Special LP roundtable: What are LPs thinking about in Venture with Beezer Clarkson, Guy Perelmuter and Chris Douvos

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 this week we're thrilled to bring back our LP roundtable with Chris Duvos of Ahoy Capital, Beezer Clarkson of Sapphire Partners, and Guy Perilmuter of Grids Capital. The last time we all got together on the pod was at the very tail end of the cycle two years ago, where we all tried to make sense of the venture market. Of course, a lot has changed since then, and this time we spoke about the impact of the downturn on emerging managers, what emerging managers can do to navigate this fundraising market, and the role of secondaries.

0:36This is always a fun group to have on, given their knowledge and transparency about venture from the LP lens. We really hope you enjoy the episode, so let's get right into it. This week's Venture Unlocked episode is brought to you by Juniper Square. Managing structured and unstructured data often means struggling to centralize information, build internal cohesion, and deliver a best-in-class experience for investors. Today, more than 1 ,800 fund managers rely on Juniper Square's end-to-end solutions for fundraising, investor management, and fund administration to manage more than 34 ,000 investment entities that span over 500 ,000 LPs and$1 trillion in investor equity.

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1:58This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Beezer, Chris, and Guy, great seeing you all and thanks for joining us today on a Saturday. Happy to be here. I was looking back at our last episode, which was October 19, 2021. So the height of all the craziness. In fact, we recorded on a Friday in September. And I remember starting off that conversation by posing the question of complete the sentence. Venture is blank today. And you all had different answers. It went from fascinating, interesting, confusing. and maybe that's the same of what we see right now.

2:43But why don't we start with that thought exercise, with that sense? I'll start with you, Guy. Venture is blank today. What is it today? So I think venture is healing right now. This is, for me, the key, the defining word for what we're experiencing right now. We have been through an incredible hyped-up market. We can argue that some of that is still going on right now with specific pockets. But as a whole, I think we witnessed the boom of the VC industry, especially in 2021. And I think we're living through the healing process of things getting a little more rational, if you will. And I think this is going to continue for a little while longer.

3:26All right. So we're in healing. Chris, what do you think? You know, I think last time I said something so generic, like interesting. This time I'm going to say venture is a tempestuous child, a petulant adolescent who by turns is calm and focused and afflicted with these bouts of madness and paranoia. Yeah, that's what it feels like now. It's been really interesting to watch the portfolio over the last our own portfolio over the last year or so, because we've got a bunch of companies that are just plugging away, well financed, you know, certainly had, you know, valuations that may prove in the fullness of time to be overwrought, but just building great businesses.

4:15And then there, the people are just like crawling and struggling and stressed about bridge raises and stuff like that. And it's, it's really kind of a tale of two cities. It's very different than, yeah, just saying interesting. And I, and I, and I like that. And we're going to dig into what, what you mean by tale of two cities a little bit later in this conversation. Beezer, what is your complete the sense? I love the fact that Guy made the thought that I had, which is venture is bumping along the bottom, a healthier, optimistic view at healing. But I think I'm going to bridge off of what Chris said to keep things spicy because I think this is what I said last time that we were spicy.

4:51I think venture is an ecosystem that just loves a good hype cycle. And I'm going to leave it there. That is actually the most amazing answer because literally we're just like the biggest hype beast. Like venture is just one big virtual hype house. Yes. And we just went through one of the biggest hype cycles that we've seen in a long time during 2020 and 21. And again, we talked last time in 2021, things were at the peak peak of that hype cycle. The last 18, 19 months have obviously changed. From my standpoint, I think we're healing. We're not healed yet. I think we're reaching that point of sobriety.

5:26But there's still folks out there that I don't think have completely adjusted to what, candidly, is the new normal. You know, as we think about venture, a lot of people put venture in this one big bucket, this monolith. They don't make the distinction between someone like an insider or a tiger versus that first-time pre-seed$20 million manager. Of course, these are very different type of investment vehicles with different risk returns. Let's maybe break down what's happening right now with each one of these things. Emerging managers is an area that all of us have spent a ton of time within our careers looking at investing in supporting the train of the number of emerging managers.

6:11I mean, I lose count even at this point, but north of 2 ,500 have been formed since the GFC to now. Many of them may not now get to a fund two, fund three, fund four. Beezer, you had described something that I thought was really interesting, which is the survival rate of emerging managers going from a fund one all the way to a fund four. Maybe we can start with what did you see and then how is that affecting now your outlook on many of the emerging managers that you might have backed as a fund one or fund two? Sure. So we tried to create a pretty meaningful database of both our portfolio returns and then the industry as a whole.

6:54And so what we did is we looked at data from 1995 to 2014 of all original funds. So the core funds, right? Not your state tacked on growth funds or overage funds or whatever that is, but the main core funds that become the real heart of a firm's fundraise. It's really shockingly, I thought it was hard, but it's harder than I thought to get from a fund one to a fund four on average, your odds are 17%. And that's because there's so many initial funds that come out. and then it gets worse if you want to get through to a fund eight your odds are less than 10 and again this is because there's just so many more emerging managers and by the time you get to a fund five or a fund four even like the funnel is just winnowed down there's still break points between them but it's really really hard there's certain vintage jumps which are harder than others and fund one to fund two i mean i'm rounding but it's on average 50 breakage i don't think people realize and i don't think and again because the last couple of years may have had a different texture to it.

7:52And there are a lot more VCs investing as LPs through programs and things like that that wasn't true back in the older days. So I think the getting to fund one to fund two might look a little bit different now, but I think what it's speaking to is the jump to institutionalizing. And I just think a lot of managers, there's not a lot of places to go to get education on this, but I think they underappreciate what it takes to attract institutional capital because it's not just your top line and here's my three companies that I got 50k into. It's much more than that because an institutional LP is looking for something else.

8:24And it could be that you just want to wait to institutionalize till fund three, but you see these break points. And I think in the beginning, it speaks to the ability to attract capital. I think later it speaks to the ability to manage your firm and make good investments. But I'll stop there. I think those are the things we see in the industry. And we apply that thinking to when we're looking at funds is what is their understanding of the venture world as well as their picking ability. There's an interesting analogy here, right? So if you think about, you know, seed stage companies going to a series A, going to a series B, going to a series C, historically, that's the percentages or roughly the percentages, you know, half of the series seed companies don't necessarily make it to an A.

9:02And then you have attrition from the A to the B and B to the C. And it's usually due to traction. In funds, it's hard to show traction, particularly within a two-year timeframe, which many of these funds were raising, maybe even 18 months, how much of that attrition from fund one to fund two is really driven by the fact that retail or family office capital might have been dried up, so the non-institutional capital, versus many of these folks just realizing that venture isn't what they thought it would be, and the opportunity cost of doing other things is so high. How do you all see that? That's a surprising number, 50 % don't make it to a fund two.

9:42You know, let me take a crack at that. And by the way, you know, this, this is a really hard question to answer with my adult onset ADD, because I've got like 19 different things in my head. But a lot of it is, you know, I'm thinking back to when I started doing this stuff in 2001. And we had just seen this, like, you know, it's like the dying out of the dinosaurs, or actually, they weren't dinosaurs, they were the little emerging managers that had been raised in 99 and 00. And this feels like, you know, similar time, But a neuron that's firing, as you say this, Samir, and earlier you said, you know, getting people adjusted to the new normal, you know, the new normal is actually the old normal.

10:15This is, we really have this recency bias. The period, you know, 1990, like late 1996, early 2021 was like really, really unusual. And I think the world feels a little bit more like the normal world of like 2012 or 2006, you know, or 1995. five. It just, you know, because the reasons he buys it, it just feels different. But, but back to the topic, you know, one thing that's, I think a lot about the difference between building a company and building a venture fund, somebody, I think it was Stuart Alsop once said, the advice he gives every entrepreneur is he says, look, you have a number of shots on goal to build intergenerational wealth.

10:55Think about how old you are now. Think about when you want to retire. You know, how many years is that divide that by four, because that's a vesting period. He's like, that's how many shots you have on goal, different opportunities to build intergenerational wealth. And you start a company, the company goes on and raises an A or not, you pack it up, you go and you start the next thing. What people fail to realize, and I think a lot of the dilettantes who came in, the tourists, what have you, came into the business, don't realize is the average venture fund lasts twice as long as the average American marriage.

11:25Think about the worst relationship you had in high school, and you have to deal with that person for for the next 14 years. That's really daunting. So if you're, you're a tech bro coming out of, you know, programmer coming out of, you know, you're a PM or biz dev at, you know, hot co, and you raised a$20 million fund, that thing is, and you're 30 years old, you're saddled with that thing until you're 45. People sometimes get caught up in it and raising a fund became like the thing to do. People think you're moving up the capital sector, actually like moving down in some bizarre ways. But it became the thing to do, you know, the way like law school is the thing to do for every humanities major coming out of it.

12:04It's just like the thing to do because we don't know what else to do. And, you know, go out and build. Don't raise a fund for crying out loud. All right, off rant. One maybe counterpoint that, you know, some people say is that having more funders come in with different backgrounds was actually a net positive for the industries, particularly at the seed stage, because most of these emerging managers are not coming in raising$600 million dollars doing series a series b investing but it's a 10 20 30 million dollar fund and the capital that was brought in is actually a good thing for the environment you know just maybe going back to your your point chris of you know yeah we've seen these a lot of atrophy do you view the you know the injection of so many emerging managers as a net positive or do you feel like the environment where you start to weed you know folks out and maybe the number of funders at the early stage decreases over time is the healthier balance for the ecosystem.

13:00For me, it actually fundamentally comes down to the question is, and by the way, when you say, you know, these managers coming in, is that a good thing? My answer to that is for whom? There's all kinds of different constituencies and the three of us on the LP side, or all of us have a very particular set of interests that are governed more by the world of Warren Buffett than they are by the world of Steve Jobs. But that's a whole other story. But what I'd ask is for me, the crux of it is like, is entrepreneurship an infinitely renewable resource? Is there like infinite demand for entrepreneurship?

13:32I have this debate with people here in the Valley all the time. If there were an infinite number of dollars available, would we see meaningful differences in the profits that people could make or the good that we could do in the world, etc, etc, etc? And I actually think it's not because we live in a world where there's a rate limiting step, which is like what happens to these companies? They have to go somewhere. They have to be acquired. They have to go public. Like something has to happen to these companies for them to like survive long term. I do believe that entrepreneurship generally is an infinitely renewable resource, but not venture backed entrepreneurship, which has a very different set of hurdles and expectations.

14:13All right. I'm going to take the side of, yes, we believe there's always room for new innovation and thought, which is a bit of a threading the needle in between. And I would say in part of the research we were doing, because one of the questions I wanted to answer, because everyone's like, oh, downturns are the best time to raise a fund. turns out legendary funds and we define legendary as the ones out of any vintage that have survived the longest to raise the most number of funds and are still a going concern because sometimes you can raise the most number of funds but there's not they're not going forward which is a different conversation this will not really surprise you three folks because you're well in tune to the industry but no no amazing funds have come out of good times and bad times again not a surprise but we we sort of accept that as reality and say great which means you should always be in the market and you should always have room for emerging managers in your portfolio.

14:59So we do a combo and to the Samir, thank you for offering to let me just say this. So that's why we've taken over the emerging manager program for CalSTRS. And we're really excited about that, but we really, we've long believed in the importance of having it as part of a portfolio. So now we get to do it on behalf of the teachers, pensions, and other educators of California. Go team. That's fantastic. By the way, as a resident of California and my daughter is actually, Lee, she just started her first year teaching in inner city San Jose. Well, I feel the responsibility of managing her pension.

15:32So keep me informed and in line. I think it's such an exciting development. It's certainly one that bodes well for the emerging manager mandate. You said something that LPs should have emerging managers as part of their investing profile. And I want to dig into that. all of us, while we agree with it, it probably poses the question of why. If you look at some of the more established firms, you can get often two to three X. You don't take the same risk. Why is it important? Maybe Guy, you can maybe mention because you invest in funds of all sizes and stages. Why do you have emerging managers as part of your investing thesis?

16:16The crux of the matter when it comes to emerging managers has to do with supply and demand, like so many other aspects of our business. And what we have seen over the past 24, maybe 36 months, is that the environment was ripe for people claiming any sort of special talent and trying to raise money and actually being able to do that, which for me was mind-blowing because the actual process of becoming a portfolio manager, being able to steward capital for other people, choose companies, allocate accordingly, schedule your follow-ons, make sure that you have the mindset as this is, as Chris said, this is like a decade-long process at least.

17:03It blows my mind that it became so easy for so many people with very little to show for to convince their potential LPs, this is why I am a good bet. But the fact of the matter is that at any given point in time, regardless of the point in the cycle where you're at, and I think we're definitely going to be talking cycles here at some point, there is talent, true talent, real talent, that is going to take their first stab at their first fund, right? And for us, I think it's incredibly important that we are always of an open mind and able to detect, okay, who within this group of people has a shot at becoming a great talent, a great new dynasty, if you will.

17:49And when it comes to the way we approach this is we are very much into first-time funds because we feel that this is the best opportunity for you to build a relationship with the GP and with the franchise because you are there to support them from day one, but we're not that excited about first-time portfolio managers because I think the jump from being an analyst or being an associate or a principal or a junior partner or a full-fledged PM is not a process that happens overnight, right? I mean, I tease some of my LPs is that if you drive by Meta's door or Microsoft door, that doesn't automatically make you a potential portfolio manager just because you drove by their door, right?

18:44And I feel that over the last couple of years, that's what happened, right? Well, I drove by University Avenue a couple of times, so I probably can run a portfolio. So what we try to do is when we look at those emerging managers or those new kids on the block, if you will, we're going to take a double click and see, okay, what does this person bring to the table? Did they work at a Sand Hill Road icon before? Did they do any sort of company building before? Have they had any experience with running people's money before? And this is for us a big, big part of our thought process. And this is what makes us really proud that every single fund one that we started backing in our first fund, we were able to kind of re-up in the following vintages because these were the right calls.

19:34These were the right bets. And what I'm seeing now is that the threshold for LPs to now be even bothered about a first-time fund has really, really exploded, which had to be the usual way for us to do things before the boom cycle began. Hopefully now this is as Chris said, this is becoming, this is getting back to the normal way of dealing with venture. So now we see emerging managers, but they know that they have to come in with more than just a couple of great or cool ideas they have or views they have on the industry. It has to come with, you know, the proper backing, the proper credentials, the proper experience.

20:19And I think that for us to stick to our principles on what we consider, you know, the bare minimum prerequisites for a manager to come into our portfolio has served us really well over this interesting period of time. Let's just define emerging managers for a second for a lot of the folks, because I think it's still a little bit ambiguous. But, you know, typically the way we've looked at it, and maybe a lot of other folks is, you know, fund one, two, three, typically are viewed that. And the difference between a first-time fund and a first-time manager. A first-time manager is somebody that's never run somebody's money, where a first-time fund could be somebody spinning out of a large shop.

20:59Given the fact that all of you run fund-to-fund vehicles, you have limited shots at goal. You're not going to do 1 ,000 different managers. You're doing, in a portfolio, 10, 15, maybe 20 at the extent. Maybe there's a few more strategies that you run. But ultimately, if you're backing a fund one to decrease and mitigate the risk of not getting to fund two. You don't want to spend a lot of time investing in a fund one if you don't feel like it's going to be a fund two, fund three, fund four type of long-term franchise. It speaks to being institutional. So is it saying that the most important criteria is having some level of track record, at least showing that you have been a fiduciary?

21:39Or are there other things that fundamentally you look at for somebody to be deemed institutional from the beginning? For me, the bare minimum requirement for me to start looking at them is that they have had some level of fiduciary experience that they have touched other people's money before. They know the responsibility to understand how serious this is, that this is not monopoly money, right? This is not make-believe money. This is a serious commitment that you have to have with your LPs and with the companies you're supposed to back. So this is like the first, the very first thing we'll look at.

22:16And then everything else in our diligence process stems from that. But if there is not a previous experience at some level, even as a very junior person at some other shop, and it's a no-go, we're not going to start a conversation. Chris, maybe you can speak to this. I know you've done a lot of first-time funds, and some of them have been started by people that didn't have this long apprenticeship investing other people's money. What's your view? And do you have a counter to what Keith said? It's funny because as an aside, I'm probably going to regret saying this because my inbox is going to fill up, but I was really excited about Fund 1s in the kind of really going back to 2006, 2005, but really kind of especially through like 2016, 2017.

23:06And then in 2018, in our portfolios, we took like a very conscious decision to pivot towards quote unquote, grownups. I've never said this out loud. And I say this with all the love, like, I literally just like pilfered Beezer's playbook. Beezer, I think does a lot of great investing in grownups. And I was like, how can I be more like Beezer? And so did a bunch of that. And I actually feel like that phase is coming to an end. We've got this great portfolio. I love our grownups. But as I look ahead to 2024 and beyond, I actually am thinking about jettisoning. I'm basically going to like burn the house down and start new.

23:38In fact, you know, just, just only investing in funds three or younger. Basically what we're looking for is, is repeatability, right? Like actually if I have to boil it down, I want people to have experience building something and maybe we index a little bit less than Ghi on. And I think this is what you're getting at index a little bit less on actually prior investing experience, but I need to have investing role models. I spent a lot of it, you know, and maybe this is like arrogant of me, but I've taken on some projects where we've taken people who have maybe a little bit less investing experience.

24:10And I've actually tried to mentor them really hard. So like, what is their unfair advantage they have that's going to like, lead to like repeatable outcomes? And to you know, to what extent can I be like a little bit helpful? In some cases, these guys weren't really raw investors per se, but like, Beezer and I like spent half of 2012 and 2013, aggressively mentoring in air quotes, one particular set of GPs. And I think that helped a little bit. And sometimes it works, but sometimes it doesn't. But for me, ultimately, I believe that there are lots of different sources of unfair advantage. For me, leveraging ecosystems is my watchword.

24:50So we've invested in a handful of groups that are tied to research institutions that have a first look at things that are coming out, different inventions and innovations. And I'm more than happy to take on the load of like, okay, the next three months, I'm going to talk to these folks on the phone every day, or every other day about like portfolio construction, why you shouldn't use safes, why you should try to try to price rounds. And it's actually like exhausting, but we run a really concentrated portfolio, we do maybe two or three managers a year, actually two to four, let's call it. For for us, that's what makes that all work.

25:23Can I ask the follow up question? How do you mentor or guide when your point of your perspective is different from the other LPs around the table? because I find that I'll roll up and I'll have an opinion on fun size or something. And there's always some other LP who has the other 180 degrees. And it's not that they're just choosing to be different, like for their system that works for them. And then the GP is in the middle of it. And no one knows who's right until a decade from now when a million different things could have occurred. So on that input side, because we were having this experience right now with somebody and I was like, Oh, we're going to have a really different response than the other LPs and everyone's, everyone's authentically giving their best advice, but it's different.

26:04That by the way is the most savage subtweet that I've ever heard. Cause I know you may be talking about somebody completely different, but I'm, I'm thinking back to, back to 2012, 2013. That happened to me yesterday. So, so no, but, but same thing, but Samir, this is what happens on the Saturday morning podcast recording. Apparently we get unconscious savage subtweets. Yeah. Yeah, I will tell you, though, that I remember something that like really, you know, one of my formative experiences is there's a brand name Sand Hill Road Fund that's still around and really quite successful. And back in 2002, they're trying to push an amendment.

26:38And I was at, you know, at Princeton's endowment. They called me up. They said, well, look, everybody signed the everybody at advisory board has signed this amendment. And I think LPs, GPs don't understand how much LPs talk. So the first thing I do is I call up Peter Dolan and go, hey, Duvos, what's going on? And then I call up Tim Sullivan. He's like, hey, Duvos, how's it going? And literally by the time I was done with all my calls, I found out that the GP was completely full of shit. So I think, by the way, Beezer, your interpretation that the poor GP is in the middle, surrounded by all this conflicting information.