E331: Ron Biscardi, CEO of iConnections on the Biggest Mistakes Managers Make

0:00So is capital truly scarce or has the bar for conviction permanently risen? Capital is definitely not scarce. There is a ton of money in this event. And we know from surveys that we did after last year's event, billions of dollars changed hands. I think this is just a long sales cycle business. It's never an easy process. People don't commit tens of millions of dollars, billions of dollars without really knowing the people who are going to manage that money for them, especially in most of the strategies here, because they all have some illiquidity built in. So it's really more about building a relationship, taking the time for the LP to get to know you, building trust, and then capital absolutely flows.

0:47But we're seeing billions and billions of dollars move after these events. And when I say after, I'm talking the next 12 to 24 months. So it's absolutely there. I would not say capital is scarce at all. When I talk to a lot of institutional investors, there seems to be this trend away from blind pool capital into more deal-by-deal dynamics, continuation vehicles, SPVs, etc. Sometimes really large SPVs, sometimes$300,$500,$2 billion continuation vehicles. what do you think is behind that and is this a permanent shift or is this just a lack of dpi today the reality is it's it's always difficult to raise money into a pooled vehicle because from the lp standpoint you have to think about who else is in the vehicle what are the rules set that that govern how this vehicle is going to function you're definitely going to be subject to some level of a gate if it's investing in liquid securities like a hedge fund.

1:49But an SMA is much easier, right? It gets custody in your name. You can control the day you decide, hey, I just don't want to do this anymore for whatever reason. It gives you that safety valve. And most people don't use it, but it's nice to know it's there when you need it. So yeah, I think I feel like there has been a big trend in the last few years towards SMAs. I also think a lot of the technology platforms have made it easier to manage SMAs. Like years ago, it was just seen as a negative from the GP standpoint because of the administrative complexity. So I think, you know, we've kind of, the LPs and the GPs have sort of met in the middle on this, but I'm hearing a lot of interest on both sides in deploying through that kind of vehicle and taking the money in that form as well.

2:43You alluded earlier that there's a long sales cycle between GPs and LPs. What should GPs expect in terms of how long it takes to get an LP into a blind pool fund today? It's very AUM dependent and track record dependent. So if you're a sub$300 million,$200 million AUM GP, you have to expect and you have to be in this for years. It is a super long sales cycle business. LPs are always nervous about the business risk in allocating to a smaller manager. So even if your numbers have been great, Like LPs are, their responsibility is to protect that capital. And they're focused on protecting it before they're focused on growing it.

3:32You know, protection comes first, growth comes second. So you just have to accept that reality and get as many at-bats as possible with the same LPs. I mean, obviously multiple LPs, but what we've really seen in our business at iConnections is the GPs who come to multiple events and meet with a lot of the same LPs at these events, they're the ones that capital is flowing to over time. If you come in, the smaller LPs, or GPs rather, who pop into one event and then we don't see them again for a few years, much lower success rates because it just feels like they don't really have the commitment to the relationship building process.

4:16If you're committed to that as a small LP, it can work. Now, once you're there, right, once you're running north of a billion, two billion, three billion dollars, the sales cycle shrinks dramatically because as you grow, the business risk associated with allocating to you has dropped dramatically. And at a larger size, now the LPs are assessing your strategy much more than they are the business risk associated with. One of the hardest things of investing is seeing what's shifting before everyone else does. For decades, only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and to stay ahead of consensus.

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6:10Talking about Schwartz's sales cycle, Andreessen Horowitz had one call to raise their$15 billion. And you have emerging managers that are taking 24, 36 months to close their own capital. And I think this is even reflected in the economics. All the top 10 funds in venture are now$2.5 billion and$30 billion. And meanwhile, emerging managers are trying to do whatever, beg, borrow, and steal to get LPs in. Absolutely. Talk a little bit more about this business risk for that LPs face. I think a lot of GPs have a hard time understanding why LPs are not optimizing on returns. For most of the LPs that are in this event, it's not their money.

6:50These are professional investment teams that are running. They are the fiduciaries over billions of dollars in sitting in endowments and foundations and pension funds and sovereign wealth funds. They have a duty to first protect that corpus. And yes, they will be judged to some degree on what their growth is, what the returns are they generate. But it is a much worse outcome for these teams if they lose money and they lose money because they took unnecessary risk. You know, the boards and the trustees of these organizations would much rather see the investment team put up a 5%, 6%, 7 % return and protect that downside than swing for the fences in the hopes of achieving, you know, 12%, 13%, 15%, whatever it might be, but then have a much more negative outcome.

7:44Not even necessarily tied to the market, remember, because when we talk about business risk, we're talking about the fact that maybe that GP just wasn't a good enough entrepreneur. Maybe they didn't know how to run their back office. Maybe their team hadn't gelled yet. And what looked like it was going to be an amazing fund and a great business completely collapsed because all the key people quit. You know, all of these, it's just like any other business, right? Until the business is really well established and you have a nice long track record, there is this risk that it just might not make it for all the reasons small businesses don't make it.

8:21It's the old adage, you don't get fired for hiring IBM, but apply to funds. And the interesting thing is you have two funds. In one fund, you invest in an emerging manager. They may even invest in the same company. Both lose money. This is bad emerging manager. This is bad company. Exactly. So this whole bias is intertwined. Because in one case, you might have lost money because the strategy didn't perform as it was expected. Or maybe the manager made some bad calls. But it's not because the business blew up because we made a bet that was too early or we didn't properly assess the business risk associated with that smaller guy.

9:02So it's emerging managers don't really like to deal with that one. But I would encourage them to always take that head on and be respectful of the fact that it is a legitimate concern for an LP. They do have to assess your team and how long your team has worked together and how well you guys get along. This is why they want to spend so much time getting to know GPs before they make that out. There's also a product market fit aspect there. To your point, a pension fund might not invest into a fund one because of the career risk, but a high net worth or a family office, maybe the family office has incentivized their team to actually optimize on returns.

9:40A lot of the top GPs, they figure out a way to survive to fund three. there's an adage that the first three funds is a GP problem and fund four and above is an LP problem. You literally have LPs coming to me and saying, well, this GP is making me do this and it becomes their problem versus the GP problem. But you have to survive to that fund three. That's exactly right. And that's all about being aggressive in your pricing, building that relationship, building trust, building out your infrastructure, right? You want to present to the LP community that you understand it's not just the investment strategy.

10:17Like, let's face it, the bare minimum of being able to run a fund is to have portfolio management skills that can generate sufficient returns. You still need a back office. You still need a middle office. You still need investor relations. You need compliance. You need all of these functions that are also required. So the sooner you get all of those other things to institutional grade, the more presentable and the faster you will be considered a lower risk on that business side. David Rubenstein from Carlisle is quoted as saying, good LP management is average returns with great customer service.

10:59And that's maybe where we're converging, where you see these funds just raising tens of billions, hundreds of billions of dollars, how are they going to get alpha? I haven't heard a good answer on that. David is spot on. I have seen so many funds in my career that have what look like, I will just say, mediocre returns. Not poor returns, but mediocre returns. But amazing institutional quality that no one is worried that the money is going to be misappropriated, stolen in any way, that the reports are not going to be accurate. They are institutional grade and they're amazing at relationships. And, you know, look, at the end of the day, this industry is not really that different than any other.

11:46We buy from people who we like and trust. If you build great relationships, it absolutely will pay dividends over time. upstream of good relationships and building good relationships with LPs is the quantum of meetings and FaceTime. So I get a first meeting with an Ivy League endowment. Let's say it goes well, or let's say it goes pretty good. What are ways to get a second, third meeting? And what are ways to keep that relationship going without them having to commit the capital? Let's say that I'm bought into this long-term vision, but how do I keep on getting FaceTime with these top LPs that by definition having thousands of people ping them every day you have to be patient you should have no expectation that the lp is going to give you anything including substantial time especially if you're a small manager and you're lucky enough to get a meeting with the yale or princeton or or any elite lp they are inundated with the best funds in the world trying to get their time if you're lucky enough to get that meeting don't have an expectation that they're going to start meeting with you on any regular basis.

12:56The best marketing teams are always looking for ways to pay it forward with LPs. They're very good at adding value in some way, providing education, providing market insights. And I'll tell you this, the LPs are flooded with emails, but they also read a ton. If you send them high quality content that's useful to them, that helps bring them up to speed as to what's happening in the market where you have expertise, they love that you won't always get a response but you will find out when you bump into them at the next event or you know the next time you're you're lucky enough to see them somewhere a lot of times you'll find that they do enjoy the fact that you're sending that to them and they're appreciative of it if you're in this for the long haul and you're doing things like that to make the lp's job easier to pay it forward to to communicate to them that you understand this is a long-term game and you're trying to build that relationship over time and you're not making them feel pressured or making like i've seen gps make lps feel guilty that they're not responding to their emails like you have any idea what this guy's you're not going to get someone into a 20 million no you're not you're not this is very bad strategy these these people i'll tell you this so i go to an event every year it's actually the capital allocator summit and there are 80, 90 CIOs of the best LPs in the world who are convening at those events and we facilitate roundtable sessions.

14:28So I facilitate, I don't know, seven or eight of these over a two day period. To a person, whenever I ask the question of these LPs, what is the biggest headache for you? They all say their email inbox. They are so inundated with hundreds and hundreds of unsolicited emails, you just can't beat these guys up because they're not, you know, you're not top of mind for them. But it's great to get a meeting, get on their radar screen, supply them with as much useful information that makes their life easier, makes their job easier. And they will hopefully remember you when the opportunity strikes. You know, it's a long term game because look, any of these big LPs, they have established portfolios.

15:13They already know, you know, they have a manager in every category they want. You want to be top of mind when they have a need in the area where you have expertise. That's when hopefully you get the call. And that's just all about being there, hanging around the hoop, building that friendship over time. If a GP internalizes the idea that the LP is managing their career, then upstream of that, you need to de-risk that for the LP. How do you do that? you show a consistent performance. You show that you do what you say you're going to do. You show that your strategy doesn't creep. You show that your fund size doesn't creep.

15:51All these things that LPs hate and that LPs will get scolded for by their ICs and by their CIOs, you could basically start to show that you're not like that. I like to say that a person that pretends to be an honest person for 20 years becomes an honest person. And I'll add to that by saying one of the moments that GPs can totally differentiate themselves from everyone else is when their performance is down. The vast majority of LPs run and hide when their numbers are down. It's the worst thing you can do. When your numbers are down, that's the moment when you should be much more active and much more in front of your LPs.

16:31They so appreciate a GP who says, look, our numbers are down. Here's why. This is our assessment of the situation. Here's what we did right. Here's what we did wrong. Here's where we were surprised. The transparency is so core to a long-term relationship. And I have to say, especially among the smaller LPs, they generally don't do it. I mean, we will see it in the system. A lot of times we actually created a feature where we have the GPs reporting through their admins now to help lessen this. But when a GP just cuts off their returns, they, you know, they update every month and then they hit a bad patch and stop updating.

17:12It's the worst thing you can do. Now the whole universe of LPs, we have a thousand LPs in our system every month, regardless of events. Now they come to look at your returns in a moment when your strategy maybe is under fire and they don't see an update. It looks terrible. So that's, I would say to GPs out there, that's the moment to be proactive, over communicate, don't run in hot. I got to meet John Gray, president of Blackstone. He hasn't gone on the podcast yet, but I'm working on it. You'll get him. And I asked him this exact question, which is, what do you do when the market goes against you?

17:45Everybody has a patch. He's been at Blackstone for, I think, 25 years or so. And he said that exactly thing. He said, I'm on a plane going out to every single LP and showing them why we still believe in our strategy, answering their questions and doing the exact opposite of hiding is actually coming to the LPS. Yes. Philosophically, I think a lot of this comes down to GP attitude. What does that mean? That means, is LP capital, are you entitled to LP capital? If I meet with you, you're an LP, am I entitled for you to give me$20 million? Or is it my privilege and my honor to even be in this conversation with somebody that could potentially invest this down the road?

18:25So I think a lot of this actually goes upstream to what is the GP's attitude? Are you entitled? Is everyone entitled to be a private equity manager? Is everyone entitled to raise a billion dollars? So I think the more humble managers, I think in this case, have a huge advantage in that they take every meeting that they have as a privilege. And then ironically, they end up the ones with a billion and$10 billion funds. They end up like John Gray, who's going in and flying out. And I think GPs should really think about why do you feel entitled? And why don't you feel like being in the top 0.0001 % is not good enough?

19:00Why do you need to be a billionaire in order to feel validated as a person? Maybe because it's a smaller community. You have some element of people who fall into that trap. That's literally the worst place you can be as a GP. I mean, it's like, think about - It's a downward spiral. I mean, it's right. It's terrible. Think about any other product in our economy. If your product is great, consumers buy it, right? If you deliver a great product at a solid price, it sells. If it's not a great product, it doesn't sell. Are we going to blame the consumer because you couldn't create a product that was competitive or delivered at the right value?

19:44There's no difference in this line of work. It's crazy for GPs to ever. That's like the absolute worst thing you can do. I was talking to a GP and he was complaining to me how LPs didn't understand the cost structure. And I was thinking, why don't you create the product that the LPs want? Are you blaming the customer? Yes. That is like the worst possible. Right. Like think of any other business where they blame the customer and succeed. I mean, you know, you're competing against people like Elon Musk and Steve Jobs, like the equivalents that, you know, they don't have the same brand power those guys do.

20:21But they exist in our industry. You know, they're incredibly smart, innovative people. if you're the guy who's blaming the customer i mean you don't stand a chance if you've been considering futures trading now might be the time to take a closer look the futures markets has seen increased activity recently and plus 500 futures offers a straightforward entry point the platform provides access to major instruments including the s &p 500 nasdaq bitcoin natural gas and other key markets across equity indices energy metals forex and crypto their interface is designed for accessibility. You can monitor and execute trades from your phone with$100 minimum deposit.

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24:11Yeah, I agree with that. I feel like this is just broadly with people. Having to suffer, actually, Jensen Wong kind of talks about this. The folks who have had the most suffering in life and the biggest challenges are often the most humble and the most appreciative of the opportunities presented to them. They're the least likely to feel entitled, like the world owes them something. And I do agree with you. Sometimes folks who've had lots of success, especially through academia, you know, they hit effectively the real world. And it's like, it's a lot harder than they expected. And again, there's just nothing worse than coming across, like everyone owes you something.

24:57A strong dose of humility always serves managers well in this business venture just focusing on that for a second venture is especially tough because venture has the widest dispersion of returns right the the spread between a top tier manager and a bottom quartile manager is enormous you know most other asset classes the band is much much tighter but in venture there's a huge spread and it's also uh it also has the additional challenge that the best deals tend to gravitate towards the best, the managers who have had the best track record, right? So if you're a top 50 VC, unless, as long as you're running your business pretty effectively, you're probably going to remain in that top 50 crowd because your ability to access the best deals is really high.

25:54Venture is not the kind of business where the portfolios, the portfolio companies would prefer a better deal from a lesser known manager. They view that top 50 as the group that they have the best chance of succeeding with. And the difference for a startup between success and somewhere in the middle even is gigantic. So the deal flow power, once you're in the top tier of VC is so enormous, it really creates a huge advantage, which is why Andreessen Horowitz sent out an email. Oh, one call. Right. And raises$15 billion. Professor Steve Kaplan, previous guest, did a study on this exact thing. Do venture capital returns persist?

26:41And the answer is yes. 52 % of the time, top quartile stays top quartile. Yeah. True, 48 % they don't, but sometimes maybe their second quartile. I don't know the exact dispersion of the other three quartiles, but that's why there's this flight to quality. That's why emerging managers are not able to raise funds and the top funds are charging two and a half and 30. Yeah. It's literally a tale of two cities. Yes. Yeah, it's absolutely right. I feel like the best move, if you're trying to get into the venture capital business, the best move is really to just keep the fund small and do it deal by deal.

27:15And give yourself the, don't put the burden of, I have to go raise$100 million or$200 million on my first fund. having to do a 10 million,$20 million fund, focus on small checks, build your network. I mean, I'll tell you the best guy in this building at thinking this way is Daniel Dart. Daniel Dart is running a$5 million fund. Daniel has the best network. Aside from the fund managers who are famous that are associated with this, I'm probably the next best known person because it's my event. I'm on stage a bunch, right? Like if you're coming to the event, you've probably heard my name. I think Daniel is number two behind me, and the guy's running a$5 million venture fund.

27:58I've never seen anyone build a network as fast and effectively as Daniel. Actually, a month ago, Daniel held his first emerging VC conference, had portfolio companies and mostly early stage VCs there. And he invited Bill Gurley to speak. Then he asked me to come and interview Bill, which was a total honor, and I was super appreciative of that. this is a guy running a five million dollar venture fund who got bill gurley arguably the best vc in the world to come to his event and speak he was only able to do that because he's built so many great relationships in such a short period of time so like when i'm thinking about how hard it is super hard if there's any guy who's probably going to make it it's daniel because he's doing all the right things he's keeping his fund small it's like let's hit a bunch of singles and build our way over time to a real track record and put yourself in a position so that when the timing is right and maybe you get a few home runs, now you're really well positioned to go raise bigger funds.

29:02Speaking of these compounding games, you're in your sixth year? Yeah, this is, yep, we'll be sixth in April. Sixth, sixth in April. And you started from a charity event to now, we're sitting here, there's 6 ,000 people, 6 ,000 capital allocators and GPs and charities. how have you been able to compound so quickly? We made a lot of good decisions. So I don't want to shortchange my team for all the hard work and a lot of great decisions along the way. But it's also often in life, it's better to be lucky than good. And in a sense, the pandemic, while we saw an opportunity and capitalized on it, it created this opportunity to build a global business that we didn't even fully appreciate when we started.