20VC: Lessons from 32 Years of Fund Investing | Why Exits Will Be Larger & Funds Sizes Bigger | Top Reasons to Turn Down Potential Fund Investments | Fees, Carry, Deployment Pace; What Do LPs Inspect When Fund Investing with David Clark, CIO @ Vencap

25:35I'm like, Alfie's a friend of mine. I would never bother pitching Alfie because it's like, two thousand is six years ago. I'm so sorry to be so rude. No, no. Do your Alfie's not asked like, why are we paying fees? You let new investment was six years ago. Yep. It's a game of access. Ultimately, what do our investors care about? Our investors ultimately want to try and get the best risk -adjusted returns they can from the venture industry. And we think we have a strategy that delivers that. In a way trying to sort of understand how that strategy works under the hood, it's a bit like how do our how do our managers find their best Company I don't really care how they do it.

26:12There's lots of different ways to be a successful VC investor I'm less worried about that. I'm more worried about their output than their process You know from our perspective, you know We want to continue to deliver that performance and so we are paranoid about every time I see I was just doing something today There was a new white paper about why emerging managers and small funds outperform and I'm all over that data because I want to understand what are we missing? What's wrong with our strategy? You know, why should we do a whole load of net new managers? What advantage will it give us? I'm loving this, but you said they were output over process.

26:44I just think that's so wrong, because like the investment decision making process is the product of venture capital. And actually, when you think about sustaining great returns and when you think about what makes a firm great, it's the process that leads, it's the inputs that lead to the outputs. I could have a random investment in Uber from a friend who I've worked with before crap process, crap portfolio, my output will be great. That fund will be great. How do you know if the process works? You do a review. Of the process or of the output? You can do a review of both. But how can you know the process works unless you judge it by the output?

27:21How do you know that, you know, somebody's investment process is better than somebody else's investment process? I think you can understand the quality of one's thinking and how they think about creating environments of safety, where you actually champion and challenge together, where you hear all voices when there isn't a dominant voice, when there isn't a bias of bully, when there isn't uneven confidence in a partnership, when there isn't unequal distribution on person. So you wouldn't invest in Vinod Kosler? I mean, that's the sort of thing. You wouldn't invest in Brian Singerman, where there's a single, where founders fund have a single, you know, single GPs can go and do deals.

27:53And recent horror of it, single GPs can go to deals. Oh, I definitely do that, but they champion, they challenge each other intensely. Brian will get pushed back from Peter like nothing else and he'll get pushed back from Napoleon and he'll get pushed back from all of his other partners. He will be rigorousy challenged. Coastler, yes I would, why? Because I think Keith would push back immensely if he didn't like a deal that Vinod light. And I think Vinod would listen. One of the things that I've seen is that there's no single right way to do venture. There's no single right way to make decisions.

28:22There's no single right way to structure a partnership. there's no single right background for a successful VC and actually trying to predict what the key determinants of success are. We've tried to do it and we haven't been able to do it. I would love to see the long -term data from other LPs that says that they have been able to do it. One of the things that we feel very strongly is that actually all the talk about edge and how you pick emerging managers, how do you know if you're successful or not with your strategy? It's very easy to talk about, you know, I found this fund or I've done that or I look for this, how do you go back in 10 to 15 years time and say, did that actually work or did it not?

29:06And what we've been able to do with our strategy is to look back because we've been doing it for so long, we've been able to look back at the output and go, that's actually been successful. Do you not worry that that is the lagging indicator? It doesn't represent a new strategy. I hear a lot of endowment funds say that say, Oh, we've got the Yale David Swenson model. And I'm like, he did that in the 80s, when there were much fewer managers to select, and venture had much better returns. That is not a comparable strategy today. Do you not worry that that is lagging data that you are now acting on in today's environment?

29:37Yeah, and I think it totally accept that one of the challenges of Ventures, that the feedback loop is so long. And to be honest, most LPs probably aren't going to be in the same job when that feedback comes. So they're more worried about deploying than they are about what happens 15 years down the line when you know when the performance data is is actually in. But then I would kind of flip that around and say let's go back to the first principles. So totally accept that. Let's go back to the first principles. Let's go back to the underlying performance data and let's see what strategies can be successful.

30:15We think venture is such a power law industry. But there are new strategies which haven't been done before. To the extent that they have like Sam Altman, who is obviously a fantastic CEO and also invest heavily on the site. They haven't been cases like him before. And so we don't have data sets to predict forward on or to judge against. How do we think about entirely new models, which may be better? Yep. And I think as an investor, we don't feel we need to be out there trying to test these new theories. What we need to try and do is to find when something is working to jump on it as quickly as we can and then trying to get access in there where we have more signal and more conviction that it's not just a good story, a good narrative, but actually it's going to result in strong performance.

31:04We are looking at adding new managers in the market today because we think that signal to noise ratio looks a lot better because we're now starting to see a lot of those companies that raise money in the height of the deserve era, begin to come back down to ground and get a sense of what they're really worth. And so I do think over the next couple of years you will start to see managers differentiate themselves. But I think for us, the earliest we would intercept a manager would probably be fun -three. And that's where we've had the most success historically. So if I look at our 12 managers, probably half of them we ended up doing it fun -three.

31:39Why is that the critical juncture? I think it's because you get a better sense in fun one as to whether or not they've been able to find one of those top 1 % Companies and once you have found those one of those top 1 % companies our experience and our data suggests that You're more likely to be able to replicate that again I go back to some of the academic data that's out there. It does suggest that that first success is actually random But once you've had that first success There's a higher likelihood that you can then leverage it and start that virtual circle and begin to build a franchise. Do you care about the ownership on that first success?

32:14It has to be material. It's not just the ownership, it's also the role of the investor in contributing towards that success. So if you wrote a $50 ,000 seed check and turned up 15 years later and found you had a company that went public at a $10 billion valuation, then that's less interesting for us. If you were leading around, if you were on the board, if you were working with the entrepreneur very closely, if you were adding value, do you think VCs add value? I think some VCs add value. I think some VCs don't destroy value. I think there's a wide range. Do you care if your VCs add value? We want our VCs to understand when they need to get involved and when they need to get out of the way, because there will be certain points in a company's life where they do need help.

33:02No success happens in a straight line. You look at most of the companies out there that have been successful. At some stage they had a near death experience. And I think the role of a founder, it can be at times incredibly lonely. There are times when a VC needs to be there for that founder and needs to give them a whole, have a whole conversation with them and needs to deliver a bit of tough love. But also needs to be supportive in a way to be a psychological support for that founder. So I think the best VCs are able to do that and can pick and choose their times. There are clearly VCs out there who just need to back off for whole heap.

33:37I agree with you. I'm just intrigued. So on this juncture of like, hey, we invest, we tend to often find that Iron Shepoint is the third fund. You acknowledge you can't really judge a process or it's very difficult to judge a process because of the lack of tie to outcomes. What else is part of the selection process then? That just helped me understand how you get excited by a manager. I want to say we've never invested in a manager that has come into us directly. I'll reply to all of them. It's not something we want to spend our time looking at. We have a pretty simple screen. You know, we want to look at what we think are those top 1 % companies.

34:11We spend a lot of time looking at who are the early stage investors in them. And then it's a case of us trying to reach out and build relationships with those managers. Our deal flow is all outbound. They'll face all outbound. Yeah. Okay, how much is referrals from other managers that you're in? If they're not on our list, none. So then they just help me understand what will lead you to outbound a manager. Is it like, oh, I really like that portfolio? Oh, that's an incredible background. Oh, I've seen that for turns in pitch book. It's looking at those top 1 % companies. We have a list of all the top 1 % companies that we think that are out there, the ones that have exited, the ones that are just below, and we're looking at who are the investors in those.

34:51Who are the early stage investors? And we start to see names that we don't recognize, that's when we'll get interested and we'll do a little bit of work to see, you know, is this, you know, where did they intercept these companies? Maybe that's when we'll do some soft referencing amongst our GPs and say, what do you think of search and search? If they're not in that screen, then we're not going to spend our time there. And this goes back to the conversation we had right at the start about, is it harder to be an LP today? Yes or no, depending on how you're looking at the industry and how you're screening the potential candidates for investment.

35:23Okay, but we find one and we are like, yes, that's great. We really want to invest. We want to do the 2018 net new investment. If they're smashing out the park and in the top one point, more one percent of companies, they have any allocation in their funds. Everyone is taking up the allocation. How do you, and respectfully, you're a funder fund. So you're not a foundation, You know what a healthcare institution? How on earth do you win persistence? Understanding the entry point as well. Even great firms go through challenging periods of time. You know, one of the reasons why we see great firms fail is because they don't handle succession well.

36:00And some of them will handle succession badly, but get there eventually, so there may be an opportunity to intercept during the period where people are thinking, Is this still a manager that makes sense? You know, we talked about intercepting a number of our existing managers post financial crisis. You know, I think there's an opportunity today. You know, we know the lack of liquidity is having an impact on a number of LPs because they need to have distributions coming back in order to make new commitments. If you're a good LPs, I'll see as one bad for distributions. Plus, the denominator effect is bad enough given my public markets all it is.

36:34Is it really the problem that we thought it was? I think the denominator effect has dissipated. I look at the distributions that we're getting and we had a good 2023 But that was on the back of things that went public in 2021 and one of the metrics we track is what's the value of the public stock That's held by our managers and that number has been coming down and there've been no new ads to that list for the last 18 months or so And they don't distribute to you they hold for you. They will distribute over time So it probably takes 18 months 24 months for a position to be fully realized from those managers.

37:09So, you know, we're getting to the stage now where those companies out went public in the second half of 21, but they certainly distributed the bulk of the shares that they had. There is some still left, so, you know, we are seeing liquidity still coming back, but it will take time to replenish that inventory. So, even if we start to see IPOs in the second half of this year, it's going to be six months before those shares become freely tradable, and again, it will probably be another 12 to 18 months before those positions ultimately get Distributed. Hard question, those positions are fully distributed.

37:39Can you hold would you sell? We tend to sell because we don't think it's our job to hold public stock for our investors. They have their equity managers who do that and would do a better job than than we would. Now we don't necessarily go back to the VCs and say to them you should distribute as soon as a stock comes freely tradable. You know we want them to to use their judgement as to when to distribute stock, particularly if they're still closely involved with that company, because we've seen a number of occasions where the very best companies will continue to compound as a public company, actually holding for a period of time after that is actually beneficial for performance.

38:18I was being to a dear friend who's now being there, said, listen, the managers who I will chastise, are those who had the chance to distribute in the last years and did not, then I will get angry. Do you share that perspective? It depends on why they didn't distribute. I don't think you can take it on a company by company basis. I think you have to look at the overall volume of their work. Let's say they had 10 companies that went public and they decided to hold one of them in their distributed the rest and they decided to hold that one because there were very specific reasons why they felt there was significant upside there.

38:51Then we have no problem with that. But it should be the exception rather than the norm. And I think it's interesting the criticism that Sequia had for the Sequia fund. It's absolutely the right idea. It just happened that they implemented it at a time in the market where you saw a significant correction once it was put in place. I don't disagree with you, but for those that maybe aren't aware, like, can you just explain to me what these is why you think it is the right idea? Because many question that at all. When we talk about venture, there's a power law, but that is even true when you look at public companies that come from the venture industry.

39:26So there are a handful of public companies that have continued to compound at high levels for multiple years after going public. It's not a systematically different company post -ipier than pre -ipier. Yes, there's reporting differences and they've got to manage to courtly expectations to some extent. But I think the very best companies can continue on that journey. And it seems odd that if you're in one of those top 1 % companies ride it all away. Don't try and sell it early because you need to get points on the board and again this comes back to what do our managers do really well and what differentiates the very best managers from the rest of the pack.

40:04They recognize when they do have one of those top 1 % companies and they have the confidence and they've got the history to know that if they do hold on to it and things go wrong it's not going to be fatal for them but they trust their judgment that actually by doing that they can significantly I can really tell. And I use Nvidia as a good example here. Nvidia was public for a very long time before the last few years. The acceleration and enterprise value of that company is unbelievable and exceptional. But you know, bluntly, I remember recommending it to my godfather in 2012, because I saw the rise in usage of mobile gaming and they compute behind that.

40:40Yeah. No fucking idea about AI in 2012 and then being at the forefront of that. And I don't think many of the venture investors would have sold when they went public whenever that was and so do you think you can even tell honestly? It depends on where you are in that company's life cycle So at the time NVIDIA went public it was a very different business And I don't think you could have predicted the AI way. Yeah, I look at what happened with square for example So square went public it was a couple of billion dollar company I know two of the venture investors in there held onto that for several years post IPO because they knew the cash was coming, then you, there was another leg there and they felt that the market wasn't fully valuing the option value of that second product line.

41:19And so where you have that sort of situation, then I think it's absolutely right for the venture investors to continue holding. I agree with you and I get you. You said about kind of succession and I am really intrigued on like, as you said, you know, you like to have that juncture where maybe there's a faltering but different firms make it through different firms, don't make it through. What have It's so impressed. But what are your biggest assets in those to make it through tough succession? And those that don't, because there's many that don't that we kind of forget about. When we look at the firms that have done it well, I think they recognize it's important, and they don't wait too long to address it.

41:58There's one of the managers that we back, that has a policy that says, once you get to a certain age, you're out unless you're invited by the rest of the partners to stay within the partnership. I think what that does, it really sets the precedent that this is a partnership, it's a firm, and the firm is more important than any individual. And I think that's really important. And where we've seen firms not handle it well, it's where the senior partners, and maybe the founding partners have just been there for too long. They've kept too much of the economics. They haven't cleared a path for the people below them to come and really step up.

42:31Things change so quickly, Inventure, that you've got to have that continued fresh blood coming through. Otherwise, you get stale really quickly. Do you think you're close enough to know when things change in the firms that you're in? I don't know the firms you're in and respect that, but I'm sure I could tell you some horror stories right now of firms, things that are happening in your firms because my friends are in them. It's like founders, no founders. Do you know what I mean? Yeah, yeah. Do you think you're close enough to know it? It's probably a fund later than the issues would start to emerge, but at the same time, you probably hear general Skoodlebuk about what's going on in there and, you know, how much of that actually plays out.

43:10You can almost hear too much and not understand, or find it a challenge to really appreciate what's material for the firm, and everyone likes the moon about where they work. That's never changed. I think for us, what we tend to look for is to make sure that firms have that process where, you know, we're seeing a continual flow of new people coming in, and they're being valued for the work that they're doing, and the senior partners stepping aside. How do you know the work that they're doing is good? It's trying to sort of understand who are the value drivers within a portfolio. You know, who are those top potential 1 % companies?

43:43And then understanding who actually sourced those deals, who did the work? Are they the ones that are being elevated within the partnership? And is there enough room at the top end to let them have the freedom to come in and continue to do those deals? And ultimately start to influence the behaviour of that partnership in the strategic direction. Who do you think has done generation transition the best? I think there's two interesting ways of doing it. So if I look at the firms that are on I look at someone like Axel Who you know is probably on the third or fourth generation now of leaders within that firm I think they'd probably admit that they didn't get everything perfect But I think they've handled most of those transitions like pretty well and it's it's really hard I think Sequoia have a really interesting way of doing it as well where you know people kind of step aside and you know don't Valentine's Step to Side for Mike and Doug, you know, Doug's Step to Side for Roll Off.

44:34So I think they understand the importance of doing that. The other way is I think Foundry Group have done a really good job. I love Foundry Group because they've understood that actually we're not going to try and do that. There's a group of people here that want to work together and when we're done we're done. I really respect that. That they haven't tried to pretend. Do you know Foundry Group? I called email brownfell when I was 18 and he would get on a call with me, he would help me, he would mentor me. I think it's astonishing this industry for the amount that actually the best do you give back, which is really special.

45:02Yep. Can you talk to me about your re -up process? Like, if you asked me today, I could tell you who we would re -up with and who are the ones where there's more of a decision. I think 90 % of the managers that we have, you know, were very happy with, we know we're going to re -up with them. And in a way, our diligence on them is a continuous process. It's not about, oh, they're now raising a fund, let's kind of meet them and talk to them for the first time. We spend time with our managers as much as we can without getting in their way, But we also make sure that we're doing a lot of work behind the scenes to understand the quality of their portfolio.

45:33Do they continue to have those key companies in their more recent funds? But having said that, for every investment we do, we still go through a full diligence process. We'll take references, we'll write our full investment recommendation. You gotta give Alfi something to do. But I think that's more confirmatory diligence that like, have we missed something here? It's not a case of, do we think there's something we're worried about here? It's really a case of making sure that there's not something that's fallen through the cracks that we haven't missed. And also, you know, to be perfectly honest, if something goes wrong in the future, we want to be able to point to our LPs and say, look, we've actually done a thorough job here.

46:13We're not just sitting there and, you know, on the beach smoking cigars and not doing any, you know, not doing the work. You know, we are properly looking after the money that we've been entrusted with. I totally get that. Do you always do three funds? No. Do you always do two funds? No. Why would you not do the second? So there's been an instance of a manager where we've only done one fund, and there were very specific reasons for that. It was mainly a China fund, and there were some team issues. Is team the number one reason you won't do a fund? I think the best funds break down because of partnerships breaking down.

46:49The two reasons we would say no to an existing manager would be performance and succession. So the succession in a way is team. If a manager is surprised that you're not coming back, is that your fault? Yes. Do you get ahead of it? Yes. How far ahead of it? So one of the things we do with a lot of our managers is we send them our internal benchmarks. So we will compare all of their phones to all of the other managers. This is great because Cambridge or pitch book or pre -quinn compare, they show the market, But our managers want to really understand how do we compare with our peers. So one of the things we do is, you know, every quarter or every six months, we'll send them the benchmarks that obviously all anonymize, but we'll show where their fund ranks.

47:31Because it's a relatively small number of managers, we group it by three years. So if you're a 2015 fund, we'd compare you to funds that we did in 14, 15 and 16. So there's a decent sample size there. And by doing that, it shows them, it's obvious if they're not performing. So we do it by IRR, we do it by TVPI, and we do it by DPI. So we've had some conversations with people that where we've said, look, you guys are really good on IRR and TVPI, but you're lagging on DPI. Well, how are you thinking about that? And some of them will go, look, we think we've got a couple of really good companies here.

48:02We're not selling them. We don't want to force liquidity. We want to ride them as long as we can. Then that's great. You know, there's it would be, ah, okay. That's interesting to know. We think there's probably some of our B companies and you start, we can generate liquidity events for in the near term to help address that. So it's always hard when you say no to a manager that you invest in or not re -upping and you send them data and say, this is why you stack rank and this is what led to our decision. Because you can always have an answer back to that. Well, I'm holding some amazing positions that aren't, you know, DPI quite yet, but they will be or well, actually whatever this may be.

48:37Is it not better to just say I'm so sorry Dave, if we wouldn't be investing? Because it will always inspire a conversation. I could argue a thousand ways on the data. Yeah, but I actually look at that. I was liking it. Look at that shit from the head of it. I think I'm fucking on the beach. I think we want to be honest with our managers. There's also limits to how far that honesty is going to go because we want to give them an explanation as to why and it's up to them if they want to accept that explanation of they want to push back on it and we'll have a conversation but ultimately it's unlikely to change our mind.

49:08I think most of them, you know, where we have had that conversation have accepted it and moved on. What do you sense to... How do you feel about compression and deployment timelines? So one of the lessons, I said we've made all the mistakes in the book. One of the mistakes we made in the late 90s was deploying our funds too quickly. I think we had one fund that was fully invested in 15 months and it was the worst fund we had. So it was in 1999 vintage fund. So as you can imagine, not the best outcomes there. And I think one of the lessons we learned there was that time diversification in a fund is so important.

49:39We look to invest all of our funds across a three -year period. And one of the things I'm really proud of was that when I look at the fund that was deploying 19, 2021, we did that in a quarter under three years. So even though our managers were coming back some of them in 18 months, we still maintain that time diversity in our portfolio. That was really important. And it's something we push our managers on all the time is that we want to see three -year investment cycles for them. I mean this nicely you push your managers all the time. Are your managers not just like come on Like I got a key of people out the door dude like next.

50:17Yep. I don't mean that really at all But you know what I mean is like I think they're more polite than that But I think we recognize that we will give our opinion to our managers where we think there's something there that that It makes sense for us to talk about if they don't want to listen to it then that's fine. Ultimately they're the ones that are playing the game on the field and as an investor we trust them to do that. If they decide that ultimately they're seeing such great opportunities that they want to put their fun to work in in 18 months then they've earned that right to do that. But they've also must recognise that they will be held accountable for what they do.

50:54You know it's not to say that we'll walk away from a manager if they have one bad fun that's not the case. You know we look at these as long -term relationships. If there is a bad fund And as part of that, we want the managers to be honest about, have they really thought about what are the reasons for that, what are the lessons that they've learnt? Now, they might just be saying that and we'll continue to do what they want, but ultimately you know, it comes down to, if it's happening consistently, that's going to impact performance and when it starts to impact performance consistently, that's one of the reasons why we'd walk away.

51:23How do you think about fees and carry and sensitivity around those? We've seen some of the best firms and some of the names I'm sure that are consistently in the top 1 % of companies even have 3 in 30. I've never seen a 3 in 30. What have you seen that's the highest? 2 and a half? How do you feel about fee and carry increases to the 2 and a half, to the 25, to the kickers? How do you feel about that? For us it's about net performance. What does that performance look like after the fees and carry have been taken off? And if it's consistently top quartile and it's consistently strong, then we're relaxed about that.

51:56I would prefer to see the carry be tiered. So I've got no issues about paying for performance, but I think it's important, you know, ideally I'd like to have that alignment of interest so that if you do have a great manager that has a poor performing fund, then that's reflected in the economics that go back to them for that specific fund. As you said, there's a whole line of LPs queuing out the door wanting to get into these managers, so that's, you know, realistically, that's not going to happen. Ultimately for us it comes back to what's the net performance. What other things would piss you off?

52:24If there's deployment timelines compressing, you know, fees and cow being elevated. Anything else we were like, ah, that's a bug there. We've talked about fund sizes. That is something that we continue to look at and to monitor. And it's important that we still feel comfortable that whatever the fund size they're investing out of, that there's an opportunity for them to return the fund within it with a single investment. Certainly for early stage funds, I think for later stage funds, you know, we probably want to see half the fund come back from the potential to return half the fund from a single.

52:54What's your distribution of dollars across the stack? Across early, in BC, and then we've got one or two managers that would have seed funds, but there's probably three or four seed funds that we're invested in across our managers. The majority of them would be early stage and that would be A and early Bs, and then virtually all of them would have some kind of fund to do later stage deals, whether that's a fully fledged growth fund or whether it's more of a kind of continuation fund as sort of opportunity fund to select fun, that sort of thing, it varies. We want to be sort of roughly 50 -50 between early and growth.

53:29It's a challenge to manage that. If we end up being sort of 45 -55, I think we're comfortable with that, we don't want to be 30 -70. How do you feel about the stapling? Because it's hard, you know, and the best managers, especially, you know, A, they have IR teams, I mean, treats the only feel about those. They also say great, but you need to do India, you need to do growth, you need to do X, and it's like, oh Christ, I just want to steer early stage fund. Again, we go back to the data and we look at the performance, whichever way we cut it. It's really interesting. So we looked at what's the performance of the early stage US funds from our core managers from 2005 onwards?

54:07What's the performance of the growth funds from our core managers from 2005 onwards? What's the performance of the non -US funds from 2005 on its core managers? It's all the same. It's all the same, all the same. In aggregate, it's all the same. You know, it's a point 1 .2 TBI difference. It's all the same. DPI difference or not? The growth funds come back quicker with the distributions come back earlier in the growth funds. So why don't you do more growth? Because we think the growth is probably more economically sensitive. If you think about what goes into the driver of a great growth, entry valuation is probably disproportionately more important than it is on the early stage.

54:43And also the size of exit is as well. So, you know, we've gone through a period where We've had some very strong performing growth funds. And if I showed you a list of the TVPI of all our core manager funds, you would not be able to predict which was a growth fund and which was an early stage fund. Our best performing core manager fund in the last 15 years is a growth fund. It's really interesting there. But I think we feel comfortable that, again, the best managers have that ability to pick the best companies. And as companies are staying private for longer now, It does feel that there's more of an opportunity to generate venture type returns from slightly later stage investments.

55:24Roger Ardenberg said on the show, Vansha returns will get worse. Do you agree? For existing funds or for new funds, both take one by one for existing. For existing? So I think there's no question in my mind that there's still more pain to be had for existing funds. You know, I look at the carrying valuations that we see for a lot of companies and they vary quite wildly. Some of our managers have been pretty aggressive in writing things down. On the times, one of the things we are interested in is when we do get pitched from newer managers, one of the things we look at are where are they holding their marks.

55:57And generally, we've seen the new managers holding last round value marks and not writing anything down, where it's the more established managers that are perhaps ahead of the curve in writing stuff down. So I do think we're only part of the way through that. One of the other things we track is loss ratios. So what percent of companies backed by our managers are below 1x? Historically for an early stage fund that's been 60 % of companies don't return 1x cost You know, we've seen that reduce significantly for more recent vindages My sense is that it's gonna go back to the average. It's gonna go back to that sort of 60 % So I think there's a lot of pain still to be had so that's not just companies You were gonna see their values reduce.

56:37I think there's a lot that ultimately on gonna be successful and go out of business and we haven't really had the wave of that happen yet. It feels like that's still to come. I don't know, I'd be interested in your perspective as a VC as well, how are you seeing that? You know, the thing that we see from the data that we have, which is a lot, is the cows and men values that different people have in their books. I'm just extraordinary cows and men values. I was looking at one stay and one was valued at 800 million and the other person had it at 10 .2 billion. I feel for LPs because I think it's really difficult to get a fair grasp of what is the true value of your underlying book.

57:08And I think that's very hard. And I definitely agree with you, the managers who don't need to posture and present a brilliant facade don't need to Yeah, and so I think you get a lot more truth to that I'm intrigued you know when we think about that You know Doug Leoni said before we've seen the transition from a boutique high margin industry to a Commodized low margin industry Do you agree with your 32 years of experience? I'm not gonna argue with Doug But really, I think what you've seen is over the last 30 years, the venture industry has expanded significantly. There's almost multiple parts to that industry now.

57:46I would say depends on which part you're talking about. If you're talking about the people that are raising multiple billions of dollars to do the crossover deals, the late stage private rounds, then I think that is more of a capital allocation exercise than it is a kind of craft. So I think returns there will probably come down because the weight of capital will make entry values become efficient and we've seen that in a lot of other areas as well. So parts of the market, I think that is true, but I also think there are other parts of the market where that's less true because it isn't necessarily about is capital the strategic advantage in certain parts of the industry.

58:28I think it's still a case that too much capital can be detrimental to a company. So I think there's parts of the industry where you will see that craft approach. And for me it's still around the seed stage, the series A, maybe the early B's. Before things are really driven by the underlying metrics of the business and it's more about an understanding of market potential and taking a view on founders. The more quantitative the decision becomes, the more that excess returns will probably get competed away. Can I ask you final one, when you think about your biggest mistake, a fun that you regret doing?

59:04When you review that decision, what did you not see that was the determinant of that fate? I think one of the challenges with investing invention is that there are so many unknown unknowns and the degree of randomness that is involved as to whether something is successful or not is high and the early you get that the greater that degree is. So I think there are certainly things that, you know, we couldn't have been expected to predict at the time we were doing the deal. And one of the things we do with our investments is sort of four or five years post investment will do a decision review analysis of those to see what can we learn from that and how can we improve our decision.

59:41One of the big things that we learned was we used to only take references on managers from VCs that they had invested alongside. So we wanted to know what they liked, it's a partner, what would they like on the board. what we didn't do was if somebody was operating in a particular space and we knew one of our managers was one of the top investors there and they hadn't done any deals with that manager, we just didn't follow up on that. But now we'll actually say, we'll phone that manager up and say like, why haven't you done any deals with this group? Is it just that you're in different parts of the market or are there specific reasons for not having done those deals?

1:00:17And I think sometimes we learn interesting things from that. So I think that's probably the biggest thing that's come out of our decision review process is not just to reference people who we know work with each other but reference people who are in that particular sector who we would normally expect to have worked with. Do you not worry that that's just a capacitor shit talk? Do you know what I mean? Which is like, you are someone, oh what's it like with X? And they're going to be a capacitor in a lot of cases. Well, that shit and the partnerships breaking down and they have a broken decision -making brosers and the browns there, but don't worry that you're actually letting imperfect information then impact your decision making process.

1:00:53Yeah, I think the importance there is you have to triangulate and so there's not just one specific source of information that is primary and you also have to understand you have to have that relationship with your VCs that you know are they the sort of person that perhaps on everyone are they the sort of person that gives everyone a great reference. You need to sort of have that that history with them where you can put that into context, what they're saying. And I think that's really important. And that just comes from time and building those relationships and having those conversations. And it's getting harder.

1:01:24It's getting harder, particularly where you mentioned firms that have big IR departments. And it's harder to have that interaction with individual partners. You've got to work a bit more. Yeah. I want to do a quick fire with you, because I can talk to you all day. So I'm going to say a short statement, you're going to meet some immediate thoughts. That sound okay. Yeah, go for it. What if you change your mind on most in the last 12 months. So if you had spoken to me, and maybe not quite the last 12 months, but certainly sort of two or three years ago, I think we were incredibly skeptical about LPs doing direct -convestments because we looked at the data, we know 60 % of deals don't return capital and we just thought, why would LPs be doing this?

1:02:03What's the likelihood that they're gonna be getting into those top 1 % companies? My view has definitely evolved on that. I'm not all the way there yet to say that, that actually it's a good thing, but I do think there are situations in which there are different ways to optimize for those top 1 % companies. One is to do it through the best primary managers, one is to do it through secondaries, and I also think another way selectively is to do it through directs. But directs in established companies not with seed stage managers. What would you most like to change about the world of venture? I think venture at the highest level is quite exclusive, and so I'd like to try and democratize venture to some extent, And that works on multiple levels.

1:02:41So it's about giving everyday investors the opportunity to invest in a sequir or on Excel or on Andreessen or a client of Perkins or on index. And not just Ivy League endowments because I think for the average person, it's tough. And venture done well can really drive significant outperformance over a long period of time. So I think giving individuals access to that, I think would be great. But I also think, you know, looking at who comes into Venture as well. I mentioned, you know, knowing in the village I grew up, I'd ever heard of Venture. I was lucky, someone was willing to gamble on me. That's what you wanted, huh, to Venture, and working in the 32 years ago.

1:03:20Yeah. Seriously. But I also look, I think about, you know, who's growing up in that village today, and what's their chances of being able to create a career in Venture. It's really hard. You need to be an exceptional person in order to do this well. It's a GP. I would like to see the sourcing of GPs broaden. I think it's a challenge. We had the conversation up there about... I mean, as nicely, you're not like sender to this. Like, you're the most exclusive, exclusive LP. You add no one. You don't, I mean, this nice, you don't take a chance on anyone. In the nicest of ways. You know, you do the intersection of fun three, but to get to fun three, Jesus, you've got to pass through the most golden, hallowed halls of endowment funds to get there.

1:03:59I'm so sorry, I just... No, no, no, no. It's like, then be the change. What we can't afford to do though is gamble the money that our investors entrust us with. You know, we have a very specific strategy that we think is able to generate strong and consistent performance across the cycle. One of the things we do want to try and encourage is to get people into the venture ecosystem from a diversity of different backgrounds. So one of the things we do as a firm is we've signed up to a charity called Gain, which is Girls Are Investors. So we take a placement student for six weeks in the summer to give them exposure to that.

1:04:34We run a 12 month placement scheme for university students and we've done that for six years and so far everyone that we've taken on board has been a female student. You know, I look at some of the things that some of our managers are doing in terms of trying to encourage diverse founders and things are happening there. But it's tough and I totally take your point. Which manager are you not in that you would love to be in? Um, did Alfie ask you to, to ask this one? Go ahead. I don't throw friends under baths. So, I mean, I guess the one, the one man, and it really hits close to home. I have a huge amount of respect for the folks at benchmark and what they've done, and it's a really painful one.

1:05:14So, back in the day, we were investors with both Merrill Picard, TVI, who were the precursor firms to benchmark. And I remember having a conversation with Bruce Dunlavy and he said, we're spinning out were forming this firm, you know, and we said great, we love you guys, we'd love to invest. And he went fantastic. It's $5 million. So this was been mid -90s. At the time, we were managing a portfolio for a UK pension fund and they had the sign off on anything we did. So we went back to them and said we've got this great investment, $5 million, benchmark, you know, fantastic track record from these established firms.

1:05:52We're really excited about it, they went great, but we can only do four. So we went back to Bruce and said, we're in, but is it okay if we only do four? And he went, no, it's got to be five, we've never invested in benchmark. Oh God, that is painful. Yeah. Should UK pension funds and universities be doing more? I think if you look at the performance that, you know, the best university end diamonds in the US have had from venture, then definitely The challenges will they end up doing the best managers or will they get pushed to do local managers? And I think that's one of the challenges that we've seen, you know, particularly in the UK when the government gets involved They want to try and encourage the UK venture scene So they'll incentivise or restrict the ability of local investors to choose managers by Performance yep, they'll choose them because they want to try and grow the the UK venture scene and for us that's really dangerous.

1:06:47It hasn't worked. 10 years time. You'll be fully tears. Why do you want to be then? Do you still want to be doing this? I mean, the first thing is I just like to be around generally. You're not allowed to. I'm not taking anything for granted. You're like 54, no? Yeah, 54. Yeah, you look great. Well, I'll think you're fit. You're fine. Yeah, you never know. You never know. But I think going back to what we were talking about around succession. You know, for me it's really important that we've got some really good people in our team and it's super important that they have a pathway to grow and become the next leaders of the firm and I don't want to get in their way.

1:07:22At the same time, I love what I'm doing and so if they feel it would be useful for me to hang around in some capacity, I'd love to hang around and support them. But I think it's really important that they're the ones in 10 years time that are driving the company, driving the strategy, driving the future of ENCAP and if I can be helpful to them, I'd love to be helpful to them. Listen, I love this. The best one's for me are real discussions. It's not a script. It's a discussion. This has been fantastic and thank you for being such a great guy. Thank you. And I've really enjoyed the fact that we don't necessarily agree on everything.

1:07:53And that's what makes a market. If everyone agreed on everything life would be so dull. I mean, I remember when people used to complain about the show in terms of me being too amenable where I wouldn't disagree enough with guests. I think that has certainly changed over time. If you'd like to see more from that incredible discussion with David, then you can check it out on YouTube by searching for 20VC That's 2 -0 VC, but before we leave you today I need to tell you about Hive 2024 is shaping up to be a big year for the markets with a number of iconic unicorns rumored to be going public Whether you're a fun manager or invest solo, Hive is the best way for you to access the coming wave of IPOs Before they hit the market.

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1:10:35Remote, opportunity is wherever you are. As always I so appreciate all your support and stay tuned for an incredible episode this coming Wednesday with the one and only critics in at AndreessenHorowitz.