E561 | David Vlerick⁠, Bluegrass Ventures: The Future of LP Capital

0:00What if everything you think you know about venture capital risk is wrong? If you do it with funds of a certain caliber, which are nicely diversified, the risk of losing money is negligible. But our survival brain tells us otherwise. You need to stay alive. You need to avoid the tiger. The reality? Success in VC isn't random. It's predictable. And the best funds share something specific. Imagine in terms of sourcing, screening, winning, managing. The data proves it. VC outperforms every other asset class as an asset class. So why stay on the sidelines when you could be funding the future? Get as much money as possible into fueling the future, into primary capital, and money that makes you proud at night when you go to bed.

0:37How does Bluegrass Ventures turn cautious LPs into purpose-aligned? Outperformers, join us on the EUVC podcast as David Vlerich reveals why the smartest money is moving from secondary comfort to primary creation.

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3:21This 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. Welcome to the EUVC podcast. As you know, we're here to showcase the depth and breadth of European venture to platform the people shaping it, connect the ecosystem and hopefully spark conversations that matter. Today's guest brings a perspective that I believe does exactly that. Lending venture values and I'd even dare say a very human take on the future of capital. So please welcome my homonymous. I don't know if that's a word in English.

4:02I guess it is. David Larrick, founding partner at Bluegrass Ventures. His investment philosophy is rooted in a fund of funds model with an emphasis on quality selection. If you know anything about myself and UVC, you know that we very much agree with this worldview. So that's also why I'm so excited about this. And David believes that, and now I'm quoting, in a world of characterized by accelerating change, increasing complexity and tremendous competition, backing top-notch venture capital funds is the most surefire way to increase wealth while shaping a brighter tomorrow. David, welcome to the show.

4:34Do you want to give us a quick introduction on who you are and what brought you here? Definitely. Thanks so much for having me, David. What brought me here and who am I? I'm from Belgium. maybe first and foremost, studied law a long time ago, then did management school in Dent, and then kind of stumbled into finance. Initially, by lack of, let's say, a better plan or a better objective. And liked also a little bit after the law school, the more figure-based approach of life or of work life, let's say. Then I went into private equity for a while, worked at 3i for a bit in Amsterdam, which kind of opened my eyes to the world of investing and to the excitement behind it, the analytical part of it, which I like a lot, analytical, creative part also, because you have to kind of make a whole idea of what a company looks like.

5:24And then also, on the other hand, the people side. You're always dealing with people. You do things together with people. So I liked the combination of these two. They shipped me off, so to speak, to London to do some M &A in a proper bulge bracket bank, where I was an analyst for UBS for a while. was not the best job in the world for me as it was very, let's say, automatic, very draining, not very colorful, I would say. You learn quite a bit and I was super happy to be in London, had a fantastic time there. Then moved again into mid-market private equity and M &A and then joined the family office about 10 years ago.

6:02Family office, which is more like an industrial group, Started off as a textile group, like many companies in Belgium. Carpets, branching out into other textiles like denim and other industries. Financial services is an important part of the group as well. And by accident, we started investing a lot at VC. As it happens, I was sitting here in the same office and deals came into my inbox. We looked at, let's say, three deals all the time. And then we would assess them on value proposition. We did a few calls, we got to know the people behind it, and we chose to invest in one of the three. Then we realized in VC, this is probably not the best way around this rather sophisticated asset class.

6:46So we also started investing a bit in small to mid-sized funds and co-investing with these funds. Now at some point, our board told us like, okay, shouldn't you only invest in top-notch funds and co-invest with these funds and stop the direct investment, which we did at this point. That's like two, three years ago, which gave me a little bit of latitude. And I had been thinking about doing something else for like three, four, five years before that. I said, okay, what can we do in venture capital that is a little bit different than the existing things, which is like either fund the fund or fund themselves.

7:21So it's construct more like a platform whereby you give investors the nice structure and a nice selection procedure of how you get to a selection of certain funds. but they have full flexibility to choose in which funds invest. And the fee model is dramatically different. And so we set this up, me with my brother-in-law, who's a great friend also. He married the sister of my wife and we lived together in London. He was doing a lot of business school. He worked against the after that. The two of us, he's in London, I'm in Belgium. We set this up and it's been a wonderful journey so far. And so just to get kind of the stats out of the way or the definition out of the way.

7:59So you're the founding partner of Bluegrass Ventures. Bluegrass Ventures is HQed in Belgium, correct? Even though your partner is in London, yes. You do early stage, mostly early stage VC funds. You can do other stuff, but this is your focus. Geo-wise, you're quite open, quite flexible as well. You're not focused on specific sectors or verticals. You've backed a couple of funds top of mind. Do you want to share some of your notable investments? Yes, sure. But so maybe first on select procedures, so small to mid-sized funds, never the large funds, very important. Proven track records, because we have to also, because otherwise it would be more difficult to sell, especially if you look at the characteristics of the asset class, which high levels of persistence and performance, the good funds that remain good fund.

8:45So proven track record, yet often emerging managers, according to the definition of it, like fund 234 is not a problem for us. But what's most important is top-designed track record. And more important than that even is the distinct unfair advantage, an edge in terms of sourcing, screening, winning, managing. An edge can be either doing the thing everybody does in a better way or it can be being the best of class in a certain niche. That said, we're also never going to select niche funds in the sense of the newest tech vertical. And let's all pile money into this because this is the future, but it has unproven trajectories.

9:23So we avoid these hype cycle plays, as we call it. We could do more infrastructure niche things or, for instance, Fintech. In terms of funds, we started two years ago, a little bit less, May 23. And we've backed five or six funds, five funds so far. First one was a European one because we always try to construct a portfolio, which is quite complementary. So Europe, US, and then emerging regions. Every year we try to have like one fund of each at least. Often it's two U.S. because there's little preference for U.S. for more Belgian investors. First one was PICUS. Maybe you know them. The Rolls Royce of European Venture Capital.

10:04They do their link to PICUS Capital, which is highly successful as a holding company, investing in very early stage pre-seed seed companies. And they do everything in a more systematic way and with better and more manpower, so to speak. huge team, huge network. The funds then invest in the winners of the holding with a double advantage of access and information advantage there. They know these companies more intimately. Second fund, Y Combinator, Silicon Valley. It's a bunch of alumni grouping their money and investing in the top 20%, doing small ticket investment, top 20 % of each YC batch. Again, super good team at the helm.

10:42The fact that they do these kind of widespread, And so investing in the top 20 % is like 60 companies per batch. So very diversified portfolio, yet with a double quality fielder YC and themselves and small tickets. So they have win rates, which are like best in class in the ecosystem, like about 95%. Makes it for a very, let's say, predictable, high quality financial product in Silicon Valley in Y Combinator. The third fund, a little bit the same guys from the Y Combinator network. Brian, also a genius, actually, who used to live in the U.S., was a successful entrepreneur there. And then they decided, him and his partner, to set up an accelerator in Southeast Asia, which mimics, which copies what Y Combinator does.

11:29Leads to huge deal flow, because they're like best in class accelerator. Huge front quality deal flow. And also attractive entry valuation. because they can kind of price the valuation that these companies, that they invest in these companies. Fourth one is our first Rising Star fund. Rising Star means that we back very successful fund managers who set up shop on their own. Typically, they left the fund because the fund became too big. They want to do it in the right dimensions, with the right setup from the get-go. It's a fund called Shapers by Phil. Maybe you know him, Phil, one of the most connected...

12:03Fellow Portuguese guy. Yeah, Phil Teixeira de Matos. Yeah, exactly. Let's celebrate the Portuguese people in venture. Thank you, David. Yes, I know him. Fintech guy, former head of Sofia investor. Yes, yes. Exactly. Super skilled, super connected, the right setup. He's not doing it by himself, but he has a network of 50, let's say, venture partners, the Shapers Club, who help him sourcing deals, assessing the deals, winning the deals. So very excited about that one as well. And then also a little bit out of topic, because not VC, but guys who we are very close with, super driven and do something that makes a lot of sense these days.

12:39They do direct to cap table, small ticket secondaries in highly successful, privately held, yet on the way to IPO tech companies. Yeah, very cool. They're called Artea. Artea. Very cool. And so we have one co-investment. Already. Really? One co-investment already. That's exciting. But we did it a bit. I don't know if we did it the right way. First co-investment, we serve to our rather, let's say, I wouldn't say conservative investor base, but half of our investors had never done VC. And then now we told the VC story. They said, okay, doing this via you with the nice quality filter and the diversification and the correct structure.

13:18It's probably a good way. And they said, yeah, we're also going to launch co-investments. And our first co-investment was like this hardware deep tech, super artist stage co-investment. And it was difficult to get some people excited. I can imagine. I can imagine. It's not the easiest sector to invest in. I want to ask you a question before we kind of go with what we had planned to talk about. How do you think about sector-specific or sector-focused funds? Because you mentioned something around hypes and trends and all of that, which is quite common, I'd say, sense. But I think where it's sometimes hard is when you start looking at some of these sector-specific funds, which part of me personally believes this is one of the two models I believe in the most within venture.

14:06But the other side is, well, at times, oftentimes, this comes with a lot of trend-ish kind of hype-ish prediction associated to it. Best example, defense-focused funds, right? Defense-focused funds versus deep tech funds, right? I personally have an opinion, but we could talk about computational biology as an example and these topics. How do you think about it? How do you navigate it yourself? It's a little bit binary. So you have the sector focused funds, which are also making a prediction about how fast a certain, that certain sector is going to scale. And so how fast the adoption will be. This is dangerous.

14:47This would be like the hype cycle thing, which is hard to predict. Maybe there's a lot of adoption and it slows down. And there are the sector focused funds, which are investing in a sector that is firmly on a very visible, very predictable trajectory. The second one is probably for us the better way to go because the first one, you may be very successful, but we cannot, and that's something we really try to avoid for investors, we cannot guarantee, quote unquote, that even in a not super optimistic scenario, those funds will perform decently. Let's say two and a half X, hopefully three X. So we tend to focus on the latter.

15:24What I see a lot of people do, what I see a lot of good VCs do and what I like is saying, look, we follow the brains, the good teams, the smartest guys that go towards a certain sector and set up companies in that sector. We follow these guys because they know what if they do it, they'll be likely more successful because of the brainpower they have and the teams they build. Plus, they may have the better nosy. So, yeah. So, I guess you didn't say this. I'm kind of inferring from it. So, correct me if I'm wrong. But it feels like you have a bit of a bias and not in a bad way, a bit of a bias for the more kind of agnostic approach to venture.

16:06But either because it's a region advantage or edge or it's a network advantage or edge, something like that. That feels like that's closer to your heart maybe than these more pure play sector focused. Clear edge, but generalist funds also because we are a platform. So every fund has to really stand there and has to have, let's say, have very good protection on the downside. Because we have some investors, maybe they have only, our minimum ticket is$100 ,000. Some people have$100 ,000 and that's what they can invest in the next few years. I want to be comfortable telling them, look, pick this fund, pick this fund, pick the other fund.

16:44They should all be fine. There's no stress. We'll come back to the platform topic because I do want to talk about that. And it is a topic that I like. But first, I think it's also interesting to talk a bit about the person behind Bluegrass, in this case, you, David. You are a very interesting chap. I've learned in preparing for this, where you have many layers to yourself, which was a very pleasant surprise. You said a couple of things that I thought quite interesting. Two of them were your learnings around being a father, and the second one being how travel poetry and the outdoors shaped your early years.

17:20So I'll let you take whatever you prefer or both, but I'd love to showcase that side of yourself as well. So in my younger years, especially at university, we started traveling a lot. I started traveling with France quite a lot. And because there was a huge thirst to get to know and experience the world, see different places, meet different people, and kind of drench yourself or absorb the whole what it means to be young, let's say, youth. and that was very forming in the way that the one big lesson always is you go to many many places and the one thing that always comes back is people are exactly the same everywhere have the same tendencies and people love people so it's relatively easy maybe the best example there is I traveled through my South America for nine months in 2009 was a wonderful period was a thrilling period let's say I was about 25 26 and 25 and I went from place to place I stayed four days in one place big city then i would go to some more like hip kind of beach place i started with brazil for three months already not too bad perfect landing and it's surprising because every time every four days again you have to rebuild a life you go from zero to one on a personal life level and it gives you such kind of such a perspective such a freedom that you say i could build my life anywhere i can build my life i can make ties i don't really depend on anything nourishing me i can just build a little life here and there and at the time also because nine months travel is a long time and i have a i had a very strict this maybe but a very structured upbringing very structured and with lots of activities so he said i need some structure in my life so what i started doing is running 10k per day i used to run quite a bit but not really running used to cycle but lots of endurance sports and started running specifically then and then also reading i was reading all the beautiful novels of the past to minimum 100 pages and poetry minimum three poems a day so i started writing a whole lot of poetry which i also started before at university already and it became such it became a life in that small period of youth it was purely focused on how to experience life to the fullest and how to feed your soul to the fullest and to express whatever that sole let's say experience so it was in hindsight magnificent because you always think you can do it at any time in life that's the best time is now how does that when you zoom out right i'm sure there's a bunch of personal learnings from that you know which we could go on for hours a bit off topic how does that inform you as an investor though yeah good question because you've seen many people, many people from different places.

20:04So you tend to have, I guess it helps in kind of understanding who the people are, what drives them. It also helps a lot in connecting with people. And in the end of the day, and I really see that also with Bluegrass, I mean, there is the rational selection and it's based on all these, let's say, filters that we construct. But in the end, you also have to get along with the people. It needs to be, there needs to be click a match. And that certainly helps in that respect as well. And the poetry helps in writing a nice email so your investors get great poems every quarter that would be fun i lost a little bit you practice it your other your other the other one i have to cover you know i had my first born a couple eight months ago or so and you say being a fatter father taught me that quantity time beats quality time every day of the week just be there yeah exactly what do you mean i have four daughters So the oldest one is eight and a half now.

21:02Then the second one is almost seven. And then four and two. Yeah, it's just been an amazing journey. Because initially, before you're a parent, you are super self-absorbed. This is it. You are the Alpha and Omega. And then these little creatures start living inside your realm, inside your cocoon. And because they're there and because you see them every day, you're so engrossed in them. And it became, for me, it's like a huge love story. It's full love. I love these girls to a very extreme degree sometimes. And I tried to be there a lot. I remember when the third one was born, and the fourth one somehow already, because the third one was important, I had this huge wave of gratitude and wealth.

21:50I felt super wealthy. Really, the feeling of wealth. Money cannot give you that, but this gave me a feeling of wealth. I'm like, look, I have these two princesses and we have another baby. Something unbelievable. And so, yeah, it's something I want to stay close to them. I want to know who they are, what they do, which has a second component of spending time. It's also trying to understand them, which is not easy because you are yourself fundamentally. So you always project. And I try to be around them all the time. So whenever they have their breakfast in the morning, I'm doing my exercise primal movement.

22:24I'm kind of running around there. I just listen to their conversations. Sometimes I dip in, I chip in. So in a very fluid way, I try to be around them as much as I can. Also in the evening, I try not to go to every event. Despite the fact sometimes I think, I should go for Bluegrass. I may need an investor, but you cannot live now. That's the major struggle of venture, but it is a champagne problem. Let's be honest. There's a much worse careers. Having that said, I won't dwell too much on this, but I do love getting to know our guests a bit better. You've shared some really interesting notes offline before we started this around your learnings in venture.

23:05And I think this is kind of interesting also when we go back to what you shared about your way into venture, like how did you end up where you are now? So I think it's also interesting to remember that to our audience. Your first one is something that we talk a lot about, so I'm probably not going to give you too much time to talk about it, but I want to let you kind of talk a bit about it. But most people wrongly conflate the risk of investing in startups with the risk of investing in a strong and diversified VC fund. And you say the two are worlds apart. Do you want to just expand a tiny bit on this, especially because you're building a platform?

23:38So I guess you get a lot of exposure to this kind of worldview. All the time. And it's human wiring. My brother wrote a nice book, not in English, but about why we are not happier. And it starts with how human beings are wired. And it turns out, because we needed it back in the day, that we are always overemphasizing the negative or the potential risks, because that is going to make sure that we are safe. And being safe is the most important thing. Not harvesting the apple when the apple is harvest worthy is a missed opportunity, but you need to stay alive. You need to avoid the tiger. And so for people in general in VC and I find with all our investors, they always think those funds are investing in startup.

24:22Then they think about a startup and I guess startup, those guys that can go anywhere, they may fail. So lots of things can happen. And it's very hard for them. One, you should look at the data that we have on venture capital fund performance, which helps just look at the data and then base yourself on it. But it's very difficult for them not to continue thinking about, yeah, but this is a risky asset class. Whereas if you do it with funds of a certain caliber, which are nicely diversified, the risk of losing money is negligible. Yeah. Can I ask you to expand on this? Because now we're shifting a bit into bluegrass and portfolio construction and how you think about it.

24:59But I think these two connect super nicely, because as you said, look at the data. And if we look at the data, I don't know exactly the detail, But what we see is venture can yield returns. Yes, there is a proven track record of the asset class. Yes, it's super interesting. However, dispersion is there. The power law is there. And that's when this portfolio construction topic comes to mind. So can you just expand on how you thought about it? So one on the performance. VC outperforms every other asset class as an asset class. or if you go to the granularity, the main or the median or both probably return of VC is about the same as private equity.

25:39And it's much better than funds in other asset classes. But then the top 25%, top 10 % score much higher than the top 25, top 50 % of private equity. The bottom 10, 25 % is to be more avoided than in other. That's so high dispersion, very true. But so good performance, but you need to have a good selection. The great thing about VC is that selection is not all that difficult, even if you only base yourself on track record of these funds. Because, as previously mentioned, there's higher levels of persistence in performance in VC than in other asset classes. So the good ones tend to remain the good ones.

26:18And why is that the case? It's because it's specialist work. Specialist work in the sense that you need to have access to the right deal flow. You fish in the right pond. You see the right deals. and then also you win the competitive deals, which you can win because you're Sequoia or which you can win because you have an edge and you can prove that you can help them and or you do small tickets, you're flexible. So great asset class and it's not rocket science even to do it just, if you just stick to the basic security based on track record, you would already construct a nice portfolio of funds.

26:48If you can add a layer that you can truly understand one, the track records, two, this unfair advantage. Why do these funds have an edge? And if you can validate that with people, because that's something we use, usually we leverage our network to validate what we think about certain funds. Yeah, then you can really start as portfolios. So it's almost like we're preaching to the priest, right? Because all our listeners do venture. But, you know, I just, I want to bring this up on screen. I just grabbed this randomly from Google. This is literally what you're saying, right? You're saying, well, what really matters when you start looking at the top percentile.

27:22And I don't know if this is the best data set or not. I just randomly grabbed it. It says it's from PitchBook. Shouldn't be horrible, right? Should be okay data. But basically what you're saying, I don't know if you can see my mouse, is you're building your portfolio, trying to capture this top bit of the venture capital. Yeah. And we say we focus on top-design funds. But the first thing I always say is, this is actually from top 5 % to top 10%. The top 5 % will never go out. They're often very small, very niche. very often concentrated funds, it's not for us. Often they will be between top five and top ten based on track record.