E109: Top Tier Capital Partners ($7.9B AUM) - Lessons Learned from Investing in 450 Funds

Summary

Podcast Summary: "Top Tier Capital Partners ($7.9B AUM) - Lessons Learned from Investing in 450 Funds" (E109)

The David Weisburd Podcast Episode E109 features an in-depth conversation between host David Sachs and Ben, a representative from Top Tier Capital Partners, a prominent venture capital fund managing approximately $8 billion in assets under management (AUM). Released on November 5, 2024, this episode delves into the nuances of managing a vast portfolio of 450 funds, investment strategies, relationships with limited partners (LPs), and insights into emerging trends within the venture capital landscape.

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1. Introduction to Top Tier Capital Partners

Top Tier Capital Partners is established with offices in San Francisco, Boston, New York, and London, reflecting its global footprint. Ben introduces the firm as specialized in venture capital, exclusively managing venture investments within their $1.5 billion latest investment cycle. The firm operates primarily through three channels: primary investments in new venture funds, secondary investments in LP and GP stakes, and direct co-investments in series B and C tech companies.

Notable Quote:
David Sachs welcomes Ben warmly, saying, “It's the top 5% of society.” [00:32]

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2. Investment Strategies: Primaries, Secondaries, and Directs

Ben elaborates on the firm’s investment strategies, highlighting that two-thirds of their capital goes into primary investments, targeting $5 to $10 million checks for emerging managers and larger sums for established partners. The remaining third is allocated to secondary investments, encompassing various forms of secondaries, including LP stakes and direct company secondaries.

Notable Quote:
Ben emphasizes the importance of local presence, stating, “It's a relationship thing... we have a firm-wide belief that it's important to be local in the markets that matter.” [00:55]

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3. Managing Secondary Opportunities

The discussion shifts to the dynamics of the secondary market. Ben notes that despite expectations of high-volume secondary sales, the actual trading volume remains modest, with most discounts ranging between 25-35%. He contrasts this with the buyout sector, where discounts are much narrower, around 5-15%, highlighting the inherent risks in venture investments.

Notable Quote:
Ben explains the current state of secondary discounts: “For ventures, it's still like 25ish discount. I mean, you still see the occasional 50% where somebody just doesn't want to be in a manager anymore...” [02:47]

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4. Manager Selection and Portfolio Diversification

Top Tier Capital Partners maintains a selective approach, adding only two to three new managers every two to three years to ensure quality and fit within their existing portfolio. Ben underscores the importance of differentiating new managers from their current lineup to maintain a diversified and high-performing portfolio.

Notable Quote:
Ben discusses the selective addition of managers: “We only add two to three new managers in our probably core portfolio every two to three years.” [05:57]

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5. Relationships with LPs and Fund Managers

The firm primarily serves large pension and retirement systems globally, with significant allocations from regions like Germany, South Korea, and Japan. Ben highlights the firm’s role as venture experts, aiding LPs in managing their venture allocations effectively. Additionally, Top Tier facilitates introductions to top-tier managers, fostering strong relationships built on trust and performance.

Notable Quote:
Ben speaks on maintaining trusted partnerships: “We're on LPACs for like two thirds of our managers... we're just going to tell you the truth.” [22:01]

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6. Approach to Emerging Managers and Fund One Investments

Top Tier rarely backs fund one managers unless they have exceptional track records or are spin-outs from renowned firms. This cautious approach ensures that only seasoned and proven managers are included in their portfolio, thereby maintaining high performance standards.

Notable Quote:
Ben explains the criteria for backing fund one managers: “It's someone like a David Sachs who has an amazing track record... or it's someone who has left one of the big brand firms...” [08:32]

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7. Future Trends and Strategies in Fund of Funds

Looking ahead, Ben discusses the firm’s strategic expansion into Europe, aiming to invest at the seed and Series A stages where local managers lead robust tech ecosystems. This move is part of a broader strategy to capture early-stage opportunities and maintain a competitive edge in the global venture capital landscape.

Notable Quote:
Ben outlines their European strategy: “If you're thinking of just like dollar cost averaging into a strong tech ecosystem, like that's where you want to be.” [26:24]

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8. AI Ecosystem Insights

When addressing the AI ecosystem, Ben expresses cautious optimism. While recognizing significant revenue potential, he notes the uncertainty in identifying category winners among numerous emerging AI companies. This reflects the broader venture capital challenge of discerning sustainable opportunities in rapidly evolving sectors.

Notable Quote:
Ben comments on AI investments: “It's totally unclear who's going to be category winners. It's obvious that there's an enterprise budget for these corporate tools solving real pain points...” [20:01]

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9. Challenges and the Importance of Local Presence

Ben emphasizes the critical role of local presence in venture capital success. Building relationships and gaining firsthand market insights in key regions like Silicon Valley remain indispensable, despite the increasing feasibility of remote operations. The firm maintains that in-person interactions are vital for trust-building and strategic decision-making.

Notable Quote:
Ben asserts the importance of being local: “We're just not adding a new relationship. And so in our junior people can kind of talk the talk... until you're in 450 funds.” [16:17]

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10. Conclusion and Final Thoughts

In wrapping up, Ben reiterates Top Tier Capital Partners' commitment to honesty, data-driven decision-making, and strategic portfolio construction. The firm’s disciplined approach to manager selection, coupled with a deep understanding of venture market dynamics, positions it as a trusted partner for large institutional investors seeking robust venture capital exposure.

Notable Quote:
Ben concludes with an invitation: “If any local managers are around that want to meet, happy to get to know you over the coming months and all that.” [30:09]

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Key Takeaways

• Selective Manager Addition: Top Tier Capital Partners adds only a handful of new managers every few years to maintain portfolio quality.
• Balanced Investment Strategy: The firm allocates resources across primary, secondary, and direct investments, focusing heavily on venture opportunities.
• Global Presence: Maintaining local offices in key regions ensures deep market insights and strong relationships.
• Transparency and Trust: Honest communication with LPs and managers fosters long-term partnerships and performance trust.
• Strategic Expansion: Moving into European seed and Series A investments reflects proactive adaptation to global venture trends.
• Cautious Optimism in AI: While recognizing potential, the firm remains selective in AI investments due to market uncertainties.

This episode offers valuable insights into the intricacies of managing a large-scale venture fund of funds, emphasizing the importance of strategic diversification, relationship management, and adaptive investment strategies in navigating the ever-evolving venture capital landscape.

Transcript

[Ben]

We're venture capital funds. We manage about $8 billion. Firm's been around for years.

[David Sachs]

How much risk is it that couple.

[Ben]

Of your funds don't perform ventures more risky inherently?

[David Sachs]

450 funds, 100 managers. When you're looking at a new manager, are you just looking for pure alpha who can make the best decisions?

[Ben]

The dirty little secret of venture capital is that you want all the best talent to stay and help grow a growth stage company. But those make some of the best founders. So people aggressively target that talent. Every venture pitch you get is pretty exciting and interesting. No one boring really. Start a venture fund.

[David Sachs]

It's the top 5% of society. Ben, welcome to the 10X Capital podcast.

[Ben]

Thanks for having me.

[David Sachs]

Thanks for coming on. So what is top tier capital?

[Ben]

We're venture capital funds. We manage about $8 billion. Firm's been around for years. Offices, San Francisco, Boston. I just moved down outside of New York and then we have an office in London as well.

[David Sachs]

How critical are you guys to be on the ground next to your managers?

[Ben]

It's a relationship thing. So I mean back in when the firm started, everybody wanted access to Silicon Valley tech. And for us to have local presence, feed on the street and be seen in the market was super important to our global LP base. Just to get the real truth of what's going on, I think we have a firm wide belief that it's important to be local in the markets that matter.

[David Sachs]

And what's your products look like? I know you have the primary fund of funds, but what other products do you have?

[Ben]

The last investment cycle is about a billion five. So two thirds of that is primary capital. So investments into venture funds. We only do venture across all of that. So five to $10 million checks into kind of new relationships, new managers, emerging managers, whatever you want to call them, up to kind of 20 to 40 and more brand name stuff. And then the other third of our billion five this last cycle was set or is secondaries, indirect investments. And so we'll do all different sorts of secondaries, whether that be LP stakes, GP stakes, direct company secondaries, all over the map. And then for the equity checks and co investments, what we call it, that's predominantly series B, C ish tech companies, a lot of enterprise tech, some consumer. Over the years biotech's been tough for us to kind of wrap our heads around and leave that to the experts most days. So the team is split really. So you either predominantly focus on primaries or predominantly focused on secondaries and directs. And so I spend my time on the primary side of the business. But the reality is we're co investors and we only invest in things from our hiring book on the secondary and direct side. And so when things come in through somebody's relationship on the primary side, it gets packed over the secondary side for underwriting. But you're still on the kind of deal team for relationship management, let's say SQ3, 2024.

[David Sachs]

What kind of secondary opportunities are in the market?

[Ben]

I mean I think there's a lot of people trying to figure out what value is and what, what people are willing to part with. I think everyone last year thought there was going to be a huge rush to sell secondaries and oh, what a time to be buying and you can get things for 50. Like reality is not that much volume traded in the venture market. And it's because I mean 2022, the venture market was down like 35% from highs. And so if I'm a CIO sitting there looking at cleaning up my book like I'm going to be down 35% and then take another 50% haircut and sell it for some cash, like I think we'll just wait. And I think they're probably right to do that. And so today, I mean when you see portfolios being traded, they're kind of in the 25ish discount. I mean you still see the occasional 50% where somebody just doesn't want to be in a manager anymore or maybe a CIO regime change and they just don't buy venture, they don't care, they want to rotate whatever cash they can. You see a bit of that. But for the most part the venture market on the secondary side, and Now I'm talking LP stakes, you know, all these discounts, the LP stakes, I mean really? Yeah, call it 2025 up to 35.

[David Sachs]

40, 2025 up to 35 of the last valuation. Last.

[Ben]

Yeah, yeah. So everything prices off a quarter end nav basically. So we get our capital account balance for you know, Q2 here in a couple weeks and so then I could take that pricing and say like it's 35% discount off of that. Some people, you'll hear people say like, oh, it traded at 85 cents on the dollar or something. Well that's a 15% discount like the lingo.

[David Sachs]

Curious. Why are discounts so high given that there are quite a few secondary buyers.

[Ben]

Coming down for sure. But a lot of the AUM for people who buy secondaries has gone into strategies focused on buyout and growth stage companies. I mean these profitable businesses, it is not uncommon to see those things trade at 5% discounts. So 95 cents on the dollar. I remember I was just talking to a broker Tuesday. The competition you see in the big broker trades for the buyout stuff is 5 to 15% discount where ventures still 25 to 35 and they're still, I mean ventures more risky inherently. And.

[David Sachs]

And the marks might not be as accurate.

[Ben]

Correct. So we're a fund of funds. We're invested in a hundred managers. We have 450 active underlying funds on our platform. So we actually track this stat and it's one of the most asked for things from our managers of like, hey, like can you blind my book? And just say relative to all the other managers who have an investment in our underlying company is like where do I sit? And there's a couple outliers for sure every time you look at those. And like, you know, one manager maybe has more confidence in the company than another, et cetera. But for the most part, people are pretty close these days. Or we know that some firms just inherently don't care and they won't mark their book up no matter what the operating metrics are from last round price. And they just leave it there until, I mean company goes public.

[David Sachs]

You're in 450 funds, a hundred managers. When you're looking at a new manager, are you thinking about how this has a diverse set of assets or are you just looking for pure alpha who could make the best decisions?

[Ben]

We only add two to three new managers in our probably core portfolio every two to three years. So there's not a lot of rotation in our book. And a lot of it's because people perform well and they stay. And so like when I'm adding a new manager, I mean I have to think about how is that different from what I already have? Cause I'm kind of assuming, luckily, fortunately for a young guy to join a funds platform, that we have access to some of the best venture capitalists in the world already today. And so what's gonna be different and new and how's that fit into my book?

[David Sachs]

Are you somehow looking at their assets versus other assets, like whether they're doing SaaS and consumer and you have too much exposure to SaaS or consumer.

[Ben]

How do you say we missed like a big winner in our portfolio? Like say we weren't in Uber indirectly and we had some. But like say we weren't and there are a bunch of spin outs coming from those companies and some other VCs are just capitalize on that talent because let's face it, the dirty little secret of venture capital is that yeah, you want all the best talent to stay and help grow a growth stage company, but those make some of the best founders. And so like people aggressively target that talent. We look periodically of like, hey, which companies are we missing in recent kind of vintages is and who are the VCs that are capitalizing on that? And then we'll go try to get in front of them. Sometimes it's you know, a early product person who got into venture and is on their Fund 2 or Fund 3 and has examples of this sort of thing or it is the VC who did that deal. Doubling down on the winners.

[David Sachs]

Intuitively it would appear you would think that serial entrepreneurs have a leg up to these kind of former, you know, employee number five at Uber to an AI. But to your point, a lot of the big winners end up being from these ecosystems. Why do you think that is?

[Ben]

Some of it is just building an early team. Like if you can go start a company with three of your buddies who you know are excellent operators and are in the trenches and frankly hungry like they're not already wealthy but they want to go change the world and be a part of the next big thing. Like that makes that initial five person team all the more dangerous in our eyes.

[David Sachs]

It de risks it and also sets the culture. Yeah, there's a corollary where David Sachs, his first like 30 angel investments were just friends. He knew that people completely de risked it. He has one of the best kind of angel track records because he has.

[Ben]

One of the angels recorders in the world. Yeah, you sound like you know more about. Well we did, we did craft fun one. So him and Bill coming together and launching that like I hope David and Bill are fine.

[David Sachs]

That's good. My sword, my source is amazing.

[Ben]

Yeah, and a lot of fun to be a part of.

[David Sachs]

You do invest in fund ones. So tell me about when would you back a fund one?

[Ben]

So emerging manager, I kind of like said and almost like air quotes earlier. So we don't internally think of us backing emerging managers. Like it's just too hard for our platform to really get excited about folks who don't really have a track record. I mean you're being compared against Index and Excel and it's like, well why do you deserve to win and what's your spot in the market? And so when we talk about backing a fund one, it's usually someone like a David Sachs who has an amazing track record, wants to institutionalize either as family office, private activity and like hey, he's all in on being a venture capitalist now. Or it's someone who has left one of the big brand firms who is going to, you know, generally they talk about just not wanting to deal with like the scope of a platform and want to really focus on either one sector or you know, one stage and not worry about the like later stage, follow on activity, et cetera. Like we see that a lot and we'll back those sorts of managers. So for example, we backed Tomas at Erie, we were in fund one there, we did West Chan at fpv. Folks like that when they spin out and they're just fantastic investors that we know we want to be a part.

[David Sachs]

Of, just play devil's advocate. There's certainly persistence in venture capital returns and you're in a lot of great funds, but can you really just go to these funds and continuously upside, aren't you basically capped in your top name?

[Ben]

So our fund of funds like 70% of our underlying dollars, if you look at it on a strategy basis, go into seed or in series a focused strategies. And so as platforms have raised AUM and most of that AUM growth has been on later stage and follow on activity like if we scaled with a bunch of those groups like our product mix would effectively change for our clients, our LPs. And so we worry about that a lot. You know, at a certain point our clients can go and buy those platforms directly and we're happy to make those introductions and maybe they should, but then maybe it's just not a fit for us anymore. And so our, you know, our kind of core fund of funds has actually stayed pretty consistent in size for the last 10 years sort of thing. And so you, you'd see 20 to 30 million commitments in there across the platform. And then excess capacity goes to one of our separately managed accounts that sits as an overflow vehicle on top of our stuff. Who would like more of that type of investment?

[David Sachs]

You mentioned your clients who are clients that invest into venture fund of funds. What are some of those categories?

[Ben]

Couple categories for us. I mean we are almost exclusively large pension retirement systems globally. I mean half our money comes from us and then the other half internationally. So Germany, South Korea, Japan. So folks like that who thinks think of us as venture experts who will help them manage their venture allocation. And so those are the large checks. And so then they're just like, hey, here's our venture allocation. We might hire two venture fund to funds and you guys go figure it out and get me into the best managers. And then There's a cohort of LP that wants us to help with access. And since our founding of our firm, we always have inherent churn in our LP base because this is part of our business model. So they'll give us a primary commitment and we'll help that for maybe like two funds in a row. And then we'll help them with introductions to managers. And it's always up to the manager to let them in certainly, but. And we don't make a lot of promises there because it just, it is what it is. But you know, the reality is it's worked and people take their money and it's a way to get smart on the space and then eventually build out their program directly. And we're totally happy to do that. Those family offices, endowments, smaller endowments, or maybe, you know, some international funds that know they don't have access in the US and they want it or happy to help them get up to speed, maybe come to the, the way we started up the feet on the street and know the market like they're, they're willing to pay someone to help them figure it out.

[David Sachs]

You mentioned when we last chat you that you don't chase sector funds for us.

[Ben]

And this is a house view. It's that we kind of view venture and innovation as people finding opportunities at the fringes. Maybe it's where two sectors collide and then bam, you have a new business model or a new method of distribution, et cetera. And like those are the big wins. And so as we think about like sectors, like it's really hard for us to not imagine that the general svcs wouldn't, wouldn't end up in some of like the most interesting collisions of sectors and finding the coolest opportunities because they're just good fec and they know a lot of people have been successful. I will caveat that with saying we, we do have really two sectors on our platform that we will invest in or are investing in today. One is biotech and that's like 10, 15% of our book. And then the other is cybersecurity. The way we've kind of gotten there is that we think you kind of need some of the gray hair in the room when you're talking to the customers of those two businesses. Like Big Pharma is not going to just like pick up the phone to any VC who invests in biotech companies. Like, you need to have some gravitas to get in front of the decision makers there. It's just the truth in cybersecurity. We knew for us that it's a sector biotech goes back to like 99 being, you know, about 15% of the book. But, but recently we kind of came to the conclusion that cybersecurity, you need that same. I'm using the term gravitas to get in front of CISOs and the importance of decision makers who can really move the needle for early stage company.

[David]

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[David Sachs]

So we chatted last time about the pros and cons. When you're in a situation where you have one more vintage where you think that the fund could really deliver very well, would you invest knowing that it's a one and done and we're already existing LPs? You're not existing.

[Ben]

They're probably unlikely. Reality is we have to monitor these funds for 15, 18 years anyways. And I mean if I can't hand over my heart, say that, I think I can get two to three commitment cycles with a manager. Like we're just not adding a new relationship.

[David Sachs]

So how often do you not commit to the second or third vintage?

[Ben]

I could count on one hand and like the 8 and a half ish years that I've been here, how many.

[David Sachs]

Times it's happened and that's been due to something that specifically happened or what are those cases?

[Ben]

Yeah, I mean a lot of it is just changing strategy to somebody. If you started a seed fund and you raised 150 and then like you come back and had great success and you're raising like 450 and you want to go be multistage, like we might have a pause at that one. I would say the number two reason would be team. I mean certainly if there's a bunch of team turnover and it's just not the same story and pitch like that's hard to get behind because it's such a personal business.

[David Sachs]

What are some other reasons that venture franchises decline over time.

[Ben]

I mean just senior partners who have made a lot of money and are really doing the deals. And it's just a bunch of junior folks who don't know how to make money in the business of venture capital that get the keys to the car.

[David Sachs]

Do you believe venture could function out of office or do you think that you have to be in office to be a good venture firm today?

[Ben]

Now I do think fundraising would be really tough and just there's a trust element to it. I mean, so like, yeah, I do pitch your strategy. Totally great. I understand it, it's in the meeting note, I get it. But there's just something about breaking bread with somebody and sitting down and having an in person conversation that I just don't think changes that quickly in this business because there's such a opportunity cost for making the wrong decision here. Like if you are one of the big platforms and you invest in what you invest in the number five winner versus the number one or two winner in the category and then you can't invest in the number one or two because you're conflicted, whatever. I just don't think people are going to be so willing to take it only on zoom.

[David Sachs]

Just to play devil's advocate, I do think in person as well. I think venture more than anything and like many asset management fields is an apprenticeship model.

[Ben]

Sure.

[David Sachs]

And you just imagine you have a carpenter and they're doing it virtually.

[Ben]

It's very difficult.

[David Sachs]

Obviously that's a very physical thing. But I think some of the greatest venture managers the next generation tend to be from in office cultures.

[Ben]

There's a lot of truth to what you're saying. I mean top tier, as I'm saying, you can do it remote. Like we still were two days in the office and we actually, we hire kids out of college every couple years. That's how I lucked into it. And for the first year, like you don't get to go to a lot of conferences. Like you don't like. Your job is to learn the book, which I mean we have a lot of active portfolio companies and a lot of active managers. So that's it's all task. I'd love to see if any of our analysts right now could talk to our entire book. But until you're shooting an LP and like till you know enough to be dangerous and probably this is true for a lot of VCs, like, like you probably really shouldn't be representing your firm. Like you manage people's retirement money and like that reputation has built over years. And so until like our junior people can kind of talk the talk and we know we're going to have a good answer for like, hey, what's an LP look for? Like what are the things with my venture fund I should be thinking about? Like until you can prove that like you know, we're not sure you're in 450 funds.

[David Sachs]

I'm assuming you don't know all 10,000. I know you're very smart, but probably there's limitations.

[Ben]

Oh totally.

[David Sachs]

So how do you talk about your book and how do you talk about top tier when you, when you talk to LPs or at conferences?

[Ben]

Like we have a standing thing that we get together as an investment team and we review quarterly new deal activity. And so it'd be like how many companies at what stages? What was the average check size? Like the managers who do provide ownership percents, like how does that tick up and down. And this is kind of a scoreboard.

[David Sachs]

What are some of the things you're tracking there?

[Ben]

Yeah, average entry price, ownership percent, size of rounds. Maybe people be curious, Q1 23 versus Q1 24 is actually about the same invested capital on like a look through basis of our managers. But if you look this year there was more of a shift to seed in series A stage. So the number of investments was higher, which like for us is a good early indicator that the venture industry is like really kind of like at least with like you know, premier venture managers, which maybe I'm saying arrogantly, but those folks here, those are the top tier, whatever you want to call it, those managers are back to work writing early stage checks versus trying to follow on into some of their winners or you know, huge, huge sums of capital into like a couple big ideals last year. Whereas this year we saw a lot more kind of back to basics. And I think it bodes well for, for the industry here over the next 18 months that, that there's such a, there was such an increase mentioned.

[David Sachs]

AI, do you have any early views on the ecosystem, on what you see, you know, through your manager?

[Ben]

Well, real revenue pulling through these businesses, but it's still tbd. If that's just fickle revenue of people just trying to figure out which tools they want. It's totally unclear who's going to be category winners. It's obvious that there's an enterprise budget for these corporate tools solving real pain points. The problem is when you see three companies show up that are solving the same thing in our fund of funds book and we're just like all Right. Who's going to win? All three are going to be winners. It's just reality business.

[David Sachs]

You said last time we chatted, our clients hire us because we have people that will tell us the truth.

[Ben]

Maybe feet on the street, we'll go back to that. But it's references are such an important. If you listen to any LP talk about investing in venture, I mean, they talk about how important references are. Well, like if I was starting a fund of funds today and was just like, cold start, like, I'm going to go get into the best venture managers. Like, every venture pitch you get is pretty exciting and like, interesting. Like, no. No one boring really starts a venture fund.

[David Sachs]

It's the top 5% of society. The worst manager is the top five.

[Ben]

They're just really smart, interesting people. And I think you could get caught up and just like, man, this, this is obvious. This is going to be a winner. And we talk to all our junior people about this. Like, it totally. And I have the same experience. Like the funds that I thought day one were like super interesting, obviously great. We're like, yeah, that's cool. But like, wait until you meet all of our managers who come through our office and I think you'll understand why our book looks the way it does. And like that then is the bar that you have to compare new relationships to. And then those are the people that I get to call to tell me the truth about the other managers and their ecosystem. And like, hey, is that seed manager really getting into all these deals?

[David Sachs]

They getting into your shittiest 20% of deals? Yeah, they're just scraping the bottom of your phone.

[Ben]

Those people tell us the truth. And I mean, they're friends of the firm over time. Absolutely. And we look to them to help us continue to make money.

[David Sachs]

In terms of your relationship with these top funds, outside of being an lp, what care do you have to give them to kind of maintain and strengthen their relationship?

[Ben]

I hope people view us as knowing what we're talking about. When you sit down with somebody at top tier, like with the access to the data that we have, like what I hope and what the firm spends a lot of time thinking about is like being a trusted partner for them and you know the money's next. Right. Like, Everybody's nice to LPs. Totally. Yeah. I mean, the ability to. We're on LPACs for like two thirds of our managers and stuff like that. Like, we just can sit down and be like, hey, that's market. Or like, yeah, you guys actually are doing a great job or you're light on dpi. I'm like, we're just going to tell you the truth. And I think people respect that. I hope people respect that.

[David Sachs]

Do you find out that people are most open to feedback your top managers somewhere in the middle or talk to me about the correlation between VC is super curious.

[Ben]

People like as soon as they know we have some benchmark thing that like will come up in a meeting. They always want, they always want to figure out where they stack.

[David Sachs]

So you lead with data, not with ego.

[Ben]

Essentially most of the firms we invest in are not like, you know, again, first time managers, whatever. Like we're happy to help on operational stuff, all that but like we've kind of got that figured out at this point. It's like how do you tweak things at the fringes to win? And so like the scout programs, I don't know what, eight years ago when everybody was doing that it was like okay, like what's best in class? Like how do I go keep up with.

[David Sachs]

Was that a failed experiment?

[Ben]

Honestly, some of those like buckets have performed well. But I don't know and I'd love to see the data on this. We should probably, I should talk to some other fun of funds and like we should figure it out. But like I would love to see the success rate of the VCs doubling down on the winners from their scout portfolio because they, because there's, I mean many portfolios of hundreds of companies sometimes and really hard to figure out which ones are working so early on. And then how do you go from your 150k check that your operator that you gave money to to invest, this company is really the one that I should go and back up the truck and put $4 million like supersede in or whatever we want to call it.

[David Sachs]

Are you not concerned that you guys are a market beta given you're in 10,000 companies and how do you suss that out?

[Ben]

Yeah, I mean I was worried. Sure. With the fund of funds. I mean we try to benchmark ourselves against the Cambridge USBC benchmark fund of funds and secondary benchmarks are a little wacky because it's together. So. Yeah. But most funded funds actually, I mean I've seen some of the numbers and a lot of them are public. Like they've, they've done pretty well relative to the market.

[David Sachs]

Why do you think that is?

[Ben]

I mean access to the best name. Persistence is certainly, I mean statistically like does exist in our industry. Sure. Willingness to probably take a little more risk than other folks in the asset class as well. I mean, it's, you know, I have a $50 million minimum check size. Like I'm limited on than who I can go for. And that's probably maybe a platform where I'm a little more later stage focused. And it's like kind of an obvious buy that, that certainly I'm saying all this about platforms. Some of the platforms are our best performers. So like, I don't want to get that loss in the conversation.

[David Sachs]

Yeah, David Clark said the same thing. He said that David Clark from Venkap said that his highest performing fund ever was a growth fund.

[Ben]

Yeah, why not?

[David Sachs]

What do you look at the future, a fund of funds in your industry? Any new products, any new approaches?

[Ben]

For us, we went to Europe, which was new. We spun our European allocation out in 2019, 2020. Historically, like, we've been investing there since 2004, I think, and we just saw what was going on in Asia, probably China specifically. We just saw the quality of company and even, I mean, our USBC is being like, yeah, we love investing in European companies where you can get it for a bit of a discount and then they immediately come move to New York or Silicon Valley. Like, yeah, why would we not? They're just really good technical teams. And then if you look at the underlying data on the European continent, I mean, the seed and Series A round, I think it's something I'll probably misquote. Our European team will correct me after this, but it's like 85% of the dollars done is from a regional local manager at that, at that round. And so if you're thinking of just like dollar cost averaging into a strong tech ecosystem, like that's where you want to be. And the local guys are just commanding the market. And the US folks are coming in at the Series B, so you don't.

[David Sachs]

Have existing exposure into it.

[Ben]

Yeah. And so we're like, we're getting in at the B, like that's cool. But like, we might as well go buy it at the seed if we can, as a fund of funds. And so we, we launched that strategy and I mean, some of those firms absolutely compete on a relative performance basis, like with a historical track record. With our US Relationships as a fund.

[David Sachs]

To fund, are you able to pursue pure alpha? In other words, are you penalized if one of your funds has a 0.5x, if overall you're doing really well and how much is it, how much, how much risk is it that one of your funds or a couple of your.

[Ben]

Funds don't Perform just like looking at on maybe the other side, it's really hard to pick which of our. We kind of have like 25 managers per 550 $600 million funded fund size. Like just so like it's hard to pick on any given fund which those 25 is going to be the huge outperformer. And so like the opportunity cost is really like okay, which one is going to be the screaming home run? And like what do you think about portfolio construction? Like I would be, I, I would love to ask our partners and myself like if you only have one fund and like you it had to be over 3x net like who hand over your heart this cycle, would you put the money in? Like that's tough to do. And so for us, I mean taking that basket approach with the upside opportunity is probably more how we think about it than worrying about the downside.

[David Sachs]

Is there a power lot to investing in funds otherwise is it right tail skewed or is it about do you expect one of your funds to return a 10 15x or does that not.

[Ben]

No, I think it happens. Sure some of the seed funds have crazy huge multiples but no, we don't think about it like that. If you're a 5x NAT plus venture fund, you're crushing it and you should be really happy about that. So the like just the number of company and we kind of got on this. So like I think since our 2008 Fund of Funds we just did this over the summer since our 2008 funded funds, like oh you could say on average like 1000 to 1200 companies in each of our funded funds every couple years at scale or at maturity. Like 18 to 25 companies, they make up like two thirds of the value and then the next tail to get you up to like 90% of value is only like another a hundred companies and so 10%, it's like kind of a 10 and 9018 to 25 account for 75% and I think of 18 to like 23 I think was the stat account for like two thirds of the value.

[David Sachs]

How does that inform your strategy?

[Ben]

If folks don't have and this is talking about maybe some of the venture math and like how do you make money in venture if a VC can't sit down with me and have a really clear like eyes wide open conversation of how much you need to own upfront, like what the sort of business can. I'll just like pick a company and be like oh hey like you know this company seems cool like how walk me through how that, like return your fund or like, how that's a substantial driver. And so as you're like talking about the finance side of life, if the DC Cam are really clear, like, oh, we bought this much upfront, we think the market is, you know, huge, whatever, and we can scale it to this amount of revenue and sell it for this return. And at that exit price, with some dilution, I'll return, you know, a huge portion of my fund. If not it be a fund return. If they don't have a strategy and a clarity of thought of, like, how to capture those winners and be really diligent about that, then I just, I'm not convinced you know how to make money at scale in this entry.

[David Sachs]

I think it's also, you know, if I was to advocate on behalf of those managers, I would say a, is.

[Ben]

It'S a learnable skill. Totally.

[David Sachs]

And two, it's because they don't come.

[Ben]

From the finance side, they come from. Yeah. Different strengths. I agree.

[David Sachs]

What would you like our audience to know about you, about top tier and anything else you'd like to shine a light on?

[Ben]

I'm down here in New York now. If people. Thank you. Yeah. If any local managers are around that want to meet, happy to get to know you over the coming months and all that.

[David Sachs]

What's your criteria?

[Ben]

Criteria? I mean, look like we're probably going to watch for a fund regardless. Like if we're just meeting you for the first time, it's just. Sorry, it's the reality of it in the business, the way the business works. But interesting people that like, on average, our entry point for a group that isn't like a spin out like Tomas, and it's fund number three. And so we don't have the smallest fund we've ever done. 50 million in size, roughly. So I mean, that's probably the ballpark of like when you become investable for us, but you should probably meet us when you're raising your fund too.

[David Sachs]

How could GPS benefit from meeting you early and talk to me about kind of building your relationship with LPs?

[Ben]

Well, I hope people still think of us as groups that knows what we're talking about and we're going to shoot you straight and we're not going to just like ask a bunch of questions and just like take some notes. Hey, thanks for your time. We'll probably on the call be like, yeah, this is interesting. Like, you know, this sort of network that you're talking about, like, you know, a lot of people say it like that. What I think is unique and interesting about you is and we'll try to give that feedback to people.

[David Sachs]

Yeah, it's definitely not a waste.

[Ben]

Time up to them.

[David Sachs]

You know, I think one of the underrated people talk about pitching but one of the underrated things about meeting with great LPs is actually evolving your strategy. We just talked about it. Portfolio construction.

[Ben]

Right.

[David Sachs]

You're not born out of the womb knowing portfolio construction. It's a learnable skill. So by meeting with smart LPs you could actually improve your strategy. It's not just a matter of pitching or rephrasing and putting lipstick on a pig. So I think that's an underrated part of fundraising.

[Ben]

Agree.

[David Sachs]

I really appreciate you sitting down and thanks for chatting.

[Ben]

Yeah.

[David Sachs]

Okay. Thanks Ben.

[Ben]

Thank you.

[David]

Thank you for listening. The 10x Capital podcast now receives more than 170 thousand downloads per month. If you are interested in sponsoring please email me at David@10xCapital combination.