DDQ: Why LPs Still Aren’t Buying the Venture Comeback

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0:58welcome to swimming with allocators the vc podcast from the lp perspective with your host alexa benz and ernest you ready let's dive in welcome back to swimming with allocators uh it's ddq time so uh it's time for us to discuss debate and question it's where alexa and i underwrite the entire venture industry. And so we got some fun for today. So football's back. That'll be relevant later. IPO season opened, I guess. And somehow LPs we're hearing are still not writing checks. So I brought a few games and questions to Alexa that she has not seen today. She has not seen this. This is real. We have no producer, which she probably should.

1:53to validate this, but you have to trust me. And then this is just a reminder for these DDQ episodes. We take all questions or feedback and recommendations. So you can send your questions at contact at swimmingwithallocators.com or just reach out to us on LinkedIn or if you have our emails. Alexa, you ready to dive in? Okay. That was a little hesitant, but all right. First, we'll start with discuss the first D. And I wanted to bring up first discussion of IPOs. And unless you've been under a rock this summer, we had SpaceX come out and it was priced in June 11th at 135, came trading on June 12th.

2:52And it raised about$75 billion. It's not a mistake. Billion dollars. The largest IPO ever. The first day it closed at$2.1 trillion. And obviously, because it's IPO, insiders have a lockup period depending on 180 days or 365 days. But since the listing, the pricing has slipped. And I don't know when you're going to be hearing this, but it's probably still slipped off the peak of$2, sorry,$211 of a price. So with all of this happening, I've been talking to a lot of different people in the ecosystem, both GPs and LPs. And I've heard a lot of different things, Alexa. So one, GPs have been saying that SpaceX event didn't restart LP activity because we're not really seeing any distribution.

3:56and that a lot of managers haven't given distribution guidance if they even had that stock. Also, conservative CIOs are still, you know, going to brand names. I've heard from a number of foundations and institutional LPs, and they're still feeling kind of hesitant, and there's just like this, I don't know, movement to consensus.

4:24and there is actually I've heard from some early stage GPs that that 300 to 500 million dollar outcome is becoming rarer and rarer it's like the it's actually the unicorn unicorn because a lot of acquiring companies have gotten smart and instead of offering a purchase price of 300 to 500 million, it's a lot cheaper just to give the founders a carve out of 15, 20, 50 million. So what does it all tell us? It's like, oh, LPs aren't re-upping on a headline. They're not going to re-up until there's a wire. So my discussion is like what actually is going to move capital to emerging managers in 2027 if that's even a year.

5:19What do you think? Yeah, I think when we started doing this podcast, it was all about the denominator effect where people weren't able to deploy more into venture because they were overweighted and they hadn't seen any returns. I think the GPs are getting out ahead of themselves by sort of assuming that they can book the liquidity. and so they'll be returning maybe like they've got an opportunity fund now they maybe they're finally coming out for their next fund maybe you're a new manager talking to a new LP and so like we have the confidence as VCs to be like we can start counting the money this must mean there's room now for new bets you know the problem is solved and what we've heard from a couple of the LPs on the show is it's not that easy there is the timing issue that you described that like in some cases you've got locked you're locked up in some cases these people might actually decide to hold the stock that they've managed to get at a great price right you're not necessarily selling that the minute that you get it distributed to you if that's if that's an option if they're giving it to you in the form of stock.

6:40And similarly, like we were in the red as an asset class. So like I also really liked Trisha Babson University's point that like this capital, when it flows back in, it's flowing back into the full pot. It's not just hers to redeploy. Yeah. Yeah. And I think that's something that's hard for GPs to understand. But when you have so much capital being raised over a 10, 15 year period with limited like liquidity events, like like much more limited liquidity events, it's going to take time for that to shake out. out back in the ecosystem. And so, um, again, it, it's, uh, I think what's going to be needed is multiple exits, but then also, um, I think even the conversation about where the capital goes to after that, uh, has not reached kind of like the nuance that it should.

7:56There's usually just kind of pitting like established brands versus not established brands. And I think it's a little bit, there's more layers to that because there are some established brands who are having real questions of like, should they exist both from internally as well as from the marketplace of founders and LPs. That's funny. This question around like liquidity, unlocking more slots for managers was also something I wanted to discuss because we hadn't gotten a chance to talk about it. I took some notes at Advancing BC, which is an emerging manager conference where LPs present. They judge some pitches.

8:39They're available to answer questions. I wanted to share three of my favorite points from different LPs who presented. and maybe that sparks your memory of some things you've also been hearing kind of off the cuff. So Courtney at Recast Capital said that nonstop talking is pretty obnoxious and that unless you're saying something super engaging, let's have a conversation. And I thought that was like such a, such a like sharpshooter straight way of explaining like what it's like being on the other end of these, like receiving these pictures. Is it, do they mean just in person or online too? I mean, I'm imagining that she probably takes plenty of online pitches.

9:30I mean, Zoom pitches as well. Oh no, I meant from like someone constantly talking to the ether and posting. Oh, this was in the context of fundraising. So this is like how to handle your first meeting with an LP. Okay, okay, cool. All right, what's number two? Giada at San Francisco Employees Retirement System, on the question of like how do you differentiate, like how do you know what your differentiation even is, she suggested you ask a friend, why did you invest in me? And what a healthy, smart way to go about this. Rather than sort of backing into what you think LPs want, it's like really figuring out what your superpower is because why did your friends trust you with their capital?

10:19And then third, final one, Aaron at 50 South Capital. What a gem. He made a great point about all. I love Aaron. I know. He's great. Aaron also calling you out. You should be on the show. Continue. Yeah. We can't all control our compliance team. So he made the point that all GPs are impressive with these incredible past successes, but he considers his job to be figuring out the subset that has like insane future potential.

10:55Those are three good points.

11:03if you could ask a follow-up question to any of those which one would you ask like which question and what would your follow-up question be i think like how to judge future potential is fascinating yeah yeah yeah and i don't feel like we're in a market right now that is is really digging into that. Like, what does that look like? What are the right signals for that? Other than like your past success. I think, you know, we've heard this over a number of our conversations, but this idea of being a founder magnet is something that I'm hearing from smart LPs in different ways of like, are we just hearing about you all the time?

12:03Where you just kind of like, it's kind of like the concept of like, that's been put in movies where it's like, oh, if you say blue car, then all you'll do is see blue cars all day. and this concept of people just becoming a part of the ecosystem and how fast it happens and how you become a node really fast. And so I think some of the best allocators are going to start to notice who becomes these nodes really fast. Another thing it makes me think of is how GPs often will forget to brag about themselves. They just want to talk about their strategy. And if they are talking about themselves, it's probably backward leading.

12:53They think that the point is traction. They think the point is what are those superstar things I've done in the past.

13:03but maybe you need to be talking about your superstar qualities for the future yeah yeah or what you're doing in the present I think this idea of like being able it's it's a lot of times when you try to make your differentiation legible which is a word that now I just hear all the time to LPs and founders. When you're breaking it down, it could sound like everything that's been on every VC website. I wonder if there is a parallel. There's a lot of data that shows that female founders get asked more questions about their existing traction for their business and are not like really given the opportunity to present the big vision.

13:56And I wonder for any female GPs listening, maybe we need to be more thoughtful about whatever questions we're receiving from potential allocators, making sure we also talk with a sort of forward thinking. You know, if you're not asked a question about the big idea or like how you're going to have big impact, you need to find a way to slide into talking about that or else you don't get a chance. Yeah, yeah. I think there are clever, you have to be authentic to who you are, but I think there are clever ways to, when you don't feel like you're being asked a question that's essential to your strategy and who you are and also might be a sticking point that you think could make the allocator more interested, it's your responsibility to figure a way out to do that.

14:50And so, you know, sometimes it's asking questions to them. Yeah, GPs, you can actually ask questions to LPs. Trust me, we've been doing it. And so, yeah, you have to find your own ways to do that. So the next one, the discussion point that I wanted to talk about was one, taking a victory lap. There is a about a year ago, almost episode 82. I know you all remember it. Two brilliant podcasters predicted what would happen. And we're starting to see it. So those two people said that LPs who went direct will eventually drift back to fund-to-funds, but only the ones that offer more than just a basket, right, of like different funds.

15:46So I can't remember which of us said that, but let's just both take the victory lap. It's starting to happen. And the reason I wanted to bring that up is because I'm hearing from more and more fund-to-funds that the interests from institutional foundations and endowments and family offices are pinging top-tier fund-to-funds. And even public pensions are as well. and the funny thing though is the LPU told me this also said that they were curious if that is a signal to you know a very frothy market like a peak of a market because that happened in 2020 and 2021 again and I say maybe but that's why you shouldn't time the market and if it helps emerging managers i'll take it but um these i think the importance of fund to funds we've been since we've been doing this show we've seen the pendulum swing on people going to do more directs and i think yeah we'll see the big names of hugging face space sex and Anthropic and OpenAI and da da da da da.

17:11But there are hundreds and thousands of other companies that people invest in directly that will never see the light of day of an IPO or a liquidity event. And so

17:26the argument was we don't want to do fee on fees. There's not much diversity in kind of like there's so many party rounds anyway now I can just invest directly into these companies. What do you think, what are you, do you feel like you're seeing or hearing similar things of like, okay, people starting to trust individuals who focus nothing but on emerging managers and, or just an asset class? Are you seeing different? Yes. I think the interest in fund of funds is actually a consensus around the barbell approach that so many of our guests talk about so if you're going to do we see all the capital is going to a few names in venture you can kind of do that direct actually there's room they're willing to take conversations with new LPs the thing that has also become consensus is having some play on the really early stage venture so I I think that's where consensus has finally kind of like come around that you don't, that venture now is multiple asset classes.

18:43And so if you're going to have a small little bucket or sliver for the early stage emerging manager part of the barbell approach, if that's what you're going to be adopting, then yeah, you're going to go talk to the fund of us. All right, next we're jumping into the debate section of our DDQ podcast. Ernest, hypothetically you learn that your GP just did a huge check into the latest round of insert AI lab, like opening AI at 1.2 trillion. How do you feel about this move? Why couldn't I get in at 900 million would be the question. Also, what is your strategy? Are you like if if I'm not an institutional allocator that's invested in Thrive, then I probably have a problem with that.

19:39But, yeah, I'm probably not too happy about that right now, but also could be wrong. Right. I know in our last I feel like our last D.D.Q., you had me rank which investments to do. and I don't agree with anything that I said there. I would definitely take it. So this thing changes all the time. So yeah, that would probably be my response. Did you have a follow-up? Because I have comments about this. I feel exactly the same way. I mean, I guess the devil's advocate side is kind of like, let's get some lotto tickets. They're not all going to go to zero. out. Some of these are going to be the companies of which the universe is built.

20:27So I should, I'll take it at any price, which I guess is the logic of the GPs. You're supposed to have some exposure. So I guess it just depends on like what I already had exposure to, how frustrated or how pumped I am. This is going to be a question that one of our audience members asked me, but I'll just bring it here because it's kind of within the discussion. And that question essentially was like is ai doom scroll real like you know is is all of the hey we've seen some crazy like the blair witch project of ai that's going on and um it has not it has not stopped any uh interest i will tell you that uh both nationally and internationally personally, of people wanting to get into said companies.

21:21Yeah. And it's actually made me, I'm sure you all can find any think piece about kind of like what's going on AI, but I'm sure I said this on the show before, but I think you should, the equivalent in history is actually the space race where people are thinking about not only being the first in progression, but like it's also some game theory involved too is that even if we agree to standards here, will everyone and every nation agree to standards? And I think the play is there's also a fight for open weight models in America and American based ones. And so if you're a coalition of people who have already kind of the market share, it probably makes sense for you to then come together in this one aspect so that you can own the, hey, we'll provide those open weight models for everybody.

22:22Yeah, I think because these bets are so big, felt much smarter than myself. Dan at Desi-In's was explaining at his AGM that, they think of themselves as indirect AI exposure. So that if one of these goes to zero, you want some diversification and their bets are not there. Their bets are not in these small names.

22:52As an LP, I guess I do want to have both, right? Like you want to have some GPs who are like valuation sensitive and are investing in companies that are not just like marked to the last round, but are marked based on anything else.

23:20Yes, but I'm actually actively challenging in my head on

23:29if ai goes bad will any do we have a bigger issue like it's like 100 100 like the house of cards were yes 100 it's like we won't have any water uh we won't have any autonomy and all our information will be used against us um i don't totally believe in that right i'm just saying if if we play this out in that pushback. I think there's two ways that AI goes bad in this case. The scenario of just Armageddon and they find a way to literally just send us all a version of COVID that none of us wake up one day. Or just one failed IPO could tank our economy for a decade. Yeah, yeah, yeah. Okay, and our final segment, questions.

24:22These are questions we've received from the audience or people have called us to ask for our advice.

24:29Question number one from the audience. Is there a tactic or was there a milestone moment or something that started to get momentum going for people to actually close? You've had first conversations with 100 potential LPs. What are those other tactics that we should be implementing? This is a great question. Well, I want to plug that both of us will be at Raise, the GP Day, and my panel is actually on how do you continue to build momentum. So I would suggest all of you try to go to that. But if you've been speaking to a lot of people, I'm getting more and more. I've heard this from LPs and believe this, but you have to raise before you start raising.

25:22and it's critical based on whatever your size of your funding strategy that you align with anchors that can put you into business. And so I would spend most of your pre-raised time on finding the right anchors and selling them on why you should do this together, and they'd be seen as like the silent partner. And so from friends who have been very successful at fundraising, once having an anchor, then you're able to go to all the other people who want to see that momentum of other people closing. Because when you're starting out, nobody is incentivized to actually participate before the final close.

26:06So that's the answer and a plug. Yeah, I look forward to sitting in and listening to your panel at GP Day, Raise GP Day. What is your favorite new AI workflow? I'll let you go first. Oh, interesting.

26:27I get asked for lots of LP intros.

26:33And the most awesome thing I have done for myself lately is make sure there's a really good record of what LPs have told me they're looking for and what they aren't. so I can quickly sort of assess for myself if I get requests. Often it's like, I heard X episode, would you introduce me? And now I don't have to go back and remember, should I introduce you? I've got a nice workflow in place that says, yes, happy to, or you know what? The last time we exchanged emails, they told me this. and so I actually know it's already not a great fit not a good use of your time or their time and I don't have to feel bad about it and final question I got from an acquaintance was you know would you be interested in co-hosting this event with me and very intrigued to hear your answer since Ernest and I host events together.

27:38The vision was very gloss, like insert fancy activity, skeet shooting, I don't know, horseback riding. Curious, your response. We are open for doing different things, but we wanted them to be authentic to who we are. And I think what's really worked well for us are these eight to 12 person dinners where everyone can connect and we can have a thoughtful conversation that can go a lot of different directions. But, you know, we we create an environment where there can be manufactured serendipity because there's like interests. And, you know, there's a variety of different people who all have similar kind of interests.

28:34And so that's I think, you know, other things might take away from it. And I also think people, now that we're five, six years out of, five years out of COVID, I think we've gotten over to just doing things for the heck of it. And what's more important is like, how can you intentionally gather people? And I'm actually reading a book about that right now, which is my last question that people send me is like, what's a piece of advice or content? sorry a one book or piece of content that people should you know consume and my recommendation would be the art of gathering by Priya Parker really really good that it's really talks about how you think about bringing people together be intentional when to be exclusive and so that's that's my answer to that one and i will say my hot take on fancy lp events like agms and stuff a lot of alligators or high networks we actually don't want you to spend our money like we get we are investing in you to make to multiply our money you are a wealth manager you are not a party planner and so my take is if I want to go ski shooting I will put it on my counter and I will invite my own friends I I think some people like these are lovely sort of like cherries on top if you're like gonna have to go to this meeting anyway maybe you get to enjoy a really nice whiskey but But ultimately, I do prefer to pick how I spend any excess capital.

30:35I think that's a perfect place to end. See you later, Allocator. After Portfolio Tile, investing with a smile. Mr. Monopoly here. Miss me? Monopoly is back at McDonald's with millions of prizes. A 2027 cheap charity. A Carnival Cruise vacation. Gift cards from DoorDash and Best Buy. He'll then play in the McDonald's app. Get your bag. No purchase necessary. 50 U.S. and D.C. age 18 plus. See play at mcd.com for rules and play at mcd.com slash A-M-O-E for info and playing without purchase by mail by November 2nd. Chance card game ends November 8th. Game ends November 22nd, 2026. See rules for prize details.

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