How LPs identify top emerging fund managers with Slipstream’s Alex Edelson | E1898

0:28this is a very long game. those can be positive, but often those are not positive. This Week in Startups is brought to you by LinkedIn Ads. To redeem a$100 LinkedIn ad credit and launch your first campaign, go to linkedin.com slash angel pod. Ketone IQ is a clean energy boost without sugar or caffeine. Get 30 % off your first subscription order of Ketone IQ at hvmn.com slash twist. And Wizard. Struggling to transform innovative ideas into concrete product designs? Wizard can help you turn your visions into polished UI designs in a fraction of the time while enhancing collaboration across your entire team.

1:16Get 25 % off Wizard Pro for an entire year at wizard.io slash twist. That's uizard.io slash twist. Hey, everybody, welcome back to this week in startups. I'm Jason Calacanis. I run a venture firm in Silicon Valley called Launch. And we have a couple of programs like Founder University. And we do this podcast this week in startups. You may have heard the other podcast that's gotten a bit popular all in. And what I do for a living is I record a podcast every day. And I invest in 100 companies a year. So right now, I'm doing a series here on this week in startups called Angel. So in this series, we're having LPs, limited partners.

1:53Who are limited partners? Limited partners are the investors who put money into venture capital firms. Those limited partners can include family offices. You may have heard that term, a fund of funds where they invest in many venture capital firms in one vehicle. It could be a retirement fund. You may have heard of CalPERS or firefighters, et cetera, having their retirement funds have exposure to venture capital. these lps could also be endowments harvard's endowment yale's endowments it'd also be sovereign wealth funds you may have heard of uh folks from the gulf or from japan or china singapore wanting to put money into venture capital they're all limited partners what limited partners do is they back venture capitalists who are also known as gps so lps and gps are the terms of art lps they manage pools of money they want to get exposure to equities like public companies real estate, private equity, and most of them now are enamored or very interested in somewhere between those two venture capital venture capital, and a lot of these portfolios are five to upwards of 25 % of their diversification.

3:00So we thought we'd do a series to try to get inside the mind of LPs. Why is this important? Well, many of you are looking to become LPs in venture funds. So it's great to hear what professionals who do it for a living, think about it. And then some of you who listen to this pod are of course, GPs running your own venture firms or thinking about starting your own venture firm, obviously, LPs are going to be your partners in doing so. And then finally, startups, you're going to really care about what LPs have to say, because you'll understand how the entire ecosystem works. And if you understand how LPs manage their GPs, these venture capitalists, you'll understand how you and need to manage your relationship with venture capitalists, because it's all part of this wonderful ecosystem in the United States, primarily, that drives massive innovation.

3:46It's one of the reasons why if you look at the 25 publicly traded companies, the largest ones in the world, it might be 19 or 20 of them are from the United States, we have really perfected this ecosystem. Today, we've got Alex Edelson, he runs a fund to funds called slipstream investors and he is going to give us a deep dive into why he chose to be a fund to fund managers and what he looks for in venture capitalists and gps to back alex welcome to the program thanks jason thanks for having me on so let's talk about it what is a fund to funds and why have you chosen this as your profession yeah so a fund to funds um is essentially a portfolio.

4:29Ours is a portfolio of early stage venture funds. They are, we invest in pre-seed and seed funds. Most are a hundred million and smaller. Um, we're relatively concentrated. So most of the capital goes into nine to 12 core funds. Um, our LPs then get diversified exposure to early stage venture funds. So it's diversified over time, geography, sectors, companies, and, And, you know, the ceiling is a little lower than investing directly into a venture fund in terms of the ceiling for potential returns. And the floor for potential returns is a little higher than the floor for investing directly into a venture fund.

5:11And so, yeah, I got into this because I was in QED and sort of looking around. I started as the chief of staff for Nigel Morris there, and I became the COO and general counsel. and I was looking around and thinking like, man, there are some great investors here and they are very compelling to founders, can add value in a lot of ways. I'm not sure like why a founder would pick me over anyone on the investment team here. But what I was learning was like how to run a venture firm and what a good early stage venture firm looks like. And we spent a lot of time internally talking about that and just being exposed to it, just sort of living it over a period of years was really helpful.

5:54And then we got a lot of founder feedback. So we'd get founder feedback every few years. We had a lot of founders when I was there. And hearing from them, like, what's a great early stage venture firm? How can we be better? It was pretty rich feedback we were getting. So I was getting this unique view. What's a great early stage venture firm? And then what I was seeing when I was there was like, we're working with these emerging managers in a variety of ways. We're sourcing deals from them. We're bringing them into deals. We're partnering with them on events and just all these other ways. Well, what happens?

6:27I'm seeing great funds who we all agreed were like very high quality funds. And our beliefs about their quality did not necessarily correspond to their ability to fundraise. So we may think they're great, that doesn't mean they're great at fundraising. And so there was just like a ton of opportunity to invest in these funds and to co-invest in their breakout companies because they're small funds. They're not going to continue investing forever. And as I built relationships with them, what became interesting to me was like, they viewed me as helpful. You know, they viewed me as someone who was helping build and run QED and maybe could help them build and run their venture firms and to help professionalize their firms.

7:05Why do LPs then use a fund of funds? what because they're they pay for this privilege they pay i think one in ten percent so they pay a one percent management fee means if you had a hundred million dollar fund you'd have a million dollars in an advance against that the returns on you get 10 carry so if the hundred million turns into 400 million the team would get 10 of the 300 million dollar gain 30 million dollars over 10 years pretty good living if you can get to it could could result in if there were a couple partners making a million dollars a year each uh and so why do they choose to pay those fees as opposed to just picking funds directly?

7:40I mean, I know the answer, but I'm, I'm asking you to give me your perspective and what you hear from those LPs that you that then give you money to put into venture firms. Yeah, it's a great question. So, you know, there are different types of folks looking to get exposure to venture, I think the answer is different for all of them. So like, a big part of our LP base is folks who don't have any exposure to venture, they're not going to spend the time trying to get it. Like they may have another career like that they're focused on, like they're a doctor or a lawyer or in real estate or something else.

8:14And they would love exposure to venture, but they don't know how to find or evaluate venture funds. And they may have heard of top tier brands, but those are hard to get into. And the minimum check sizes are very large. And so for them, a fund of funds makes a lot of sense. Now there are others who know, I'll speak to slipstream in particular. There, there are others who know that the small emerging managers are a big part of the best performing funds in any given vintage. Why? Why are those early stage funds? You know, overperform? I mean, we the statistics show this the seed pre seed funds tend to do better on a multiple of cash, but they're smaller.

8:53So what do you think is the reason for that? Yeah, it's a great question. And let's be clear. These are some of the best funds. They're also some of the worst funds. So like, I don't want to let's, let's, I don't want to oversell this. Like, it's hard to do well in venture by picking the right venture funds, especially by picking the right emerging managers. But if you pick the right ones, they are usually in the best in the highest. And they're among the best performing funds in the asset class. Why do I think that is? I think there are a few reasons. Some of them are like, you know qualitative subjective some of them are like based on portfolio construction fund size so like let's start with the latter first small low like high ownership relative to small fund size i mean ownership relative to fund size is a general matter um i think is a great predictor of the return potential of a fund so if you're getting high ownership relative to your fund size and high ownership you would say is what in a startup uh you know you get to 10 ownership 8 ownership 15 ownership what would be high yeah so it's relative in my view so like if you're a $10 million fund getting 3 % ownership, that's incredible.

9:56That's like a$100 million fund getting 30 % ownership, which you typically don't see in the US unless there's like serious adverse, like serious risk of adverse selection. I think about in terms of fund size. So if you're a$50 million fund getting like 7 to 10 % ownership, I think that's great. If you're a$30 million fund getting, you know, 5 to 7 % ownership, I think that's great. If you're a$5 million fund getting one or two percent of one or two percent of one i think that's great and even lower is totally fine and can generate excellent returns a 10 million dollar fund getting one percent can do really well don't i know yeah so the math answer the the portfolio construction answer is that if you get a winner when you have high ownership relative to your fund size the returns can be unbelievable like well into the double digits right and we have we all know some anecdotes there and we've all seen some and maybe it'd be fortunate to blps in them or worked at funds but um there's also a qualitative factor to this like you're you're in your first two funds first three funds like you're betting your career on this yes you're like you're all in often some some of these folks have made it so maybe you would argue they haven't bet their entire career maybe they're a successful operator with an exit and if this doesn't work out as a venture capitalist like they they'll be okay but as a general matter like this is this is a very long game and if you get your first funds right, you get to be in venture for a really long time.

11:17And if you don't, you have you won't be able to keep raising capital. And so all the pressures on in those first few funds, the fund size is typically smaller, the investments, the sourcing, the picking, the winning, the adding value is typically done by the core people who thought they were uniquely positioned to start this venture from over time, teams grow, fund sizes grow, strategies may evolve. and some of those can be positive, but often those are not positive for fund level returns. All right, listen, B2B marketing is hard. We all know that. Why is it hard? Because buying cycles can be long and B2B decision makers are hard to find and they're really hard to target.

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12:31And according to LinkedIn's data, when B2B tech companies use LinkedIn ads, they generate two to five times higher return on ad spend than other social media platforms. LinkedIn ads is a no brainer for B2B companies, you'll build relationships with these decision makers, you'll drive results for your business, and you'll do all of this on a platform that respects the world you operate in. So here's a call to action, make B2B marketing everything it can be and get$100 credit on your next campaign. Go to linkedin.com slash angel pod to claim your credit that's linkedin.com slash angel pod for a$100 credit terms and conditions do apply on a qualitative basis you've got people who are hungry putting their reputations on the line they have pride they're proven winners so when you when you pick an emerging fund manager yeah those exist in the world who are emerging means are on their first three funds or so after their fourth or fifth fund maybe they're more established and most funds never get to their third or fourth fund yeah yeah that's right and and yeah it's interesting right i mean there's obviously a survivorship question there due to performance um in both directions so like let's say a fund doesn't do well it's not looking promising harder to raise capital let's say a fund does really well those people might say hey i don't know that i need to keep doing this venture's hard like we've done well for ourselves too much work i'll retire yeah or we see people saying like let's just use our own money um yeah that happened with homebrew right homebrew was like we're gonna just use our own money and we'll be super selective we've made some money we'll just we'll take 100 carry because it's our money um and so your point here is those people are hungry as time goes on maybe they're less hungry so that's one of their qualitative reasons why seed might overperform but it is a lot of work and so that has been my experience and so uh and the anecdote you're referring to a lot of the people who are the uber first investors when i was a scout that fund i put 650 to work and i think it the dpi was 120 million or something depending on when you sell your uber shares um yeah and uh chris saka was in that as well the first round of uber and his fund was famous for being you know also a hundred x fund or something crazy like that right 200 x fund um so and i think uh ron conway had i think a little tiny piece of google in that first one of his first 10 or 20 million dollar funds and that one did extraordinarily well too and i was in uh one of the funds that was in whatsapp and that was a 20x fund so it's very rare to get 20 times your money back cash on cash after 10 years the averages i mean maybe you could explain to people what the averages are for seed funds you know cash on cash versus say the stock market or irr or both however you want to sort of phrase it yeah well one thing you said though reminds me of a point that I should have made before, which is talking about the emphasis on small funds.

15:29And I didn't completely answer your question about why folks invest in fund-to-funds. So I can circle back to that too. But one thing that's really compelling about the emerging managers in the small funds, you're naming iconic winners, companies that have reached valuations that are astounding. No one you probably assumed was possible at the time. And so you can get low ownership in those relative to your fund size and still have a great fund. I mean, those exits are so unbelievable. Yeah. But one reason why small funds and high ownership relative to fund size is really compelling is that if you get more modest outcomes, which is much more likely than getting the next Google, you can still generate great fund level returns if you have high ownership relative to your fund size.

16:15And we can sort of go through an exercise. It's like, hey, you had 10 % ownership, not diluted much. You're a$50 million fund. Like what's a fund returning outcome, right? And it's much more modest than like some of the outcomes you're talking about. 10 % of a$5 billion company. If a company became worth$5 billion and you owned 10 % of it, that'd be a$500 million return on a$50 million fund. You'd be a 10Xer. And you just have to go look, how many times does a company become worth$5 billion and you can maintain your ownership? Or even if it was half that,$250 million on a$50 million fund would be a 5X.

16:48So the math kind of pencils out. yeah and so what i think about when i'm investing is not like what's going to happen to this fund if they get a five billion dollar exit because if they get a five billion dollar exit they're good yeah how good well sure that's what the math is for but like i want much more modest outcomes to generate meaningful fund level returns yeah so yeah if we're getting like 250 to 500 million dollar outcomes which is which are much more likely than a five billion dollar outcome i want that to be meaningful to the fund that actually raises in my view the floor on the fund level on the likely fund level performance.

17:22And so there's a lot of, it's risky in many ways to invest in small funds with limited track records. On the other hand, the math is like very much in your favor if you happen to be right. And so, and circling back to the question about why folks invest in fund-to-funds, the one answer is certainly true for Slipstream in particular, where it's folks who just don't have exposure to the venture asset class and they feel like this is a great way to get it. They wouldn't get it if it weren't through a vehicle like a fund-to-fund. But the second answer is folks who know these are the best performing funds, they may know these are also some of the worst performing funds.

17:56But there are so many. They are very hard for some folks to evaluate. And for some of them, it may be difficult for them to get an allocation. Like some of these are oversubscribed. Some of them are oversubscribed quickly. It's a lot of work. to get in just like it's a lot of work as a seed fund manager to manage 50 100 200 300 i have 400 portfolio companies now uh now some of the in total over just over a decade now some of those are uh you know gone right now or you know uber's uber and i maintain a relationship with dara but i'm not involved like i was as a seed investor obviously uh but your job is very hard you have you're going to put nine to twelve fund managers into your fund of funds i understand your fund of funds is 50 100 million 200 million ballpark well yeah i'd rather not talk about my fund size on here but okay my fund size my current fund is like a little under 15 so it's pretty small um and i want to stay very small like my next fund's not going to be that much bigger because got it for a variety of reasons but to put in but you you might be 10 of a fund that you're going into five or 10 of a 10 million or 20 million dollar fund yeah you know it's funny I actually don't worry about the percentage of a fund that I am.

19:12I think for funds where I'm a small percentage, I actually find that I'm as close or closer to the GPs, just because I think I'm working with them in ways other LPs aren't because of my experience at QED. And I think I probably behave a little more like a GP. And then I'm very open and I'm constructively challenging folks and I'm responding to everything they send out. And so I end up being close, I think as close as maybe a much larger investor. and i also have yeah no concerns about being a very large investor like if there were someone who i was really high conviction i'd be their only lp um i don't really worry about the percentage of a fund that i take and by the nature of investing in a dozen venture firms you hope to you're going to hit some sort of an average because like a mutual fund you know you want to pick the best uh vehicles but you're you could have some underperformance you could have some over performers.

20:08So therefore, you're giving your LPs who are in your fund of funds, you know, a bit of an average, hopefully a higher end average. So maybe you could explain your strategy there and what their expectations are. Is there expectation? Hey, if you just hit the average, average is pretty darn good for seed. Yeah, here's, here's how I think about it. When I'm investing in a seed fund, I want to see a path that seems plausible to like a four to six x net of their fees. That is very high performance based on historical benchmarks. And they won't all get there. And hopefully some will outperform it. That is where I hope they get.

20:48For pre-seed funds, I'm hoping that, yeah, it's more like, I want to understand and believe in a plausible path to a 7 to 10x net fund. Is it a failure if it's not a 4x seed fund or a 7x pre-seed fund? No, no, it is not. because at bottom my thinking on you know what success in ventures like if you're over a 3x net yeah i don't think anyone should be complaining about that no i mean if you were to i mean that's really good by historical benchmark and they say it takes you know whatever 10 years to double your money in the public markets historically so if you are 3x in the same period of time you beat the market uh with which has liquidity of course by 50 if you hit 4x you know you're probably doubling it.

21:32And so just back of the envelope, people who are allocating capital, and I do myself, I'm in 24 venture firm, my four and 20 other ones, I look at it like, you know, I got money in the stock market too. If this beats my stock portfolio, and the money's locked up for 10 years, 12 years, I'm kind of kind of like that as a feature. I know it sounds crazy, but it's kind of nice to put, you know, I'll typically put 25k to 250k as an LP individual P in these emerging fund managers and some i mean the highest i think i've gone is 500k with more established folks um so it's probably on average 100k uh in each of these i have a couple of million in venture just as a small you know uh investment for myself but also it helps me build my network and it helps me support other managers and you know um you know i'm looking for a return but if i triple quadruple on average great once in a while you'll hit a 20 xer man that lifts everybody's average because I'm in 20 funds.

22:25Now every fund has become got one more turn, right? One more X on top of it. So if my average was three X across nine funds, and somebody hits 20. Well, there you go. Now everybody's a forex fund. So yeah, the math does pencil out for me with my access, I think to funds. Yeah. And I think that's right. And so so, you know, some people would say, hey, why not invest in like 30 funds, right? Why not invest in 50 funds, more likelihood of hitting some of the sort of generational companies of any given vintage, why not just be lower concentration? Yeah, why not? And the answer, in my view, is like it's much harder to outperform.

23:02Ah, yes. And I don't know why I exist if I'm not aiming to outperform. And so I want each investment to be a big enough part of our portfolio so that if we're right, if we're investing in top decile funds, top quartile funds, like this should be a great performer. and um and that yeah that's how i think about concentration but we will have hopefully fingers crossed some that outperform my underwriting and some that underperform our underwriting that's just likely to happen so i have to be very careful with returns and with how hard it is to generate dpi because a lot of this stuff just looks like unrealized gains for a long time and and you know what actually comes back if it comes back is like a net DPI, a DPI of like three x plus, like, I think any LP in a venture fund should be happy with that.

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24:33I have been on it for a couple of months now and my energy level has gone up up up and my focus as well I love taking these shots I take it in the morning before I work out I take it when I'm skiing and man it makes you feel like a superhero so here's the call to action get 30 % off your first subscription to ketone iq at hvmn.com slash twist that's hvmn.com slash twist for 30 % off or you can easily find ketone-iq at your local sprouts market comes in little bottles and you just take this little shot boom you're off to the races how much of your strategy is based off of watching the portfolios emerge so let's say you're in 10 funds and they have 30 names in each on average you got 300 names there might be some duplication there so let's cut it back another 20 so call it 250 names maybe is that what you expect to see across those 10 funds or so 200 names 250 names i actually expect to be a little higher than that because there are a handful of funds that are lower concentration and i also um so maybe 400 names 500 names yeah i think it's more like four to 600 funds um and i think we're tracking towards that in the current fund so let's say 500 is the number you'll you're able to determine what the winners are by year three four or five of those you know how do you do that how do you mechanically do that well i would turn the tables on you you you mean which winners there are of the of the 500 companies which yeah i mean you can turn your feel free you can i know you had some questions for me it's a great question and like i think and part of it is a definition is a definition question it's like how do you define a winner when you're getting really high ownership relative to your fund size a 500 million outcome could be a winner even though in many funds that's not a big enough outcome because they don't have enough ownership or because they don't have enough they need they need um but bigger wins relative because of their ownership relative so let's just say winners in general these are companies that are going to break are breaking out i'll just use the term breaking out they're starting to break out because you want to co-invest in some of these companies so you're reserving some amount of the fund for co-investments and then the uh you pop up spvs special purpose vehicle so if i if i was one of your 10 funds and i hit an uber but i'm not doing the series b at three or four hundred million dollar valuation you might want to go to your 10 family offices or 20 lps whatever number of lps you have in your fund of funds and say hey we can get an allocation in this you know taxi company or you know this stock trading app robin hood uh or we should try to get an allocation in this because we see we have inside information it's breaking out how much do you expect of your returns to come from co-investments you know based upon those um well Well, yeah.

27:17I mean, your original question, which was the right question, which was a really interesting question. I love having this conversation. I wanted to ask you that. I wanted to say on you, like, how long does it take you to know whether you have a winner? And I think I have a decent sense from talking to a lot of fund managers and sort of living through this at QED for how long it takes many people to realize they have a real company. but a company that generates dpi i mean that it could be a long time you may never know until you get it but what's your experience yeah uh four to seven years they they emerge in that number time you knew uber was a winner in year two or three just based on i knew it based on the addiction level that i saw amongst users and the rapid interest from top tier firms in getting intros to that founder to get an allocation.

28:10So you we saw two things there. One was user adoption and just how maniacal users were about the products, you know, when it came to LA, you know, people are like, I'll never work in LA. And then you know, you talk to 10 executives who use it, they're like, there's a game changer. So you know, and the press never understood the company. So you just ignore the press and embrace the users. And then when I've got people emailing me saying, hey can you introduce me to vlad from robin hood or hey i'm my wife uh my daughter my cousin my son is using com uh and they love it can you introduce me to alex and michael from com you know like you start getting those kind of inbounds from really top tier investors or they want to talk to you about it i just want to talk to you about it i know why you want to talk to me about it you want to place a bet so you know those usually happen in the first couple years year three four five um and then you know the revenue ramp and the quality of the revenue i think are the things that determine a dpi and the real breakout so there have been major questions about the quality of the revenue at uber quality of the revenue at robin hood and so we had to really look at that and say this is actually a high margin business or not and then i just did a back of the envelope at some point where i was like well they did 100 million rides and they're losing a dollar a ride so you know whatever they were losing 50 cents a ride losing 50 million dollars this month whoa it's crazy um but then i was like wait a second the average ride is you know whatever 19 dollars would anybody not take an uber if it was 21 and i was like no maybe you lose the bottom five percent if you lost the bottom five percent you're making a dollar right now this thing's throwing up 500 million a year that's easy to do so i mean in the press of course was going crazy this can never be profitable they're burning money and it's like you could just flip the switch though it's kind of like amazon story right so i think that's where i come to is you have the user love you have you know inbound interests from other investors or acquirers you know at one point i had a very high profile you know one of the top three technology companies in the world reach out to me to talk about one of the portfolio companies and they were like hey can i talk to you confidentially about this company and i was like sure i talked to them oh they want to buy this company they want to know you know what the founder's like they you know oh okay i get it uh you know this is like a google amazon level company having interest in one of your portfolios that's another signal that this could work out so i have now come to i've been working on this a lot because we have a doubling down strategy and i guess this speaks to concentration of portfolios um and we can talk about that in a second but what do you think are the early signs of when you know you have a winner and how do how do mine match up to yours no i mean i think like i listen to yours i'm my job is to sort of listen to the gps and listen to their experience so i want to hear from like thousands of venture investors about you know what have you heard from other gps yeah i mean well in terms of time it's funny i almost never hear experienced investors say that they know in less than two years.

31:20They almost never hear it. But I often hear emerging managers say, oh, I'm just going to follow on into my best few companies, we're going to get an enormous percentage of the fund into those best few. And my question is like, well, how early are you going to get those dollars in? Because often companies are raising their next round. Certainly, the market is slower right now in terms of price, you know, price day round after a price seed round. but um that's taking longer now than than it has yeah but it used to be like a year later six months later they're raising the next round right so it's like in a year yeah not much well well like maybe you have seen growth maybe you have seen a lot of things and you are very high conviction on this company but you might not have even made all the initial investments that you're going to make out of that fund so it's hard to know at that point like at the time a company's raising its next round which are the best few in your fund so i certainly see funds where like they got the follow-ons all right and and it's amazing and like major kudos to those investors and some people have done it over many years or many vintages and like they actually do seem to know earlier than most folks but most folks it seems like it's at least two years um and so yeah like i'm thinking about that and i'm looking for signal from the gps that we've invested with i'm looking for signal from other investors coming into those companies like i'm typically not in the next round after the initial investment from a fund that we've made we've invested in maybe it would be like the b round and we were in the preceders we have exposure to the preceder seed round and now we've seen them raise you know an a round from a great investor at the a round and then we've seen maybe someone come in to lead a b and we're all pretty high conviction at this point yeah and what percentage of your reserves are you do you think will be for co-invest like that or are they all just spvs and you'll just put them as icing on the cake yeah yeah so i can in the current vehicle uh we can use up to 20 of the capital the funds perfect that seems smart well you know we'll be recycling and over committing and so so we have room for that even after after we're sort of fully allocated is the plan yeah i i it's so interesting we're having this conversation right now because i have a large team um because we have massive amounts of inbound so our deal flow because of the two podcasts i mean my deal flow was absurd before all in and then it went absurd again so it's like absurd on top of absurd uh now we have 20 000 people applying for funding if you're one of those founders launch.co slash apply launch.co slash apply you can just fill out that form and meet with our team as long as it's like an actual venture style business not like a pizzeria or a movie or a cd you're doing your next album we don't invest in those kind of things um but we in training folks i literally have to i force myself to write these things down and i've written down now two instances because in our current fund structure half the fund is going into the primary investments that first bet through our programs etc founding universal etc the second half of the fund is going on to follow on so i'm pursuing like a brian singerman who i had on the podcast recently hey we're going to put the half the fund into the top five names let's say 10 names 15 names we'll see you know what the what the market tells us right if we hit a unicorn every 25 and we have 200 names in this fund well we've got to divide that second half of the fund by eight if we have three unicorns we're going to divide it by three but we also have to be able to pick them right to your point and so we've come up with likely winners definitive winners and so So I now have a criteria of what's a likely winner and I have a criteria of a definitive winner.

35:01Now that doesn't mean it's definitively DPI. It doesn't mean that the money has come in and it's gone public. It just means at that early stage, we can then say, okay, it's a likely winner. We should put an X amount. We should put another a hundred K and we should get another one, 2 % ownership. This is a definitive winner. Okay. We want to get more like three to 5 % of additional ownership and get us past the 10 % hurdle of ownership. So yeah, I've really thought about that. you know yeah i love it and one thing i think about is um the information that folks should track over time that might be actionable down the road and so like one thing i encourage people to do um who are investing is hey like track your level of conviction yeah um you know could this be a fund returner uh it not likely to be a fund returner like no this is a zero um track that on a quarterly or every six month basis or more often if you'd like and track like how these companies are trending like are they trending positively are they trending neutrally are they trending negatively like if you have time and interest like maybe force rank these and then like we can talk in two or three years and we can say like hey how likely is it or or maybe further down the road does it ever happen that you get to a point where a company is trending negative and it ends up being a fund returner or how often is it the case like very rare yeah well yeah like a save you're talking about like a crazy save yeah right or like how long did a company go without in your mind having the potential to be a fund returner and then it actually could still become a fund returner like use that information so now it's like you have this information you can look back historically and see like well historically nothing has ever emerged from uh you know a likely 0x or likely 3 to 6x return yeah to being a fund return it's never happened in our history or it's happened three times out of 100 it's very unlikely i had that only i had that from 10 years ago when i was doing this all in my mind uh this is why i'm writing deal memos and so what i do is I capture all of this now, we have two investment team meetings.

36:58So we I now record them. So I had to tell the team like, Hey, never talk, you know, in a spicy way on the investment team call, but we're recording every call, we're transcribing it, we have it. And then we can go search it. So you know, in three years, we can go back to the original decision for making the investment in Uber, calm grin, you know, Robin Hood or whatever. And we could actually look at that. And then we can look at oh we had an opportunity to buy more shares in the company oh we didn't have them as a likely winner we didn't have them as a definitive winner and that's where like forcing your team to to define things you know in a very specific way is super powerful so i can say to the team when they're having this discussion there's 14 people on a phone call okay is it a likely winner or definitive winner and then make your case uh you you want to put more money into this is it a likely winner here's the criteria for a likely winner or is it a definitive winner here's a criteria for that make your best case and write it down and that's why i try to like we we do what's called the mini deal memo um so if people want to fight for an investment i should put a mini deal memo in slack and give us the criteria of why we should invest why we shouldn't invest and then i ask other people who maybe have domain expertise or who i think value the opinion okay do you agree or not what would you do some people might say stand pat stand pat is one of our internal terms like we're not going to add to our position it's a poker term means like check basically stand pat or stand pat we're not adding to our position but we're not selling our position and let's have a thoughtful discussion about that and man has that changed everything in our firm over the last couple years that people are using a framework for debate yeah i mean i think it's really thoughtful and it also like docktails with another thing that's on my mind when i'm thinking about managers like are you thinking about every round that a company raises as like a buy or sell opportunity?

38:47And if it's a sell, like, what are you doing about it doesn't mean you need to sell, it's not always possible. And if it's by it doesn't mean you're in a position to buy. But I think it's helpful to think about it sounds like you know, your analysis is is similar to that. Right now, startups have to do more with less, we all know that. And that means increasing your product velocity while maintaining or even lowering your costs. Now don't forget product velocity is how startups speed incumbents. So here's the great news. AI is going to help you do that. So let me tell you about wizard. It's spelled U I Z A R D.

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40:00That's U-I-Z-A-R-D dot I-O slash twist for 25 % off. Stop wasting time and start shipping faster. The sell side is super important. Do you talk to fund managers about when, about their strategy for clearing positions and returning capital to LPs? Do you do that when you're selecting them? And then what do you like to hear? Yeah, I mean, it's really important to me. So like, I think about, and we can talk about sort of what I look for when I invest. But at a high level, I think about like venture, like, you know, there's like a five tool baseball player, there's like a six tool venture capitalist.

40:35And in my view, like everyone talks about like sourcing, picking, winning. Some people talk about adding value. I would add two more to that that are really important when like we're making an investment at Slipstream and that is like getting your portfolio construction right and getting liquidity from these investments. And yeah, what I want to hear from folks is that they are thinking about it. They are thinking about it every time a company raises capital about whether they're buyers or sellers. They are not necessarily acting on it. I want to get a sense for whether they're sort of in the ride or die camp like no, we'll never sell early.

41:08were just right until the end um which i think can be great but has some drawbacks um there's risks associated with that and i'd say like if there's one regret when it comes to getting liquidity that i hear the most and that um i've seen most frequently yeah it's it's well yeah it's i waited too long like i regret taking the kill oh it was it was a unicorn i could have sold a little into that round um i didn't now the company didn't work out or it went public but it was locked up and after the lockup by the time you know the lockup ended i i wasn't comfortable it's very different for it's very different for seed stage investors versus series a and series b investors when you sell because if you're a series b investor you're almost always overpaying and if you're investing 25 million for five percent at 500 million okay like you're not going to sell that position at a billion or two billion and very few companies get to a billion or two billion so you have to wait till it hits five ten x right if you've got some basic portfolio construction if you're invested at five million we invested at com as an example at five million we had the opportunity to sell 10 of our position at 250 it was like a 40 some odd x you know 50 x i took that opportunity to sell 10 of our position we had an opportunity to sell another 10 of our position another i think we sold 11 million dollars of our position uh 12 million dollars in our position when it hit a billion change and i took that opportunity so we sold 24 of our position going up that had nothing to do with our belief in the business of the founders it just had to do with the fact that well 50x how often do you get a 50x and you have the ability to sell some of it and lock in a 50x and then do it again at you know man 200x the great irony of that is it was that we had some money in spv when we told the lps that we had sold um person was like oh my god you got me a 50x this never happened to me in an spv and i was like yeah we still have 90 of our position they were like you have 90 what do i don't know what you mean i'm like we only sold 10 of our position they're like okay so we sold our position we own 10 and so we got a 50x i was like no we owned 6 of the company we now own 5.2 of the company we sold about 10 of our position we were diluted you still have 90 the person could not understand that we had not sold our entire position oh my god jacal i love you but wait there's more money we still have 90 % of our shares yes we still have 90 % of our shares now we've been diluted a little bit but that's par for the course um and you know i did the same with uber uh you know and i haven't talked too much publicly about it but i was able to sell some back to the company you know in like 30 some odd dollars a share years before it went public um now that seems like a stupid trade when the stock's at 70 now but you got to remember that was eight years ago i put that money to work that money has done more than uber has in that time so you know there's two sides to this coin i think peter teal was you know very famous saying that he missed the best investment of his life which was the round i think gary milner did the year before facebook went public because in nine months people doubled their money so like 100 irr on an irr basis that was extraordinary but in terms of like other opportunities peter teal has to put money to work or founders fund does maybe selling and not having that opportunity, but putting that money into their next fund would have been a better return, right?