that there's an important thing, which is venture is an outlier business. It is not only an outlier business for the founders, it's also for the investors. And I think that needs to be recognized. And we're not all outliers. It's just not possible.

25:20And I think that's a very important take. I think Eleanor with her group, they have tons of applicants and only taking a few. So the bar is high. I imagine you have the same. I just think it's so important to focus on this little point, which is that it is an outlier business. And you've got to recognize whether you are that. Well, the same thing, though, applies to people who decide to become entrepreneurs. They need to recognize that some people should do this and can do this. And some, maybe they can, but maybe they shouldn't. Because there are other things in life that they're going to be much better at.

26:00And venture capital, I think, is the same. Yeah. I also know you run a Swiss scale-up company. Sorry, not company, but program. Could you talk a bit about that? Yeah. I mean, this is an interesting initiative. And it was the state, the local state, the accountant of Vaux, who came to us five years ago and said, you know, we've done very well at having startups in the area. We have the Swiss Federal Institute of Technology right next door. Tons of startups come out of there, people's PhD programs, et cetera, turn it into a startup. But we seem to have a difficulty going from startup to scale up.

26:38And they asked us to create a program to help them understand the challenges they had in front of them and you get through those challenges. So we're in our fourth year of running this program. And it's a joint venture between us and the state, between IMD and the Continental Faux, where we take in about 15 to 20 founder CEOs, take them through, it's five months, 10 evenings. We do it in the evening because that's when we can get their time, going through different facets of what we see from our research and also interviews with companies that have already scaled, what are the challenges they have to overcome?

27:16The red thread through all of it is leadership and getting them to ask and then somehow answer the question, am I the right person for the next stage? And do I want to be that person? And let's assume that the answer is yes to both of those. Okay, what else do I need to do? How do I bring the team along with me? How do I know when to start adding structure and processes, et cetera, to the organization? How do I know when to start saying no to certain customers? What do I need as a board? Can I grow the board at the same rate that I'm growing a sense of maturity, the board at the same rate that I'm growing my organization and the complexity that we're dealing with?