Fundraising best practices for managers, strategic LP management, and LPACs with Meghan Reynolds of Altimeter

0:00Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. I'm your host, Samir Kaji, and on this week's show, we're thrilled to be joined by Megan Reynolds, partner and head of capital formation at Altimeter Capital. Founded by Brad Gerstner in 2008, the firm has backed companies such as Snowflake, Unity, Gusto, and Modern Treasury. Prior to joining Altimeter, Megan worked in a variety of investor relations roles, including at TPG, Goldman Sachs, and Jazz Venture Partners. She's also quite prolific on Twitter with her insights on the LP world, and this conversation was a lot of fun as she went through the system she uses to form and maintain relationships with world-class LPs.

0:38We hope you enjoy my conversation with Megan, and let's get right into the show. Today's episode is brought to you by Juniper Square. Venture capital firms and their investors have realized that a fund administrator without best-in-class technology is no longer acceptable. At the same time, experienced fund managers also know that a reliable and responsive fund accountant is critical to ensure fund activities are done in a timely and completely accurate way. It's time you talk with Juniper Square, a fund admin built for sophisticated venture capital firms by pairing world-class support with leading technology.

1:11Request a call at junipersquare.com. That's J-U-N-I-P-E-R-S-Q-U-A-R-E.com. Samir Khadji is the CEO and co-founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third parties, investments, or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate. Allocate or its clients may maintain relationships with or investment positions in guests, third parties, or securities mentioned in this podcast.

1:51This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Megan, it's so great to see you. Thanks for joining us. Samir, I'm so happy to be here. I feel like this is meant to be you and I chatting about this stuff. I think so too. And you are one of the most active people when it comes to LP Twitter. And that's something that obviously is near and dear to my heart, given how many LPs I talk to. But there's going to be so much to unpack in terms of what we're both seeing. But maybe a good place to start is you've been with Altimeter now for almost two years.

2:31And before that, you had a variety of roles, different firms, you know, in the capital formation world. But let me just start with your history and what led you up to Altimeter? Sadly, I have a long history, which is giving a some indication of how old I am. But, you know, I've essentially had three chapters of my career, which goes back to early 2000s when just by a stroke of luck, I landed at Goldman Sachs in their private equity group right out of school and into a capital formation role at really what was kind of the advent of the asset class. Private equity had been around a long time, but it was really at the point when private equity and venture capital and alternative investments were starting to grow from a very small cottage industry to a real institutional asset class.

3:23So when I joined Goldman there in their private equity group, they were managing about 10 billion of assets. When I left 10 years later, they were managing about 40 billion of assets. And this was through a series of fund of funds and secondary funds and direct funds. And that was mainly through both institutional and high net worth growth. So had a great start to my career there. And then I left Goldman and joined TPG, time in the market that was post-global financial crisis, post-mega buyout boom, but when the buyout part of the market and the large end of private equity was really expanding into multi-product firms and public alternative firms.

4:07And I was really lucky to spend another decade learning many things about being at that part of the market and what it meant to service investors both coming out of a crisis and raising capital in a multi-product format. And so 10 years at TPG, watched them grow from 40 billion when I joined to over a hundred billion when I left. And when I left, I was co-leading fundraising for the firm globally. And I was really ready for a third chapter in my career. I love the build and grow, as you can imagine, given what the first two chapters look like. And I feel really excited to be a part of Altimeter when venture capital, the venture capital part of the industry is really going through its own transitions and institutionalizations.

4:51And we can unpack that, but exciting to be at Altimeter for people that don't know Altimeter. It's a life cycle technology investment firm that invests from the earliest parts of a company's journey and venture all the way through to public markets, technology focused, and a fabulous LP base that I get to work with every day. It's a great history. And there's something that I wanted to come back to, which is this concept of capital formation. Oftentimes, when you think about fundraising, you're thinking about it into the context of investor relations, working with LPs, working on the fundraise.

5:29But I think capital formation is a more nuanced term that probably has several dimensions to it. Maybe we can talk about what does capital formation mean from your perspective? Happy to chat through that. And it's funny, I think that the role is called many different things and the industry across the board could use some consistency in what we call this role. I mean, some people call it fundraising. Some people call it investor relations. I think capital formation encapsulates all that's involved and doesn't just, I think those other terms have a tendency to capture a portion of the role, but not a complete definition of what's involved in servicing and raising capital for servicing investors and raising capital for an alternative investment firm or private markets firm.

6:20So I think that, you know, there's different components. One, as you said, is investor relations. So I think, you know, what, and I think this is what people have a tendency to think about when they think about an investor related role in a firm. So traditional IR would be the servicing of your existing investors from an administrative standpoint, from updating addresses to sending out capital calls to doing your quarterly reporting to answering, you know, day-to-day Q &A around what's happening, what's happening with the fund that I'm invested in. And I would say this is something that from a, just like a pure legal standpoint, you have to accomplish certain things when you are a fund manager, you have to send the reports and send the capital calls.

7:06And there's a certain amount of administration that's just related to that. And it's, it's extremely important, but you know, it's certainly only a portion of the role. And then I think there's also a part of capital formation that what I call product management, other firms call it project management. But this is, I define this as looking at the portfolio that you're running, thinking about the fund that you're managing from the lens of what your investors expect from you and need from you. So how does you're working with the investment team, working with the portfolio manager or general partners to say, how do our investors think about the actions that we're taking?

7:53And are we delivering on what was marketed and promised to them in the management of our portfolio? And I think about this in terms of when is the right time to distribute capital? Are we communicating proactively about not just our annual reporting, but are we communicating proactively about what's happening day to day? Part of what they need from us is information. It's insights. It's beyond just an annual report. I think about this around fundraising strategy and timing, right? How do we strategically plan when we're coming back to market with a new fund, you know, running, what capital do we need for a product and when?

8:40So a little bit is, is push out, like what do we need from our investors? And some of it is pull of what do investors need from us? There's a third component around like relationship and brand management that I think is more traditional sales, but like, how do we maintain relationships with both our current and prospective LPs? What channels and resources are we leveraging to build new relationships in the market and connect with existing investors? There's a lot there. And the things that I think are pretty obvious to most people that are fundraising, and this could be somebody that is a professional that's working at a firm that is in the IR position, or it could be a smaller firm where the GP is both investing and also managing those LP relationships.

9:28And the things that people typically think about is, okay, when I'm fundraising for a particular fund, there's a number of things that need to happen. I need to fill up the funnel. I need to work people through the funnel. There's materials that I need to put together after they invest. There's those quarterly reports. There's these inquiries that come up. It's the AGM. But you mentioned something during that part of what you're describing, which is around how do you work with the investment team to be more strategic in nature? You mentioned distributions, the DPI. You're listening to your clients, which are these LPs or shareholders, which are the LPs and understanding and empathizing on what they're going through.

10:11And ultimately, you're working in concert with the investment team. So all of it is very holistic when you make decisions. What does that look like and how you interact with the investment team to ensure that number one, the investment team is doing what they're best at, but at the same time, it aligns and corresponds to the LP or shareholder side of the table? It's an everyday component of the business. It really is. And one would think that it would be very straightforward, right? Like we marketed a fund and we're going to invest the fund. And do we really need to be understanding the LP mindset as we move forward?

10:49But it really is dynamic. And it looks like a lot of different things. It looks like sitting in an investment committee meeting and we're discussing an investment that may be sensitive for a certain like component of LPs because, and I'm making up a hypothetical situation here, but it may tap on something that's ESG related where we have ESG sensitive investors, or it might be, look for us, like it might be something that's maybe out of stage from where we typically participate. And it's like, okay, this is a really attractive investment, but to LPs, this might look like strategy drift. So how do we, it's not that we shouldn't do the investment.

11:33It's not that the LPs are determining how we go about day to day and that we're oversensitive, but maybe we need to communicate why this extra, like have extra communication on why this is relevant, or maybe we should be sensitive to how this might be perceived by our LPs. Sometimes it looks around the timing of an investment because, you know, this has been an interesting market because LPs are liquidity constraints. And if going out and doing a big deal and having to make a big capital call at a time that it's, you know, where the public markets are way down, again, it's not, it doesn't mean you're not going to do it, but having a sense of how LPs will respond in what position that they'll be in if you do do it.

12:15And on the flip side, maybe distributing capital at time where liquidity is needed when you have level level levers to pull in that regard is important. And I love that you use the word empathy. I think that's really the component that's most important here. It's like as general partners, you have a ton of empathy. I see it in venture. Everyone has empathy, founder empathy. Like they really relate to founders and they really think about how is how our founder is going to feel. And I think the same level of empathy needs to just be turned on our LPs, right? Well, how are they? What's going on in the LPs mindset?

12:55What do they need from us? How would they feel when, you know, certain actions are being taken by the buyer firm? You're describing a lot of things that refer to really knowing the LP, their incentives, who they are as people, what their individual situations are. And of course, as you have more LPs, there's more to track and you really have to determine exactly whether an LP is a good fit for your fund. How do you work with them over a period of time? I still see a lot of managers when they think about the LP component is how do I get them to invest in my fund and then I'm going to hopefully perform so they go into the next fund and the next fund and the next fund.

13:36There's much more to that. And especially at the front end of fundraising, tell us a little bit about how you go about when you are meeting an LP for the first time, instead of just pitching what altimeter is, for example, what are the things that are necessary to build the right sort of frameworks and foundation with LPs who may ultimately become long-term partners? What are the things that you do in that first meeting? I think the most important part of a pitch is listening. Personally, I think that every meeting with a potential partner. And I use that word partner, right? Because that's what you are.

14:16You're going on a 10 year journey together. And probably more, right? Probably more. Very few of these journeys actually end up in 10 years. And hopefully it's a 30 and 40 year journey as involves multiple funds, right? I would say, so understanding an LP's program, where you fit, what's important to them, what makes for a good partnership, like what defines a successful venture capital partnership for them is really helpful. One, it helps you adjust your pitch. So you're focusing on the things that are most important and relevant, but I think it also helps you understand, is this a good fit for me as a general partner, right?

14:59If someone, you know, if you find out in that conversation that you're working with an LP who, whose program is really IRR focused and you're, you have, you know, you're focused on MOM and maybe long dated capital and you're unlikely to, you know, that where you're not going to see, you may have a deep J curve in your portfolio because of the style of investing. It's really important to establish that fit up front because frankly, it will save everyone's time or maybe avoid frustration. Down the line at Altimeter, we love to think about partnerships that are not just focused on the opportunity set right in front of us today, but look to have a multi-fund journey that have a deep understanding of the style of our investing that is patient in nature, that is going to understand there will be ups and downs of the journey, but that you can build together with great transparency and sharing of insights.

15:56And that has to resonate. And so I think it's going back to that listening mode. And there's lots of questions. I think if you don't spend five or 10 minutes of an hour long meeting on at the minimum of understanding an LP's program, you're really missing out. Also an opportunity to just learn more about the market and what the LP mindset is. Yeah, I like that. And it seems such an obvious thing to do, but oftentimes people just start unloading on what they're doing and why it's going to be the right fit for the LP and it goes straight into sales mode. Sales 101 is know who you're selling to and what product you're actually selling.

16:33And the product that you're selling has to conform to what is actually important for the person you're talking to. Most people, most GPs I talk to, when they think about fundraising and are talking to an LP, they really hone in on performance. You know, what have I done before? What can I do potentially going forward? Here's why we're special. But are there other things that are non-obvious that you found that LPs actually do really care about, but they may not vocalize outsider returns? Hmm. That's a great question. I think it's especially relevant today where we're coming out of a part of the market where everybody had good returns.

17:14And frankly, returns haven't and private markets haven't really fully adjusted yet because they're on a deep lag. So everybody's returns look pretty good. So differentiation beyond returns matters a lot. Team dynamics are really important to LPs and having an LP understand how decisions get made, like how organizational design, there's no right or wrong answer, but how a team functions and how you move an opportunity from the top of the funnel all the way through is extremely important. I find time and time again, LPs get to the question, what makes, you know, I'll use altimeter because I work at what makes an altimeter deal an altimeter deal?

18:06Like what is, how do you describe the playbook? How does that work with your team? What are the organizational dynamics that bring you to, to help us understand what is classically you in the market? I think that is incredibly important in working through an introductory meeting and frankly, as you go through diligence. And it all kind of leads you to getting to what is really unique and different about is the differentiation piece beyond returns. And of course, when you invest in a fund, especially in venture, it could take four, five, six, seven years to know actually directionally how good that one's going to be.

18:52And during that time, during a five or six year period, you may have a venture fund raise three funds during that period. So LPs are often forced to make decisions based on limited information at the time they invest on the past fund that they have allocated to. what does that ongoing relationship dynamic look like in terms of driving things that are post not just distributions, but helping the LP with other things that they care about, whether it's sometimes it's learning, sometimes it's information, it's network. And it's all outside of like what is legally required for you to do, which is you have than at the quarterly report.

19:34So you have to do K-1s. I have to believe that when you run a shop of your size and scale, there's much more that goes into the ongoing relationship management. Completely. And we're in the business not of just delivery. Returns are really just one component. There's other components to it. And you can see this time and time again with firms that, you know, frankly, have pretty mediocre performance, but continually raise capital and can raise very meaningful. So there's got to be some other value add if it's not just, you know, if returns are frankly mediocre. I think a lot of that in the market today looks like insights.

20:16You know, what I am learning from you, you are operating in a market that I need, you know, I have, I manage a portfolio within that market and private markets by their nature are harder to digest and analyze than public markets. And so what insights am I gaining from you and your team about what you're seeing on the ground? And how is that making me a better investor? It's such an important component to managing the entire portfolio, the insights that you're getting out of private market investments. And so I think that could look like your specific sector expertise. It could look like your macro observations.

20:57It could look like geographic observations, but delivering insights is very important to LPs. And that can be delivered in many different forms. I have heard some LPs say they continually invest in a manager because they can't miss out on their annual meeting because the annual meeting is so good. And you would think like, that's crazy, right? You'd think you have an investment when you still get invited to the annual meeting, but that shows you how much insights matters to certain investors. For some investors, it's co-investment. Co-investment is, you know, they want direct deal flow. And I think some managers do a very good job at looking at, you know, at delivering direct deal flow.

21:39Sometimes it's access to big thinkers. GPs will have incredible thinkers around the table, either because they run the organization or they have access to them, or they've brought them in as advisors. And if you're managing a private investment portfolio at a family office or even a pension fund, and you can get access to former treasury secretaries or head of the FDA and get regular insight, that's incredibly valuable. And so I would think about, you know, as a GP, even if you're small, think about what unique insights you can deliver to your investors that they would otherwise not rely on and or otherwise have access to because that is very special.

22:28It's such great insight. And there was actually somebody I had on my podcast recently, and it's a smaller manager, sub$50 million. What he was saying is that one of the most valuable things that he is providing his LPs is effectively his newsletter. And the newsletter is very thoughtfully done. It provides a lot of insight into trends, what they're seeing from a technology perspective. and he called it a very expensive newsletter that somebody is signing up for. At the end of the day, his point was returns are table stakes. Over time, you're going to have to drive returns, but in the interim periods, you have to augment it with more of an experience for the LP.

23:11And it sounds like you would agree with that assessment. Totally. I think transparency is another piece of it too, right? You can have great returns, But if you're not delivering transparency on where those returns, on how those returns are derived, there's some real missing pieces. And it's a missed opportunity. And I think LPs can be very frustrated by that. So it works both ways, too. There's opportunities and value that you can provide. And there's also actually frustrations that you can end up delivering and you can destroy value with investors by not communicating transparently or not being thoughtful about your reporting or not being able, because at the end of the day, most LPs have sitting in an allocator role, unless you happen to be an LP that is managing your own family wealth.

24:07And even then you have, you have constituents, you have family members or, you know, other people in your life. Like most people are managing that portfolio on behalf of someone else who needs information. And I think that all of these things, the insights, the transparency helps those allocators deliver the value that they need to provide. And it's a really important component of a relationship between GP and LP is understanding that they're sitting, they're your advocate. And they are sitting between you and another underlying customer or underlying important constituent base that needs to understand what you're doing and where you're coming from.

24:52Transparency is obviously something very important, the GP LP dynamic. And most LPs would say that in venture, transparency is still a work in progress with a wide range of how different VC firms provide information, disseminate updates and the like. And we're in a world now that things aren't up and to the right the way they were for most of the last decade. And that level of transparency can be a differentiation, as well as just being simply LP friendly. And we've seen things just over the last few months where Sequoia dropping fees or Founders Fund splitting their fund, you know, essentially in half or cutting it in half.

25:33And then other firms like Tiger going from a$12.7 billion fund to publicly announcing they were going to cut the most recent fund, even down from$6.7 billion to$5 billion. Curious from your lens, what are you hearing from LPs and what they're seeing GPs do? And some of the things that I mentioned with founders Sequoia and Tiger, actually part of a broader trend line or are these still kind of outliers? This is a natural ebb and flow of a market that is not new, not unusual, and has been seen before in private markets, right? Markets don't always move up and to the right. The deal market doesn't move that way.

26:17Returns don't move that way. Fundraising does not move that way. And you need to adjust to the supply demand dynamics of the industry and GPs need to do that. And we are in a market where there is constrained capital and ultimately the deal market has changed, right? We've in venture round sizes have come in, deal pacing has slowed, the opportunity set is shifting in real time. We've seen massive shifts in subsectors of the market from crypto to AI, and all of that flows through to dynamics. And we've seen public markets move dramatically, which has an impact on private market allocations. So it is only natural that the GPs will have to adjust to those dynamics in the market over time.

27:12And that's going to look like fund size, economics, legally agreed upon transparency, LPs demanding limitations on funds that look like various things, could be limitations on sectors that you could participate in or an LPAC having more control than it used to. These are all things that we saw happen in the buyout end of the market post global financial crisis, when we had a very similar dynamic of capital being deployed very fast, very peaky markets, valuations getting very high, and then dropping off a cliff, the rise of mega funds. And, you know, in, I think in 2009, I was looking at the data recently, global private markets fundraising dropped over 50 % from 2008 to 2009.

28:06Now we're not in the global financial crisis. but there will be contracted fundraisings that people still raise capital, but their funds got smaller and there was a big adjustment and terms changed and you had to react. So I think it's just, I don't think it's a permanent shift in the market. I think this is just natural supply dynamic, you know, markets ebbing and flowing. There's a few things that I wanted to double click on that you just mentioned, and we'll talk about the traditional market and we'll talk about alternatives for this capital. But before we go there, you mentioned the LPAC, LP Advisory Committee, which a lot of funds do have.

28:46But what we found historically is they've been more symbolic than anything else. In other words, leveraging the LPAC, there's nothing different outside of bringing maybe a few agenda topics to the LPAC on a quarterly, semi-annual basis. I've heard you say that there's a deeper relationship you can create with an LPAC to not only drive synergies, but to drive better decision-making as a firm. Maybe you can unpack what that actually means. The LP advisory committee is set at the time that you raise a fund. And it typically is made up of your largest, some of your largest or some of your most sophisticated investors.