Podcast Summary: How I Invest with David Weisburd
Episode E123: Should LPs Invest in Venture Capital?
Guest: Gregor von dem Knesebeck
Release Date: December 24, 2024

Introduction

In episode E123 of How I Invest with David Weisburd, host David Weisburd engages in an insightful conversation with Gregor von dem Knesebeck, co-founder of Blue Future Partners. The discussion delves into the nuances of Limited Partners' (LPs) investments in venture capital, exploring strategic allocation, brand building, portfolio construction, and managing LP relationships. Gregor shares his experiences, challenges, and best practices, providing valuable guidance for family offices and institutional investors considering or currently navigating the venture capital landscape.

Strategic Allocation of Venture Capital for Family Offices

Gregor opens the conversation by addressing best practices for family offices allocating to the venture asset class. He emphasizes a three-pillar approach:

1. Fund of Funds
2. Direct Investments
3. Individual Funds

Gregor explains, “You’ll have part of your money in fund of funds, you’ll have some in funds and you’ll have some direct” (00:04). This diversified strategy helps mitigate risks inherent in venture capital’s power law distribution, where a few high-performing investments drive overall portfolio returns.

Key Insights:

• Fund of Funds: Ideal for LPs new to venture capital, providing diversified exposure and access to top-performing funds.
• Direct Investments: Suitable for experienced LPs who can manage higher risk and seek outsized returns through concentrated investments.
• Individual Funds: Balances the portfolio by accessing established venture funds with proven track records.

Gregor highlights common pitfalls, especially for those leaning heavily into direct investments without adequate diversification: “Another Persona is the Persona going direct burning his or her hands because they did one of five, 10 investments in a very short period of time... not looking at vintage diversification” (07:00).

Building and Scaling Blue Future Partners

When asked about founding Blue Future Partners, Gregor shares the origin story and strategic focus on brand building. Initially receiving advice that a strong brand and digital presence are critical for success in venture capital, Gregor and his brother Philip prioritized establishing credibility: “We focused a lot on not in scaling people at the firm. It’s not about headcount, but it’s about brand reliability” (02:34).

Brand Building Strategies:

• Consistent Branding Efforts: Engaging in activities that systematically build the firm’s reputation.
• Early Trust with LPs: Leveraging existing relationships from other asset classes to secure initial investments, overcoming the "chicken and egg" problem of establishing a fund.

Gregor recounts their breakthrough: “We were very fortunate that we had a trusted circle of LPs that very early on for our Fund 1... took the leap of faith with us” (03:26).

Portfolio Construction and Diversification

Gregor discusses portfolio construction, advocating for concentrated portfolios with significant ownership stakes: “When we invest in fund managers, we look at concentrated portfolios and we want managers to take fairly large positions... 15 to 20 lines in a portfolio” (09:34). This approach ensures that capital is allocated to high-conviction investments, maximizing potential returns while maintaining a manageable number of investments.

Diversification Strategies:

• Vintage Diversification: Spanning multiple investment periods to smooth out market cyclicalities.
• Geographical Diversification: Initially global but shifting towards more regional mandates for better manageability and clarity.

Managing Relationships with Limited Partners

A significant portion of the conversation revolves around managing LP relationships. Gregor underscores the importance of long-term partnerships and warns against engaging with "tourist LPs" who are more trend-driven: “We want long term relationships... avoid the tourist LPs who invest when markets go up and pull out when they go down” (12:35).

Best Practices for LP Management:

• Transparent Communication: Regularly engaging with LPs to foster trust and provide value beyond capital.
• Educational Initiatives: Hosting academies and events to educate LPs on venture capital intricacies, enhancing their investment acumen.
• Networking Opportunities: Facilitating connections among LPs to build a robust community and encourage knowledge sharing.

Gregor adds, “Our LPs typically don’t because their family offices... benefit highly from meeting other LPs... we're like the kids throwing a cool party” (14:29).

Value Proposition of Fund of Funds

Gregor elaborates on why Blue Future Partners prefers the fund of funds model over direct investments, citing better downside protection and outsized upside potential: “I personally really prefer the fund of fund model because I think if you look at downside and upside, the bet you’re taking on a fund as an operator is way better than a direct fund” (07:20).

Advantages of Fund of Funds:

• Risk Mitigation: Spreads investments across multiple funds, reducing the impact of any single fund’s underperformance.
• Access to Top-tier Funds: Enables LPs to invest in leading venture funds without the barriers to entry associated with direct investments.
• Operational Efficiency: LPs can leverage Blue Future Partners' expertise and relationships, enhancing their investment strategy.

Lessons Learned and Early Mistakes

Reflecting on the journey of Blue Future Partners, Gregor shares valuable lessons and early mistakes:

1. Timing and Cyclicality: Misjudging market cycles can lead to inefficient fundraising and deployment of capital. “If you spent the last two years on the road trying to fundraise, you wasted a lot of time” (16:03).

2. Global vs. Regional Focus: Initially adopting a global deployment strategy proved complex and less digestible for investors. They are pivoting towards more regionally focused mandates: “We won’t go for global, but we’ll go for kind of regional mandates with some kind of international component” (17:28).

3. Personal Strain: The demanding nature of running a venture firm while managing personal life was underestimated. Gregor emphasizes the need for work-life balance and understanding the personal sacrifices involved: “It takes you 10 years and takes all of your energy... need to get that right” (17:47).

Future Outlook and Final Thoughts

Looking ahead, Gregor remains optimistic about the venture capital landscape, particularly in Europe: “We have huge kind of tailwinds from a regulatory point of view. European Union is really trying everything to get Europe back on the feet and reinvent itself” (19:01). He encourages LPs and emerging fund managers to stay committed despite recent market challenges, highlighting upcoming initiatives like the VC25 GP accelerator program and ongoing community engagement efforts.

Final Recommendations:

• Educate and Adapt: Family offices should invest time in understanding venture capital’s unique dynamics and adjust their strategies accordingly.
• Long-term Commitment: Embrace a long-term investment horizon to navigate market cycles and capitalize on future opportunities.
• Leverage Networks: Utilize platforms and events to build robust networks, enhancing both investment insights and collaborative opportunities.

Notable Quotes with Timestamps

• On Allocation Strategy: “You’ll have part of your money in fund of funds, you’ll have some in funds and you’ll have some direct” (00:04).
• On Brand Building: “It’s not about headcount, but it’s about brand reliability” (02:34).
• On Overcoming the Chicken and Egg Problem: “We were very fortunate that we had a trusted circle of LPs that very early on... took the leap of faith with us” (03:26).
• On Avoiding Tourist LPs: “We want long term relationships... avoid the tourist LPs who invest when markets go up and pull out when they go down” (12:35).
• On Fund of Funds Preference: “I personally really prefer the fund of fund model because I think if you look at downside and upside, the bet you’re taking on a fund as an operator is way better than a direct fund” (07:20).
• On Personal Strain: “It takes you 10 years and takes all of your energy... need to get that right” (17:47).

Conclusion

Gregor von dem Knesebeck’s insights provide a comprehensive guide for LPs considering venture capital investments. Emphasizing strategic allocation, the importance of brand building, concentrated portfolio construction, and fostering long-term LP relationships, Gregor outlines a clear pathway to navigating the complexities of venture capital. His candid reflections on early mistakes and the personal demands of running a venture firm offer valuable lessons for current and aspiring fund managers. As the venture landscape evolves, particularly in Europe, Gregor’s forward-thinking approach and commitment to community engagement position Blue Future Partners as a pivotal player in shaping the future of venture investments.

Timestamps

• [00:00] Introduction to Allocation Strategies
• [00:04] Best Practices for Allocation
• [00:55] Family Offices’ Intuition on Asset Classes
• [01:07] Managing Family and Business Strain
• [01:44] Founding of Blue Future Partners
• [02:32] Building a Great Brand
• [03:23] Overcoming the Chicken and Egg Problem
• [04:13] Scaling Asset Allocation
• [05:06] Comparing to Endowment Models
• [05:55] Detailed Allocation Strategy
• [07:00] Direct vs. Fund of Funds Investing
• [07:20] Preference for Fund of Funds
• [09:12] Fund of Funds Economics
• [09:34] Portfolio Construction Approach
• [11:00] Vintage Diversification
• [11:39] Managing Troubling LPs
• [12:35] Avoiding Tourist LPs
• [14:29] Challenges with Small LPs
• [14:53] Value Add to LPs
• [15:57] Early Mistakes in Fundraising
• [16:03] Impact of Timing on Fundraising
• [17:28] Shifting from Global to Regional Mandates
• [17:47] Personal Strain and Long-term Commitment
• [19:01] Future Outlook and Initiatives
• [20:45] Closing Remarks

This summary encapsulates the key discussions from the podcast episode, providing a comprehensive overview for those who haven't listened while preserving the depth and insights shared by Gregor von dem Knesebeck.