Investing in USV Fund I, lessons learned as a LP, and why Emerging Managers are so important

0:01Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. On this week's episode, I'm excited to sit down with Lyndall Eichmann from Foundry. Lyndall has a long history as an investor in funds and companies going back to the early 2000s when he was at UTIMCO. During our chat, we covered the history of him being one of the first investors in Union Square Ventures, his affinity for smaller partnerships, and the art behind conducting quality reference calls on GPs. He and I have known each other for a while, so it really felt like a fun and casual water cooler conversation about venture.

0:36I hope you enjoy the show and let's get right into it now. Samir Kaji 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. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

1:14Lyndall, it's great seeing you. Thanks for being on. Yes, Amir. Good to see you. All right. So this is going to be a lot of fun because I love how you think about investing in GPs. And you and I have shared so many notes over the last, I feel like, decade in what's happening in emerging managers, what's happening in venture. We're old. We are old. We're age inclined, I'm going to say. I feel better when I say it that way. We have perspective to offer. Speaking about perspectives, let's talk about your start into venture and a little bit of the background leading up to Foundry. So I really started paying attention to venture back in 2002 when I first joined UTEMCO as an intern, actually, University of Texas Endowment, as an intern.

1:56I really didn't know anything about endowment foundations or particularly venture at that point in time. And I fell backwards into this opportunity at UTEMCO. Ended up, I think because of my age and like the age of the group, spending a lot of time focused on venture. we were relatively large at that point we were about nine billion in capital we had a cio that had been in uh in california in the late 90s who was like go get me four percent in venture we had almost none what we did have was kind of not great from a from a consulting firm that had put it in there um on on the endowment's behalf um so we did get to learn some lessons from that you know we had a young team i personally was naturally interested in tech um i'd taken a bunch of classes and just sort of was naturally oriented that way.

2:42I spent a lot of time sort of focused on that piece of it. I also got lucky. My first investment was Union Square Ventures in 2004. We can talk about that and sort of the predilection for why it was a back then it was a PPM and a pile of PPMs, you know, on a desk and why that made sense and why, you know, I've gotten and a girl old with Fred and Brad. Over time, I took over the lead role at University of Texas Endowment. I always did venture because I thought it was the hardest to do and the most interesting. And so it's the lead person you get to pick where you spend time, but also covered all the other areas.

3:20So I got to see the whole menu of opportunities in the endowment world globally, including emerging markets. I was turning 40. I was looking for the next thing, looked at a bunch of different things actually. But one of the conversations I was having and had been having for a while with my partners here at Foundry, kind of thinking, you know, they had personally been investing in these new small funds. And this is sort of 2014, 2015 timeframe. And it was an opportunity area that looked really enticing, but now UTEMCO was big. We were 25, 30 billion, starting to get harder to invest in things like that, even with some success.

4:00We helped put Michael in business over at Sandana Capital. He was our test case for, this is really interesting exposure. We really want to get it. That led me further down this path of, I want to be in tech. I want to be in venture. I want to do something that combines all the different elements, be it primary investing in funds, but also investing in companies. I want to continue learning about that. Then I had some good friends over at Foundry that we were aligned around that. It was time for them to start thinking about the next iteration of Foundry. And we put together Foundry Next, which is now three funds, where we invest kind of 25 % funds, 75 % directs.

4:40It's all early stage. It's primarily seed funds on the 25%. As you know, we've put a bunch of small checks into a good number of funds. We're in about 40 something funds, fund managers. We try and bring more than just capital, but we work with them as if we're their true partners. We like to say they get the benefit of an experienced senior partner without having to give up a bunch of economics. And that sometimes I have to help them learn to speak LP a little bit. And so I spend a lot of time helping GP speak LP. I've also done a bunch of direct investing over here. I will say that I've sort of lost my LP hat and I've put the GP hat on at this point.

5:22I've learned so much about the deals and about the business and just how it actually gets done when you're down in the soup, when you're not up in the ivory tower at the endowment. And I love it even more. I love being closer to the founders. Such an interesting shift over time, going from a really, really big sort of institutional investor and just looking to allocate capital. I do want to get into USV in a second here. And then now doing a lot of direct. I didn't realize it was up to 75 % of these funds actually doing direct deals. But going back, when we think about venture, venture is the absolute people business, right?

6:00You're betting on people, whether it's an entrepreneur who you are underwriting to be able to execute on something, and that vision could change over time, but somebody that can stay with it, to a GP that ultimately you're looking across the table and saying, this person is going to deliver on something. And they have a set of characteristics where I can put money in them relative to the sea of opportunities. And one of the things I always love to ask really experienced investors and LPs is, what do you actually look for? Use USV as a test case. I think at that time, if I'm not mistaken, Fred had come from Flatiron.

6:38USV was kind of in the infancy. It was just getting started. Why did you do that deal? What were the underlying characteristics of Fred? I'm going to answer that direct question, but a couple of thoughts in there. One is everything you do as a GP is just like one level up or one level down from the LP world. And so it really is all about people, whether you're picking founders or you're picking founders of a VC firm. There's always the risk of founders of a VC firm not getting along and founders of a company not getting along. And understanding how you're aligned with them and and that you share the same strategy, the same vision, and that the team at the company or at the partnership sort of have the strengths to attack that same strategy.

7:23I always say, does the strategy match your strengths, and does that match the size of your fund? And at the highest level, that's how I think about this. I think we'll talk about some things in a minute, like specific questions. But to talk about Fred and Brad in 2003, 2004, they couldn't raise capital. Everybody hated venture. They hated venture. Yeah, they've gone on to be a huge success and I got lucky and they were great and all that. But I think we're entering a period right now that's going to start looking a lot the same, which is experienced investors who have made good investments and bad investments.

8:06who have now honed their craft, who have the network to be able to know and the right people to see it, to source it, who have, as I said, good and bad heuristics on how to pick them, have been doing it long enough to know how to help a company. And they're now all of a sudden freed up in their own firm with their own specific view. We can talk about sort of spinning out firms versus transitioning firms too in a minute, but I think it's so important that the partnership team has its own view that they create from first principles and they align behind and then they run at it. Well, Brad and Fred had this framework about digital networks and digital natives at the time.

9:01And it resonated with me because I was 29 years old. It was a moment where this made sense and they matched. I was probably their ICP, ideal customer at that point, who had capital and it resonated with. And we actually saw it. And maybe a little before the rest of my team, I was like, we want to do this. We had an appetite to do it. And so I called Brad, actually. I was like, hey, can we be 25 if you're 125? And he's like, yeah, sure. Great. That sounds amazing. He at the time didn't know if it was that big a deal. And I was like, I hope I can back that up. I think I can internally. And then that turned out to be an amazing investment for the endowment.

9:45Today, I'm still looking for that same set of characteristics. I think Fred was like 40, maybe 42. By the way, if I look back in history, there's so many firms of asset management broadly, like public markets, hedge funds. How old was the founder? He was 42. It's also the answer to the universe. But he was 42 when they founded it. I think that's just the happy place of when you've got that much experience that you're willing to take the risk and you have the vision to take your own risk. Maybe it's 35 to 45, but it's that kind of zone. Well, it's actually interesting you talk about the age, but also the position that you were in.

10:31You did essentially 20 % of that fund, and it was a fund one. And people generally think of individuals that work in endowments, pensions, as being completely risk averse. You just don't do those type of things. How did you get conviction at the age of 29? because there's some career risk. You just get in, you're supposed to build this portfolio up to 4%. But what most people would do is find brand name X, find a way to get in and then start building it that way. Why did you decide to do it the way you did? Well, we were lucky because we were forced to. They wouldn't let us in to the name brand.

11:10We were public. Remember, we're a big public institution. I mean, this was what? This was right after George W. Bush had been in office and And there'd been a bunch of kerfuffle about, you know, him giving money to friends and cronies, you know, via Texas systems. And so there was all this risk of having to disclose things. Brad and Fred needed money. They weren't picky about it. And they would take$25 million, you know, 20 % of their fund from us. Look, if Sequoia had let us in or KP at the time had let us in, maybe we wouldn't have had appetite for this new set of emerging managers, if we're being honest.

11:54But I will say now having done it for 20 years, it's so much more fun to be somebody's first check and to help them. And now that I have experience enough to help, I couldn't help Brad and Fred. But I mean, they helped me more than anything else. But I now have the experience to really help people and to think about how they build their business. And that part to me, I do it for free sort of thing. It's really fun to be a first checker and early check into these new funds or companies for that matter. Yeah, it's interesting because I started working with emerging managers 14 years ago. And I would agree, it's much more fun.

12:34And a lot of these people felt like entrepreneurs that just happened to write checks versus code. but the way they were thinking about building a business, the way they were thinking about being a service provider, both to the founders, but also to the LPs, fundamentally felt that. Now, it was a little bit of a necessity for you back in 03, but you've learned a lot, of course, and I know you've been such a big help and a big proponent of investing in these smaller funds, and we've seen a big, big increase in, let's call it first-time managers over the last 15 years. We count over 2 ,000. You probably have your own database.

13:09But one of the questions now is, well, what happens to the venture market? And specifically, all of these funds that raised a fund one, two, and three during the extreme hype cycle, how do you see it playing out? Because many of these folks raised at a time where actually money was easy to get. Markups were being had so you could raise your next fund. But now we're sitting in a very different environment. So how do you think about the market today? Yeah, let's just acknowledge that the number of VCs formed and that the number of talented individuals choosing that as their vocation skyrocketed during this period.

13:49Foundry is a pretty well-known venture fund. And at one point, once we raised our hand and said we were making emerging manager investments, I think we were getting more fund pitches than company pitches for a little while there. How many were you getting a month? I mean, out of control. I couldn't give you a number. We couldn't even track them. Some of them were just randoms. So we just said, sorry, no, you know, a bit like a nightclub or something where you had to get a, you know, you had to get an invite or you had to get a warm, a warm intro just to even sort of take the first meeting because it was overwhelming.

14:19And because we were active in it, it was pretty easy to reference around for us. But to answer your specific question, I think that what we're going to see is a lot more fluidity of that talent. Because there are talented people that are investors. I think there's a lot more fluidity back and forth between entrepreneur and investor. and that many of these people will become operators with a side hustle that is their old fund. Because there's really no reason for them to give it up. They should just keep working it. And especially these small funds, they don't have any control. I mean, they've got shareholder consents to sign and that's kind of it.

15:02And then they wait for capital to come back. And they outsource all the back office. So hopefully that's running well. So I don't see them quitting. There is no way to quit, by the way, other than selling it or something. But I think bouncing back and forth, we've actually already seen a number of people say, nah, this is harder than I thought it was. I'm not going to get paid for a lot of years. I'll raise what I can. I'll do a smaller fund maybe. Maybe I'll just manage my own money. And they start to look more like angels, which is what they were for the most part anyway. angels with their friends' money.

15:41And that needs to exist. That should exist. Was it ever part of an institutional LPs opportunity set? I don't know. I mean, we always were looking for people that had an institutional mindset. Like they wanted to do this as their full-time vocation and they wanted to become experts at investing. I don't think it was part of ours. I do like small funds. I don't mind solo GPs. I think there's some value to that. those two pieces of it. But that has to be their primary vocation and they have to be dedicated to the craft, I guess, is what I would say. So when we kind of going back to the question, maybe in a slightly different angle.

16:24So of course, yeah, we can acknowledge the number of firms that have come. Some will decide they'll continue those funds. And the average length of these firms could be 14, 15 years until the last portfolio company. And you kind of hope that everything runs as it should. There are going to be some people that continue to raise capital that are backed by institutions, but we may not have 4 ,000 active VC firms. Maybe it drops to 2 ,500. Who knows what the number is? But there's still this concept and this question of like, from a macro standpoint, you and I have been around long enough to see the 99 internet boom, the bubble bursting in 2000, and then almost a dead period for a number of years.

17:0708, 09 was a little bit different because it was more focused on the real estate sector. We had a blip in terms of capital raise, but it seemed like things went back really, really quickly. And we had the tailwind of interest rates going down. And so - Oh, it was so net positive, Samir. I was an allocator at the time. And I'm like, it was scary as could be. Like, I remember. Actually, I had breakfast with Brad Burnham. He was in town. And he's like, should we take money out of the ATMs at this moment in time? Is the financial system going to shut down? But the big picture for venture was so positive.

17:42It was right about the time that iPhone had come out. AWS was ramping up. People trusted cloud all of a sudden. And you had this giant unlock of people, the talent that became available across all these different industries. So tech went from a vertical to a horizontal. and opened up because costs came down 80, 90%. And, and all these people that were experts in other industries were suddenly unemployed. It was a huge tailwind. I feel like actually it wasn't a, wasn't a blip negative. It felt like a blip for this, for us living right in 08, 09. We're like, oh my God, this is a bank. And I mean, by the way, I remember hearing from people, oh, venture's dead because you've had this lost decade of returns.

18:27Everything's bad. Of course, things change. And you did mention two of the things that are that actually really drove seed to what it is right now, which is really AWS. I mean, AWS made it so and I think the cost of starting a company went down by 90%. I think that's the actual number. And then of course, the mobile made it easy to distribute it. But when we look at the past as a proxy, perhaps, and history doesn't repeat, but of course, we've heard that it does rhyme. Where are we right now? Is this closer to like 2011? Is it like 0203? How do you think about where we are in 2024 from a venture standpoint?

19:03I think we just went through a 20-year cycle. To me, we're kind of early 2003 is my guess. I actually looked up. I don't have it at handy, but somebody sent it to me on my team. They were like, look at this Bloomberg post about fundraising from 2003. And it reads just like today's headlines. It's shrinking, it's getting harder, and it's so much less than last year. And what we didn't realize in 2003 was it wasn't temporal. It was a long period of time that LPs were souring on venture. And in 2002, LPs thought they hated venture, but in 2003, they definitely hated venture. 2004 brad and fred couldn't raise any money because nobody wanted to do any venture my partners at foundry like mobius had blown up and in 2006 they were casting around trying to figure you know they'd given up on raising a mobius fund because that didn't work then they were like okay let's reconstitute let's raise foundry again couldn't raise money people with great track records a great story that was 2006 2007 now you know now you're into like 2008, we never caught up from 2002 to 2009 in that financial crisis.

20:31That was back in the days. Beezer and I were talking the other day. That was back in the days when we knew every firm that was raising. We knew them personally, and they came to us. There were 10 of them that raised every year that were backable. Our jobs was a lot easier in a lot of ways because we knew, And it was kind of easy to pick the top half out of 10 rather than 1 ,000 trying to raise. But if you think about this period of these returns and all this big emerging manager formation, all these high marks we've got now at TVPI, we are so not done with this cycle. Mark Sooster's got that great quote about 60 % of the unicorns of the 1 ,200 unicorns come from four firms from 20 and 21.

21:22Well, guess what? In 22, the markets went down. They didn't have to write them down because they had just done the financings. Markets came back. So now they're marking them somewhere with good comps around what they paid for them. that means that nobody has had to recognize all those made up valuations that are still in the system it's going to take years for that to come out we're already seeing some of them come out billion two valuations selling for 200 million okay great some people still make money but it's not a billion two that's going to continue to play out over the next year two years three years and LPs move slowly and they look at track records and CIOs in particular and boards are going to get tired of seeing these headlines and get tired of these slow write downs.

22:14And they're going to say, I hate venture. I absolutely hate it. And you're going to see this place where, you know, we're already seeing this path to like brands and where people think it's good and think it's safe. I think it's going to dry up even further and cause a further consolidation. Therein lies the opportunity. But I think we've got, we're 2003, we've got a few more years to go. Yeah, I agree with that. And people sometimes do forget is the quantum of capital, these companies raised in 21, and you can kick the can down the road by doing reduction in forces, and you do bridge rounds, and everything kind of looks okay.

22:55And yes, there's some markdowns, but they don't really reveal what the true DPI or what the true exit of some of these companies are. And you mentioned that stat, my Mark, which, yeah, I think 60%, those four firms are inside SoftBank, Code2, and Tiger. And they were playing a different game, right? They were playing a very different game where it was valuation insensitivity. And it was just, let's get into the best companies and let's ride this wave. And arbitrage between the private markets, late-stage private markets and the public markets, of course, things changed. So it is going to take some time.

23:28And intuitively, you think that you should invest when others aren't. This is the whole Warren Buffett sort of view. Invest when others are fearful, but that doesn't happen in LP land. So when you think about opportunities, where are those opportunities? Because I think we as investors, like when you invest in a fund, you're saying, well, I want GPs that can find things that other people aren't excited about, get in early and be contrarian and right. What is that version of that from an LP perspective today? LPs have very few levers to pull. The one they can do is commitments. It's always amazing to me that LPs don't keep investing through the cycle at a consistent level.

24:13I get it. I understand human psychology. I understand the denominator effect. But venture is different. Fred wrote a post a long time ago, maybe 2008, 2009 timeframe. You got to have inventory on the shelves to sell when the times are good. And you got to keep investing through the cycle so that you can benefit from those up cycles. That's the kind of the lever that LPs have. And they can then do selection. So I can commit a certain amount and then I can pick which managers. We can talk about selection in a second, but like, do you go to established brands? Do you go to new managers? Think about that in the context of the cycle, cycle, the macro cycle, the market cycle, also where that manager is in their cycle.

25:01To me, LPs can't help, but slow down and chase it. And, you know, you ask like, where do I see the opportunities today? It's kind of a reflection. of that, which is endless opportunities are coming for secondaries. You don't want to catch a falling knife, but there are opportunities here to build on secondaries, especially with managers you already know. There are opportunities on the company side to provide liquidity because liquidity is a long ways off for a lot of these firms. And LPs are desperate for that liquidity, especially all the individual LPs, most of the LPs you mentioned, all those firms you mentioned, those 4 ,000 firms or whatever, most of them are individual LPs.

25:48And stuff happens in their lives. Divorces happen. They need money for this or that. And they realized that they had too much money in and they thought it'd all come back in three years when it's actually coming back average duration of eight years before you make any gains. So people just get over their skis and they just decide, you know what? I don't need the upside. I just need my money back. And taking advantage and being able to pick up all those small checks, huge opportunity. And that I think we're now, again, in this period where there's going to be a lot more Brad and Fred's that come out of these brand name firms.

26:28In fact, I'm talking to some of them that are coming out that want to start their own firm with their own thesis, with the right partnership, the right size and bandwidth. That's something nobody talks about is like, by the time you're on your third fund, everyone has a big board load and they're busy on the existing portfolio. Well, you get the same experienced investor and you set them up on fund one. And with that same set of knowledge, well, now they got all this hustle and all this bandwidth. And by the way, they're scared. They're running so hard to prove themselves. That spin-out firm or that group of experienced investors, those are coming.

27:09You can't see it yet in the markets. Some of my LP friends asked me, they said, what's the one firm we should invest in this next year? And I was like, it doesn't exist yet. And they're like, what do you mean? I was like, no, it does not exist yet. It's coming. Just be patient. There are two or three or four firms that you should invest in over the next few years that don't exist yet. And that's because they're going to look a lot like Foundry in 2007 or True in 2004 or USV in 2004 or first round in that same time frame. Experienced investors creating their own platform in a right-sized firm. That's happening.

27:48But the GPs at those name brand firms are getting greedy because they're realizing that the carry is not going to be worth as much as they hoped. then the younger partners are going, wait a minute, my golden handcuffs aren't as valuable. Huh? Wait, how should I think about that? Or they're not going to retire as soon as I thought they were going to retire, you know? And they're like, huh, maybe I should start looking. Well, then they start looking and then they decide to go, but then they got a date for a partner on the GP side and then they got to negotiate their way out. And maybe there's, that takes a while and there's a little gardening leave maybe because you know the name brand firm's about to go fundraise or something like it just takes two years for for for all that to happen but it's happening it's just slow motion in the background so interesting because i think it aligns with what we're seeing too like i i think we're going to see more spin outs than we've ever seen over the next few years because of what you just brought up and by the way many of them are very successful in raising that first fund it takes a little bit of time of course but at the same time there is this opportunity to kind of hang your own shingle, you know, do a right size fund, invest in what you're passionate about.