E394: How Great LPs Pick Venture Funds | Jamie Rhode

0:00Why I get so excited about emerging managers, why I believe there's so much alpha in fun one managers. When you see the interaction of high skill and high volatility in the environment that you're playing in, it creates this moment in time or this place where skill can actually show up in your terms. If you were to come into your Monday deal meeting and have this manager come across as brand new and someone that you had never met before, would you take the meeting?

0:37so jamie your partner at screen door one of the top lps in the world and last time we chatted you said that a lot of the managers today look exactly the same what did you mean by that it's funny you ask this question because i think it's the lp's fault but you have a manager come in your inbox or come through a warm intro and you are x product manager x operator x xyz brand name firm that you're spinning out of or you have x network and it's all generally the same like if you were to blind yourself and just hear the story a lot of it sounds the same but i think lps force that like we're looking for something that's an easy underwrite that's fundable so we're all looking for the same thing let me see your track record with your co-investor list do you have dpi I mean, that's a huge win.

1:25But let me see what network you have. Let me see what thesis you have, which is really just a sector play, but they call it a thesis. And so a lot of LPs just force a standardized way to underwrite a GP. So when you come into my inbox or you come into my network, you all sound the same. And then it's really hard to discern what that person's edge is or why they're differentiated than the 50 other ex-product managers that are in my inbox. And so it then falls on the LP to dig in differently and really understand that managers, what we call screen door, GP market fit, which means your fund size and your strategy and your lived experiences.

2:08So what gives you the right to be the best at sourcing, selecting and winning all need to align to give you that high probability of an edge that turns into a win. it's not just the best strategy for the best market it's also the best person executing the best strategy for the right market exactly because i think what's an example for that yeah i think it's really important to ask this gp first like why are you doing this like this is really hard and it's not just i am really good at networking and so i have xyz into my arms reach and I'm going to go invest in my buddies and we've seen that a lot before and that's great for today but it's really saying hey I was early at xyz firm multiple of them I was also early at these failures and so I lived the zero to ten at multiple places and then I became a venture partner somewhere and I started doing angel deals and I started to really see what excellence was not just on the operating side but on the investing side because I think that gives someone unique perspectives and then they're taking a crawl walk around approach of I'm going to go start my own venture fund because I have unique insights in developer tools or developer ops and I understand the investing side of the house so I'm going to go raise a small fund because that aligns with the deals that I wrote as an angel investor.

3:41And then I start to win deals because founders want me because of my unique experience and the unique skill set that I offer at that zero to one phase. And then that earns you the right over time to start writing slightly larger checks. So maybe your fund two is one and a half times what your fund one was because you've earned that right with founders to start writing larger checks. And so you're going along this journey of crawl, walk, run, but you're doing it with intention and you're doing it based off of one's lived experiences or one's journey up until today. What does it take to be a good seed manager today?

4:20Yeah, it's a really interesting question because I don't think it's just being a good investor. Like a lot of people can be a good investor. But I think borrowing from kind of my public markets experience is that you have to understand what it takes to build a firm. And it's not just investing in great companies. You also need to know when to exit. The market has changed so much that being a good investor is only half the job. It's being a fund manager and understanding that along that way, there may be times that you need to sell a piece off. So is that six years into this investment or is that 10 years into this investment?

4:56Is that 12? Is that 15? When do you exit? And so being a good manager is understanding what it takes to endure and survive and win. And then to DPI, that's always important. But understanding that part of this job is to build a firm and what that takes. And that might mean I am really good at investing. Like I have such a nose for network. I can find really good founders. I can talk shop with them. But that means I need to hire. And I need to hire someone that does other parts of the job of running a fund. And that's okay because you should be spending as much time as you can with your superpower, which is investing or talking to engineers or playing in those networks with other people that are just as socially awkward as you.

5:38But that might mean I'm not great at running operations or that might mean I'm not great at interacting with LPs. So if you can hire for that part of that job, that's also really important. And then lastly, I would say flexibility. The market is adapting and innovating so quickly that if you raised a fund three years ago, midway through your investment period, the market shift. And the definition of seed is so much bigger or wider today. And so your investment strategy needs to be flexible and adaptable to changing market conditions. So if you are too rigid in your focus, then you're likely going to lose.

6:22You said managers need to be able to endure and survive. Today, there's what some people call an extinction level event happening with emerging managers. What differentiates the emerging managers that are going to live through this extinction event and those that will not make it? It's interesting where you have these funds that raised in the ZERP era, and some of them have taken longer to come back and fundraise intentionally because the marks just aren't there. where if you raised a fund two years ago, you're getting some nice AI momentum marks in there. And so does that mean they're going to win?

6:55Does that mean 10 years from now, that's going to be the 50x fund in the portfolio? That's really hard to know, because it's so volatile, that journey up until the end. But I think any manager that's starting a fund right now seems to be a lot more serious and understands the implications of what it takes to run a fund. And I've noticed a lot of the managers coming to the table have taken advantage of the innovation that's happening today and understand that I have to know about DPI. I have to talk about secondaries or I have to go find people around the table to help me understand how to manage this firm and hiring, call it junior level talent.

7:38where I talked to a lot of GPs three years ago that said, when I raise fund two, I'm bringing in an equal level partner. That's my plan. Benchmark is my goal. And now when they come and raise their fund two or if it's their fund three, they've completely changed their mind. And they're bringing in more junior level talent to date them and recognize that, no, this is my firm. This is my superpower. And I need the help. But I need to bring it in in a smarter way because some of the junior level talent out there has a great nose for finding talent, but also gets pulled into the FOMO. They don't really understand the full cycle and they don't necessarily know what it takes to produce excellence in venture because it's really, really hard to understand that exponential curve before the curve influx.

8:31And by junior talent, you mean investment talent. When is the right time to also bring non-investment talent into firm? It depends on the strategy. Depends on the fund size. Candidly, if you're a$15 million fund, what's that budget for bringing in non-investment talent? But we've certainly seen fund one and fund two managers outsource non-investment related needs, especially around the, I'm just not really good at this operations thing, or managing how do I get my K-1s and my audited financials out in time, or how do I deal with any of this back office stuff? And so typically we find that fund one managers try to do it themselves.

9:08Some are successful and some are not. And then they realize I'm about to raise my fund too and I've only spent half my time investing. I need to outsource that talent. And that could be someone that is very junior level or that could be hiring an outsourced CFO that's able to support that stuff because that's the unsexy thing. That's the boring stuff. That's the headache. but that's really important for LPs to get the reporting on time. Outsourced CFOs, do these generally work? Are there good outsourced CFOs? I don't have any names to shout out there, but I've certainly seen that create a lot of success for the GPs and even a scenario of like a chief of staff that can be supportive of gathering all the information, especially if you're in like a highly diversified portfolio.

9:53That's a lot of data that you need to be tracking. And so having that set you up for success is really important. I'd also be curious, too, with AI now, is there tools that you can build in-house or if there's agents that can help support your data tracking of that? Where if we have this conversation three years from now, I'd be curious if that's as much of a need as it is today. earlier in the conversation you referenced this concept of bringing together a team that plays to their superpowers how do you do that practically and what are some of the archetypes for high performing teams that succeed at early stage venture because an early stage venture you have to be non-consensus and right i think that's really hard because i think it's like once you've gotten excited about an idea you kind of start to own it and you start to build up a thesis and excitement around it and then by the time you're in the fifth inning if you were to get all that information freshly new today would you still be just as excited maybe not but you've just started to own this idea and you have this natural behavioral bias in you that kind of creates that excitement and if you've received new information that may be cautious maybe not a red flag but cautious enough that you probably should take that seriously enough to continue to do more work but it's hard because you've started to build up this idea and you started to build this excitement having a partner around the table that can ground you on that and say hold on hold hold you're crazy or like you're missing this or this is actually more than just a caution this is red flag we need to spend a couple hours diligencing out this potential issue having someone around the table that you can have that conversation with and can ground you in reality is crucially important and so I think being able to disagree but with respect is where I've seen a lot of success happen because you need to be able to pull someone out and say you're wrong And I think you're wrong because of XYZ supporting with evidence, ideally.

12:06But if it's not done with respect, then I think you start to have cracks form and you start to see partnerships dissolve over time. Disagree and respect. But you also referenced this archetype of essentially this crazy entrepreneur that tries to hit these thousand X and this level-headed partner. Is that something that you see in some of the best partnerships? I certainly see the yin and the yang there. And I think that with those types of partnerships, because the personalities are so different, that you need to have known each other a while, and you need to have kind of like figured out those differences.

12:46And even going back to my days at Bloomberg, where I would see like an engineer talk to a salesperson, that just didn't work. Like they were talking two different languages. And so being able to find a common ground and a way to communicate with the same language, even though you have very different perspectives on something is crucially important because I think that communication can either make or break you. That's why the respect is so important. Everybody talks about this concept of having a partner with complimentary skill sets, which sounds so wonderful. Everybody nods their head in reality it's extremely difficult with no respect said another way there has to be respect for this part kind of partnership to work versus if you have two sales people or two engineers they kind of already speak the same language they might have different styles but they don't have this fundamentally different philosophical view on the world exactly because when you say to if you're my partner and i say you're crazy or i think you're wrong like what are you thinking like i have a completely 180 perspective on what you think and if you're like I'm pounding the table for this and I'm like you're completely missing it and you're wrong we have to come to a resolution and I need to be able to say to you like I think you're wrong this is why you're missing it and it can get heated because sometimes you're passionate about this opportunity or whatever decision you need to make and if at the end of the day you can't like walk away and be like I think they're wrong but I completely respect them.

14:15How do you come back together and not have any resentment build or cracks form, especially if one of you is going to be right and time's going to tell, and then you start to build up those resentment or you start to see those cracks form to be even wider. It's really why the respect piece is so important. Expert calls have always been one of the most powerful ways to build conviction, but today investors are asked to cover more companies, move faster, and do it with leaner teams. With AlphaSense AI-led expert calls, their TGIS call service team sources experts based on your research criteria and lets the AI interviewer get to work.

14:54The magic is in the AI interviewer, purpose-built and knowledgeable-based information to conduct high-quality context-rich conversations on your behalf, acting as a trusted extension of your team. Then they take it one step further. Your call transcripts flow natively into your AlphaSense experience and become querible, searchable, and comparable. So your primary insights plug directly into earnings preps, digital work streams, and pitch books with zero tool switching. And with AlphaSense expert call services, the AI-led expert calls are just one option because we know the importance of a hybrid expert research approach.

15:27AI for coverage and efficiency, humans for complexity and conviction. It's the institutional edge that scales research without scaling headcount. For hedge funds, that means validating thesis assumptions across dozens of experts before earnings instead of a handful. For private equity, it means faster pre-IOI scans and deeper commercial diligence. For investment banks and asset managers, it means pulling real operator perspectives straight into models and sector positioning without disconnected tools or manual handoffs. All of it lives inside the Elphasense platform, trusted by 75 % of the world's top hedge funds alongside filings, broker research, news, and more than 240 ,000 expert call transcripts, turning raw conversations into comparable, auditable insight.

16:11Take advantage of AlphaSense AI-led expert calls now. The first to see wins, the rest follow. Learn more at alpha-sense.com slash how I invest. You've seen now across hundreds of GPs, maybe approaching thousand based on your previous experiences. This concept of consensus at the early stage, all things being equal do you want your managers to have this policy where somebody could pound the table and bring through a non-consensus deal or do you find two very smart people should come to the right decision more than one person advocating for their own position having alignment and not necessarily agreement is really crucial and so what does that mean in play My favorite topic, obviously, portfolio construction.

17:01But I tell GPs in general, do enough deals to be confident that you'll be in a winner and then grab as much ownership as you possibly can because that's the cheapest entry point. But it's important to have 10 % of your fund or your capital allocated to break the rule investments. So if that means, especially, it has to be what works for the partnership. if someone has a silver bullet that they can use that other partner needs to be comfortable with that silver bullet going into the portfolio because like you're in it for the carry and so is that bullet going to be the next big thing or is that another zero in your portfolio eight years from now where it could have gone to something else and so making sure that the partners are comfortable with that investment strategy but i think having 10 of that capital go to break the rule investments whether that may be your pre-seed and seed fund and you have access to 125 million dollar post money valuation seed do you actually put some capital in there because you have a network reach that gets you access to that profile of a founder and deal if you think it's going to potentially return your fund don't pass on it or if it's some weird wonky founder that doesn't really fit your archetype but there's just something about there that you think is super unique and it's a new network and there's a relationship there you really want to build does it fit into that 10 % bucket do it because I think that it is so hard to continue to stay non-consensus in an environment where so many people are focused on like momentum style plays and you see these markups there and it gets you super excited and you're like I want to double down but early momentum correlated to big wins 10 years from now i think that correlation is pretty low this being able to go non-consensus invest in things that look weird or different so critical for early stage venture at nico bonazos who built the general catalyst seat practice over 15 years and he gave a stat they did a lot of research on this which is 50 of all returns for entire sector are made on companies before the sector has a name, before fintech has a name, before mobile had a name.

19:19And what's crazy about that is 50%, well, you could say, well, I'll just wait for the other 50%. The problem is that the 50 % comes in the first couple of years and the other 50 % could take another two decades. So the extreme power laws and things that look weird, that look different, that look like, why do people have people laying on mattresses in their homes? Why are people jumping into strangers' cars? and paying them for that, these really weird, really uncorrelated business ideas, those tend to account for these thousand X power law. And I think that's why I have a lot of reasons why I like a more diversified approach.

19:55Although at Screen Door, we certainly back all profiles of portfolio construction. But I think when you tend to lean into more shots on goal, it allows you to take those few bets on the wonky and weird that like this just doesn't make sense. but if it works, it's huge. And so when you have a couple more shots on goal, it allows you to take that risk because if it doesn't work out, it's not as detrimental to the fun model math because you have other bets in there that may feel a little more safer than that allows you to really take advantage of the tails. I want to double-click on what you said earlier because it's a really brilliant model that solves for a couple different things.

20:38You said 90%, essentially very rules-based. You have to follow these rules on all these 90 % and then 10 % flexibility. The reason I think that's a really good model is a lot of people, they either pretend that they never break the rules and are always breaking the rules because you need some flexibility in the model or they do the opposite, which is they break all the rules and then every one of their investments is at a three to four X higher valuation because valuation doesn't matter at entry. They use that mantra and then they end up having this. Sometimes even these funds have great winners, but you paid up for everything.

21:13You end up with a 2x outcome. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast. Receipts are instant. Sometimes I even get loyalty rewards automatically.

21:42There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly whether you're in the shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing to your best customers keep coming back.

22:16And right now, you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground.

22:55I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, then sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly, whether you're in the shop or on the go.

23:28And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing so your best customers keep coming back. And right now, you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place.

24:10Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time.

24:44You can track sales, manage inventory, book appointments, and see reports instantly whether you're in the shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing to your best customers keep coming back. And right now, you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity.

25:20Run your business smarter with Square. Get started today. I've thought a lot about why I get so excited about emerging managers or like why I believe there's so much alpha in fund one managers. And I've seen a lot of great returns in this space. And I think about it in like this investment framework where if you think about like two axes and on the vertical axis is manager skill. So the higher up you go, the more skill you have. And on the horizontal axis, there is the volatility of the environment that you play in. So if you're on the left side of the axis, it's low ball. And if you're on the right side of the horizontal axis, it's high ball.

25:59And I think when you see the interaction of high skill and high volatility in the environment that you're playing in, it creates this moment in time or this place where skill can actually show up in returns. And I think that in that like top right quartile between high scale and high volatility, that's where fun one managers naturally live because you have less constraints. You are a fun one. There is no pre-existing LP expectations from you. There's no pre-existing expectations around your ownership targets. No pre-existing expectations from founders. even if you've spun out, you're likely doing a different strategy than what you were doing at XYZ brand firm.

26:49And so it's this low constraint world that fund one managers live in that allows them to just invest in a way that provides significant upside. And as firms mature, you naturally have pattern recognition set in. You naturally have expectations from LPs. you typically have raised a larger fund so you naturally have ownership targets that you must hit to make your fund math work founders have certain expectations of you if you've made follow on investments there's more expectations of you and so that's a natural evolution and not always a bad thing but I think that it just naturally means that fun ones play in an environment that have less constraints and allow for more upside whereas you mature as a firm constraints set in that make it harder for you to take advantage of sometimes the wonky and the weird.

27:47Set another way, fun ones are oftentimes best ideas for the GPs. Fun twos are kind of what you went out in the market 18 months ago. You're almost constrained to that strategy. Exactly. And so I've certainly seen fund four and fund five managers do really well and keep those constraints loose and lean and flexible and adaptable. But it becomes harder because you just have these expectations set from LPs and founders around what you are in the market. and when you think about kind of high skill and a high volatility environment, if you throw a little randomness in there or a little luck in there, when you get a lucky bounce, like it can really make a difference in your return and really drive it.

28:35And you mentioned you've seen some fun fours and fun fives that have more loose mandates. How do they pull that off and what's upstream of that? I think the most consistent thing that I've seen across all ASSA classes in success is staying humble and kind. Because the sourcing strategy that you had at Fund 1 is very different than your Fund 4 strategy. And if you've backed really great companies before, hopefully that founder flywheel effect is showing up and that has a positive network effect to your sourcing. But it's very different. you may have started this fund based off of some unique insights and unique opportunity maybe you did have an edge in your network access but by the time you're a fund two or fund three it's probably arbitraged away and everyone else figured it out so if you are humble enough to know that you need a refresh or it's maybe the reason you do hire someone more junior because they're able to hang out at those hackathons and they're able to get into those parties or they're able to get into those networking events where they fit in a lot more.

29:42It's able to refresh your network edge. And candidly, it's why a lot of the GP advisors are part of Screen Door today, because a lot of them are able to stay close to the new managers coming to market and ensure that their game is just as good as their emerging managers. It's a massively underreported topic in that managers' networks decay over time? Oftentimes, you mentioned earlier, they'll be operators, they'll be within an ecosystem. It might have been in the PayPal mafia and then the Palantir and the ex-Uber. But at some point, these networks decay. How do GPs avoid that? That comes through, first, backing really good founders because if you back someone that spun out of PayPal mafia and now you backed a company that created its own mafia, that's a great way to build a direct network effect.

30:38Founders introducing other founders. Exactly. Is that what you found as the best source of introduction for portfolio companies? I have. And it's sometimes a little wonky, though, because I've seen scenarios where you were early into a great company and they introduced you to this company and they introduced you to this company. But what happens when that founder introduced you to a network? and then you get a bunch of deals out of that network. From a mapping perspective, it's a network check. You were well-networked in YC, for example, and you got a bunch of deals out of YC eight years ago. Great.

31:15But the reason you got into that network is because you back some founder that introduced you to everybody. And so I think that the founder flywheel effect is really, really helpful and really accretive to an underlying manager's portfolio because it also allows you to not have to be the content machine. Because if you don't have a good sourcing network by backing good founders, you need to find another way to get the introductions. You need to find another way to get to these founders. And so there's nothing wrong with content. It's a great way to find managers. I found wonderful managers from being on your podcast, NLPs.

31:53But, you know, I think that the founder flywheel effect ends up showing up in a lot of the returns. We were talking about this earlier before we started recording. Alex Hermosi calls this choose your heart. It's fund management just like any type of business. For some reason, fund managers don't think about their business like a business, but it is fundamentally a business. And the best businesses have some competitive advantage. I've seen so many different variations. Some people have founder dinners. Obviously, for me, I have podcasting. Some people have writing. Other people speak at conferences.