← How I Invest with David Weisburd
How I Invest with David Weisburd
E293: Inside GEM: How a $12.5 Billion Platform Selects Outlier Funds
00:40:05
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- [00:00]
A
So, Kate, you recently joined Gem, which is a $12.5 billion AUM platform, to lead the venture effort. For those not familiar with Gem, tell me about the platform.
- [00:08]
B
Gem was founded in 2007 initially with the name Global Endowment Management and its initial business. And really still the core business today is as a leading, fully discretionary, outsourced Chief Investment Officer, ocio. Today, on that side of the business, we work with about 40 endowments and foundations and other small nonprofits. In more recent years, we've been partnering with a wider variety of LPs who want to leverage our research and our manager selection in more targeted ways across alternatives. And by that I mean in fund or fund to fund formats.
- [00:40]
A
I want to get into some of your venture thesis in a bit, but first, you joined the UNC Endowment immediately after undergrad. What did you learn at the UNC Endowment? How does that translate to how you invest today as a venture manager?
- [00:53]
B
That first job opened up a career path that I didn't know existed, but came to really enjoy. I certainly didn't set out to become a career lp. Not sure if anyone really does. The truth is I did not know what I wanted to do professionally after college. I had a lot of interests. I enjoyed a wide variety of subjects. I did well in all of them. I really took advantage of a true kind of liberal arts education and I loved it. I was a generalist, if you will. So the investment office at UNC took a chance on hiring me. I was a history major. I was a clean slate when it came to finance and investing. So I did have a steep and long learning curve and I was lucky to have a supportive mentor. I learned a lot about allocating capital, taking kind of that 30,000 foot view of the world. But I did work primarily on a team that was managing the Endowment's private investment. A couple of things stuck with me throughout my career that I initially learned there. One was the importance of asking good questions. Both of the managers we met and frankly with my own mentor for learning purposes. This is a job that requires continuous learning. I also learned the importance of professional relationships and network. Right. They build over time, they build off of each other and last a long time. It's really hard to place a value on that in the beginning, but it absolutely becomes an asset over time. After the endowment, I worked for for two different fund to funds. And I think it was at those firms that I really learned what a good institutional due diligence process looks like, particularly the art of conducting reference calls. And I learned importantly how important and hard it can be to raise capital before you even go on to invest that capital.
- [02:29]
A
I think a lot of people will be surprised to hear UNC is one, arguably one of the most underrated endowments. I think they achieved a 12.6% return in 2024 being at the UNC endowment. You mentioned asking the right questions. What's the one or two best questions that you ask today from managers that helps you really focus your time on managers that could end up being interesting.
- [02:49]
B
I'm going to use the word that's probably one of the overused words in the industry and that is differentiation. But it really does come down to figuring out why in land of venture, why a particular founder wants to partner with a venture investor. But founders have a lot of choice in today's market. There's no shortage of capital, there's no shortage of venture capitalists. And founders are very, very savvy, probably much more savvy today than they were a couple of decades ago. So they have a lot of choice. So it's. It's incumbent upon the VC to sell themselves on why they should be the right partner for. For a venture investor. And then it's incumbent on the LPs to. To understand that dynamic and understand who the best founders are gravitating towards as their capital partners. So it does come down to differentiation and that can take a lot of different forms. It comes down to that, that value add capability and what venture investors can bring to the table to help founders build their business.
- [03:49]
A
Mentioned references. I'm sure you end up doing multiple dozen references per gp, but at which point do you get a really good sense, let's say you have an 80 or 90% confidence on that manager. Is this reference 3, reference 8, reference 12. Give me a sense for how quickly you ascertain whether this is a manager that you really want to double click into.
- [04:07]
B
I don't know if it necessarily boils down to the number of references. What really moves us from a maybe to a high conviction. Yes. Is the quality of the references. I think the reality is most of the references that LPs do are. Are good. Right. If you're going down the list of listed references that a manager has provided a potential lp, all of those references are going to be good. The craft of doing references comes down to the types of questions you're asking, of course, but also some pattern recognition such that you can differentiate between what's a good reference and what's a glowing reference. Obviously references that we do that are off list. Right. Where we're leveraging people in our own network, people that we trust, people that we think we will get a very candid, truthful answer to our questions. Those references carry probably more weight than do others, but founder references are important. But again, it, it comes down to, I think, asking the right questions and being able to recognize through doing so many of these over the years, which ones are good and which ones are outstanding. And that's a bit of a nuance and a bit of something that's hard to kind of describe and put into words, but you can recognize what a glowing reference is and not just a what.
- [05:18]
A
What is that telltale sign? What are you looking for to know that something's a glowing reference versus a good reference? Because that's. There's a game theory to this where no founder wants to speak poorly on the vc. Double click on how you really assess whether it's a glowing reference.
- [05:31]
B
Yeah, I mean, asking for anecdotes and very specific examples. Understanding the dynamics of financings and the types of decisions founders make at various points in their capital raising journey to decide which partners to partner with. Seeing that a reference has made multiple introductions and referrals to whatever VC we're referencing, I think carries a lot of weight. The detail with which they can speak about the relationship, can speak about how a VC has helped them, can speak about their personality and work style. I think it comes down to both the quality of the reference and the words used, but also the detail behind the reference. You can tell if a reference is positive at a very high level, but a reference that is very positive at a granular, detailed level, I think pops out in our, in our estimation, oftentimes.
- [06:29]
A
Some of the metadata is how long the person being interviewed actually speaks on the reference party, how, how long they talk about it, how glowing they, how much more they volunteer versus saying good or he was excellent or using these kind of generic words.
- [06:42]
B
I think the best references are often those that, where, where I don't ask many questions and the, the person that I'm speaking to, they, they can't help but just go on and on and on about how wonderful the investor is. I do think it's important to, to ask very targeted and inappropriately timed questions in that conversation, but sometimes you don't have to ask much at all. You just get the full story. They just can't wait to, to tell you about the person you're referencing. And sometimes you even have to, to stop them so that you can get your questions in. They're a lot of fun it's like, it's one of the most fun part of parts of the job.
- [07:16]
A
I would argue it's really one of the main aspects that an LP could add. Alpha references are kind of ground truth. Everything else kind of looks very, very undifferentiated to use your term. But references are one of those things that, where the truth really shines. You went early in your career from being an inch deep and a mile wide to today being an inch wide and a mile deep. How's that transition been and what are the biggest trade offs between those two ways of investing?
- [07:46]
B
As you said, at the UNC Endowment, I covered all private asset classes. So that's what I meant when I referenced an inch deep and a mile wide. I moved to a fund of funds focused on buyout and venture after that, where size was really the first screen. So I narrowed my investable universe based on size. And then most recently prior to joining jam, I was with a fund of funds focused on venture. And honestly, you know, those doors, as I reflect in my career, those doors kind of opened for me in the right place at the right time. I've, I've appreciated that opportunity to specialize over time to be kind of an inch wide and a mile deep. So now at gem, I've in essence returned to my endowments roots in a sense, but I'm still specializing in ventures. It's a bit of a nice full circle moment for me. I've reflected along the way why I like my job as an lp, especially one focused on venture. You know, getting back to that liberal arts education. Maybe it's kind of my well rounded nature, but I am drawn to both the qualitative and the quantitative aspects of the job. Picking good partners. Investing in venture funds is definitely part art and part science. There are a lot of human elements, right? Developing relationships and networks, evaluating the soft skills of investors, conducting reference calls. As we've talked about, if you're a people person, this is a great job for you. But there are also many measurable elements, right? Evaluating track records, building models, dissecting strategies, researching markets and companies. If you're a person who loves data, who loves information and math, this is also the job for you. If you're intellectually curious, this is a great job. We get to talk to really smart, ambitious people every day. It's really a privilege. We're talking to founders, investors, other allocators. There's always another question to ask, always more to learn, always a new person to meet, another rock to turn over. Every day is different, but Engaging in different ways. And then on the venture side we have this front row seat to innovation, which is kind of a whole nother topic, but it makes the job a lot of fun.
- [09:51]
A
Double click on this Fun math. It's one of these things everyone repeats as if it's this, as if it's an agreed prompt principle. But many people have different philosophies. What's your philosophy when it comes to fun math?
- [10:01]
B
So yes, we are obsessed with, with fun math we, you know, when we reach a certain stage of diligence with, with a manager we're excited about, we build our own model which we call the what you need to believe model. So essentially we've, we've developed some internal metrics and a framework to evaluate a fund's size relative to the number of positions in the fund, relative to the ownership targets and then importantly the reserve strategy. So how, you know, how much capital is going in at that first check versus later stages at of course higher or what we hope to be higher valuations. We want to see assuming a realistic range of outcomes, a path to 5x. And this is, you know, particular with particularly when we're evaluating small early stage funds, oftentimes seed stage funds. We want to see how many single deal outcomes are needed to return the fund. We want to see how much market cap creation is needed to return multiples of the fund. This is so we don't have to have heroic assumptions. And that's what I meant when I said we don't have to squint to see a realistic path to a 5x fund. It helps us compare small funds that have different strategies and maybe different portfolio constructions of their own. It helps us compare apples to oranges, so to speak, in the industry. And it's important because we, we view, we, we assess hundreds of managers every year. Many of them have similar portfolio construction and philosophies but, but there's always nuances and differences. So this gives us a framework to compare different funds against a similar set of metrics.
- [11:38]
A
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- [13:29]
B
If you think of venture right, you're you're investing in very young companies and startups. Not all of them are going to become winners, right? Like venture, Venture is an asset class of many losses and fewer wins. So we expect a relative high loss ratio in venture funds. We, you know, we track graduation rates as an interim predictor of performance. But at the end of the day we care less about the loss ratios and more about portfolio exposure to the outside, those outsized winners. VC is, is obviously driven by power laws, right? Only a few companies each year drive returns in the industry and in our portfolio. So it's our job to pick the managers that we think can identify and lean into those outliers. To capture those outliers is a non negotiable for larger funds in order to produce strong returns. But the reality is not every VC is going to have a power law company in its portfolio. That's just a reality given the relatively small number of power law companies there are relative to the number of venture funds and capital being deployed in venture. So if your fund is not sized appropriately, if your ownership targets are not appropriate for that size, you run the risk of underperforming. And that's why venture funds have this really broad skew of returns. And then there's always this luck factor, right? There's always a little bit of good luck that accompanies the best portfolio construction and the good skill of any manager.
- [14:54]
A
Can a fund get to 5x without a power law outcome? And is that what you're looking for, which is if this fund manager is not lucky, can he or she gets a 5x?
- [15:03]
B
I think a 5x is achievable without one of these power law companies in your portfolio. If you're a small fund, it's much harder, it's much harder to do that with a multibillion dollar fund. And that, you know, maybe that is leading us into a discussion about this bifurcation we've seen in the industry. I'm happy to talk more about that.
- [15:24]
A
Yeah, let's talk about that. You look at Venture almost as two different asset classes, which is these small funds and these multi stage funds. One is when did you start looking at Venture in that manner and how do you see it today?
- [15:38]
B
In our last conversation, I think we talked about this idea that there's there's two games on the field today. There's the Access game in Venture, there's the discovery game, Inventure. I think there's been an element of, of that dichotomy all along, but it was really in sort of the 2018, 19, 2021 period when we saw fund sizes escalate, when we saw this distinction in the market between sort of the haves and the haves. Not so. So the market in more recent years has clearly bifurcated with more established multi stage brands at one end and a seemingly endless number of smaller, newer early stage managers at the other. Our view is there will continue to be firms in that first group that will have a structural and competitive advantage going forward. Those advantages I think are in place because of the firm's reputations, their platforms and really their scale. It's not rocket science though to know who these firms are. The challenge is Access Gem is privileged to work with and we include a number of these firms in our portfolio. But these funds are larger, they are multi stage and they may not have the right tail skew that LPs want to see in their venture portfolios. Maybe they will if this idea that we're having trillion dollar private companies, if that is a new norm, like maybe those larger multi stage funds will have that potential for right tail skew. But if LPs want smaller early stage funds in the portfolio, that opportunity is large, right? That part of the market is really hard to navigate. Given the sheer number of managers, many of them new and still emerging. It's crowded. It's hard to separate the signal from the noise. As I said, our team alone has reviewed hundreds of venture funds this year alone. Our framework at JAM is rather simple. We evaluate a venture investor's ability to source, to pick and to win. I think it's much harder in practice to unpack those questions. GEM is uniquely positioned to execute well and try to answer those questions. Given a few things, we've got a lot of good resources. We're a high functioning team that includes a dedicated sourcing team. So maybe we.
- [17:53]
A
Yeah, tell me about that. So you guys. And it seems like it would be obvious that most LPs would have this, but you guys are quite different that you have a sourcing team that's separate from the investment team. Tell me about the function of that and what should somebody that wants to build a sourcing team, what's some best practices?
- [18:09]
B
So today we have a three person sourcing team which we think is absolutely differentiated and a competitive advantage. I've referenced that the market is crowded and it does feel that way. So good information helps us to cut through the noise quickly. So the sourcing team, I mean their mandate is to know about which funds are raising, when, which VC is spinning out or leaving to set up their own firm, which firms other LPs think, think highly of. And look we at Jam, we like to back managers early. That's kind of been part of our DNA and part of our track record across asset classes since the beginning. We like, you know, those emerging type of managers because earlier in their life cycle, because they're hungry, they're motivated, they're aligned with LPs they're managing smaller pools of capital. We are eager and comfortable discovering those managers before other LPs maybe realize their potential and before it's maybe obvious to the, to the broader market. But that takes a lot of, a lot of hunting, it takes a lot of screening and in order to have a good picture of the market opportunity, we like to know and see everything in the market. But that takes time. It takes resources, takes people and we have invested in those people in order to make sure that we are seeing anything and everything and, and to help us make the best decisions.
- [19:31]
A
You evaluate your GPS on sourcing pick and winning. As an lp, what is the one part of sourcing, picking and winning that is most important to being an elite investor?
- [19:42]
B
It's hard to boil it down but, but I will say, you know, before you can Pick. Before you can win, you need to see the opportunities you need to source. So one enables the other two sourcing. Again, it's one of these easy questions to ask and easy questions to answer, but really unpacking how a VC is meeting founders. What are their network nodes? How are those network nodes different from other investors? Why are founders coming to them first or early? Like it's, you know, you develop this, this picture, this narrative around sourcing and I think it truly is something that can set apart a good investor from from a great investor.
- [20:28]
A
Again, just to play devil's advocate, I would argue that GPS have to win hyper competitive deals. Oftentimes they're the lead or the second position. There's only so many investors in around in lp. It seems like there's room for multiple winners. When you want more, you start your business with Northwest Registered Agent. They give you access to thousands of free guides, tools and legal forms to help you launch and protect your business all in one place. With Northwest, you're not just forming an llc, you're building your complete business identity from what customers see to what they don't see. Like operating agreements, meeting minutes and compliance paperwork. You get more privacy, more guidance and more resources to grow the right way. Northwest has been helping founders and entrepreneurs for nearly 30 years. They're the largest registered agent and LLC service in the US with over 1500 corporate guides. Real people who know your local laws and can help you every step of the way. What I love is how fast you could build your business identity. With their free resources. You can access thousands of forms step by step guides and even lawyer drafted operating agreements and bylaws without even creating an account. Northwest makes life easy for business owners. They don't just help you form your company, they give you the tools you need after you form it. And with Northwest, privacy is automatic. They never sell your data because privacy by default is their pledge. Don't wait. Protect your privacy, build your brand and get your complete business Identity in just 10 clicks in 10 minutes. Visit www.northwestregisteredagent.com invest free and start building something amazing? Get more with Northwest registered agent at www.northwestregisteredagent.com/invest free. So does that change the dynamic of what it takes to be an elite lp and that you're not always. You don't have to have as sharp elbows and there's a different game to it, right than being a great gp.
- [22:16]
B
Both have an access component that's I think important. I think being an elite lp, yeah, you have to Be good at the access but you have to be good at the discovery piece too. And look, it's hard I think to be like a value added LP right to our gps, like one your relationships and your portfolio and your performance kind of can speak for itself but those are very long feedback loops like we've talked about before that how venture is a very patient asset class. It takes a long time to know whether your decision to back a manager, your conviction in a manager is actually a great decision. Right.
- [23:00]
A
I, I question this. There's this meme that you don't know until year 10 if you're a good GP and it's something everyone repeats and there's a lot of wisdom to that frame of thinking like you have to play the long game but actually question that where to me it's a, it could, it could end up being absurd if taken to the extreme. You invest in a seed company at $10 million, it's now $10 billion Series F. Yes. Technically you haven't done, you haven't sold any shares and technically it's only on paper a thousand X or whatever. Isn't that a, especially if you have multiple companies like that, isn't that as clearly you're skillful in picking even if you haven't had liquidity. So I think there's almost this, this dogmatic view that unless you have literally returned cash, it's impossible to know whether somebody's good. Isn't there a little bit of an overcorrection on that theory?
- [23:42]
B
Yes, yes, yes. There are obviously other signs and signals along the way along the path of a company to try to determine if investor is, is a good picker.
- [23:56]
A
You're invested and you're now two years in. What's a sign like I hit it out of the park, this is going to be a home run manager versus maybe the opposite which is I made a mistake.
- [24:06]
B
Yeah. I think an early signal could be one graduation rates. Right. That you can, you can, there's good, there's good information and data in the market about sort of average graduation rates. So you can track your, your underlying portfolio's progress in terms of graduation rates from seed to A, from A to B. So that's one signal. I think the more important signal for us is who are the follow on investors? What are the best seed managers that series A investors are tracking and investing in their portfolios. Right. The quality of the follow on investors by firm but also by partner I think is a great signal. If a follow on round is led by, you know, a firm that nobody has heard of and that maybe doesn't bring any strategic value to the table. You, you know that, that, that maybe makes us question the progress of that VC and the importance of that company in a portfolio. So I think there are signals related to follow on capital that you can monitor and assess along the way. But look, over the last couple of years DPI has been this kind of elusive metric for, for LPs as a, as a patient long duration asset class. We are signing up for an instrument that returns capital on the back end of an investment with a lackluster IPO environment. In the last couple of years LPs have struggled and have been lacking meaningful distributions from their portfolios, especially relative to 2021. 2021 was such an outlier. It sort of set people's expectations at probably too high of a level. In the absence of distributions which, which have certainly been more absent in the past couple of years, there, there are good signals in terms of, like we said, follow on capital graduation rates where, where things are trading in the secondary market. I think that's, that's a meaningful and good representative of progress of a company demand for a company in the secondary market. And the secondary market is here to stay. It's been, it has served a good purpose in this environment where the IPO market has been a little bit lackluster. And I think VCs have become smarter about utilizing the secondary market as a liquidity tool along the way where they can take some chips off the table but still, you know, play, play the long ball and ride their winners for future liquidity.
- [26:24]
A
Kind of going back to what you said before about LP value add, that's paradoxically what I see as one of the most value app thing, which is patient capital, which is it's very easy to raise in 2021. It's very difficult to build a franchise today. Therefore it's LPs like Gem that have that long term view, which is actually really LP value add, which is I'm not going to force you to make short term decisions in your portfolio just because I have DPI anxiety. I'm betting on you as a manager and I want to see you be successful over long term. Is that not kind of the greatest part of value add? And if not, what are some other LP value ads that I think that you think are underrated?
- [26:57]
B
So if John, it's interesting, we serve two constituents, right? We serve our clients and our LPs. We serve our GPs. So when we say we want to be a best in class Venture investor. We say that with both our LPs and our GPs in mind. Maybe I'll take the LP part first. For our clients, for our LPs, it's absolutely more than delivering strong performance. It's often a thought partnership, a research partnership. We think a good partnership is one that works in both directions where we can learn from each other and hopefully make each other better at our job. At jam, I feel like we take that a step beyond just kind of common mood sharing and offering introductions. As an ocio, it's really in our DNA to be a hands on partner and our firm is set up and resourced really well to deliver that kind of value to our.
- [27:45]
A
Can you double click on that? If it's not notesharing, what is it that you're delivering to LPs and what are LPs really hungry for in this market?
- [27:53]
B
So I think a lot of LPs are hungry for. They're building their own pipeline, right? Like if venture is a discovery game, but also an access game, I think they can use partners like GEM to build a future pipeline that they may want to invest in directly over time. So we are I think positioned to offer insights along the way, offer introductions along the way. But you know, we have, we have teams, chats set up with some of our investors so that they can ask us questions real time. That's just one small example of how I think we, we approach that research partnership. And I think we can do that because we have a large team that is sort of client facing and savvy, so to speak, relative to a smaller number of investors. So I think we can operate at that sort of close partnership with level, perhaps in ways that other firms cannot. But to get back to your question about being a value added LP to our DPs, it is hard like the, our capital is just as green as others and I think at GEM maybe our capital is more flexible than others, meaning we are investing at a scale that is both meaningful to our GPS but still allows us to be nimble to flex up and flex down without kind of throwing off our portfolio construction. I mentioned earlier, we have a long track record of investing in newer emerging gps. So I do think there's guidance and advice that we can offer to those, to that cohort of venture investors and other things that I guess you can say are table stakes. But I wouldn't underestimate them. We strive to be thoughtful, transparent, supportive, helpful when we can, hands off when it's appropriate. And importantly, we're not afraid to ask the hard questions or deliver the hard messages. But we also always try to do so in a way that respects and hopefully preserves the relationships. I think those are again, easy things to say, harder things to do in practice, institutionally, over a long period of time.
- [29:58]
A
And I think one of the most underrated aspects is being actively involved in the space. GPS, just like LPs have to pick their funnels, they also have hundreds and they need to pick their couple dozen. And where do you spend time? And upstream of that is who's actually investing, who's deploying capital. So being an active participant in a space is, I think, one of the most underestimated forms of value add, even though it's, it's, I guess, before the investment even comes.
- [30:22]
B
That's a great point. We are long term investors. We understand the asset class, we understand the nuances, we understand the challenges. It is, I think, harder to be a good lp. Thank you. With a shorter experience being an LP and also one that may have been coming in and out of market again. Venture is an industry where continuous learning is warranted and needed. If you're coming in and out of markets, I think that can inhibit your ability to build a successful portfolio and venture program. But it also does impact your reputation as an lp.
- [30:58]
A
You just used that word hard last time we chatted. You said today's one of the most difficult markets to invest in as a venture LP, which is quite a statement given you've been an LP for 20 years. What makes today uniquely difficult from so many of the market cycles that we've seen over the last two decades?
- [31:17]
B
Let's start at a high level with some truths. Venture is not an asset class that lends itself to indexing. Right? So I'm sure you've, you've seen some data. The average returns over any time period, short or long, will disappoint. So you really need to be in those top quartile, if not top decile funds in order for your venture portfolio to produce returns in excess of the public markets and in excess of other private asset classes. Yet, as we know, the dispersion of returns that skew or that range between top quartile and bottom quartile in venture is wider than in any other asset class. So that makes the manager selection piece paramount. It always has been and I think it will continue to be. And look, we talked about, you know, before why manager selection is sort of uniquely important in this, in this asset class. And it comes down to picking those managers that have the ability to identify and lean into this power law companies.
- [32:19]
A
What's the narrative or the thesis that multi stage managers are pitching in the market to why a 5, $10 billion fund could still return venture like returns?
- [32:32]
B
I think it boils down to this new normal that we're in, that we have been in for, for a number of years where companies are staying private longer, they're continuing to grow scale compound in value as private companies whereas a couple decades ago they would have, and that value creation would have accrued to public market investors. But today a lot of that value in the next generation tech companies is accruing to private market investors because those companies are staying private longer. So those funds that are set up based on their, their, their size and scale to lean into those companies, those true disruptors, those true kind of iconic generational companies, I think that is, that is how returns at scale can continue to be generated. If those companies, you know, and we, we know which, which ones they are, if they continue to, to you know, grow and scale and raise capital in the private markets.
- [33:30]
A
Just to give a back of, back of the envelope example, you invest at a billion dollars, it exits at a trillion dollars, that's a thousand X. That's the same as investing at $10 million and exiting at $10 billion. Just the exact same math. In fact, some of these hyperscalers in the AI space actually being diluted less and less in future rounds. So you're not necessarily taking 25, 30% dilution, you might be taking 5% dilution in the case of an OpenAI or anthropic. So actually that dilution paradoxically goes down at higher valuation sometimes. So we talk about these two different aspects, the discovery aspect and the scaling aspect of the discovery and the allocators. There's also this weird unicorn of these solo gps that are scaling. There's Orin Zev. I'm getting ready for my interview with Elad Gill. Where do these solo gps that have raised billions of dollars, where do they fit into this ecosystem?
- [34:17]
B
That's so interesting. I'm glad you raised that. It's interesting as I reflect on the types of firms I've backed as part of kind of the institutions I've been affiliated with. Over time one of the elements that has changed in venture is this notion of solar dp. So one of the, one of the learnings I think that me and other LPs along the way have grown accustomed to is not to be afraid of key man risk. Many of the great venture firms were founded and led by a single person. I think we can think Of a lot of examples of firms that even today, even at a large scale, there is a single decision maker. Elad is a great kind of example of that. Single decision makers can, can make decisions quickly, they can lean into their conviction, they can avoid group think, they can avoid internal politics. I think these are some of the ingredients that can make a great firm. The rise of the solo gp, which today is quite common and again institutional investors have gotten comfortable with that model, but that was not always the case. It's been an interesting evolution both in the industry and as LPs have come along to sort of understand and appreciate the risks versus returns in that model.
- [35:31]
A
Yesterday I was at a dinner and LPs were talking about some of their solo GPS were taking full time jobs and really during their deployment period, mostly because they couldn't raise and it's not necessarily sustainable at some of the fund sizes. What happens in that case? So that is keyman risk. So what happens when you have a situation like that and how do you minimize the damage?
- [35:52]
B
So there's two, two situations maybe to unpack there, there's, there's a full time VC who goes back to an operating role or interim chairman or CEO role. And that is, that is certainly a different situation to navigate than what has become fairly more common. And again, I think embraced by the LP community is an operator founder who has scaled a company to a certain, a certain size and maturity where they're now able to spend time investing. So they're, they're, they're, they're going from operator to investor. And I think that that model again has been, I think better understood and embraced by LPs and I think, you know, going back to the sourcing, the importance of sourcing, right. The founders today, especially young founders who aspire to be a founder that has grown and scaled a successful company, they want those people on their cap table, they want somebody who is still in their seat is not very recently in their seat as a young founder. So that that operator founder profile or archetype for an investor is super compelling I think for both younger generation of founders, but also LPs. The other situation that you led with a full time investor taking other jobs, whether it's inside or outside the portfolio, I think is a different question. It is a different maybe risk, if you will, to evaluate, but I think it has to be situational. You have to understand why they're, why they're taking this new role, what the value is strategically to the portfolio, what the rest of the team is doing in their Absence. So I think it's very situational and probably a bit more, it's less common I think today. But certainly we have faced situations where we've had to understand the dynamics and those decisions.
- [37:47]
A
Yeah, I had episode 101, I had a former Stanford endowment in Texas endowment, Mark Schoberg. And we talked about this whole thing which was, my naive understanding was well, okay, they don't do another fund, so who cares? But obviously there's portfolio management that comes into play which is making sure that your startups have the next round done and have the right exit. And there's empirical data that shows that if you don't manage your portfolio and in the cases where there's breakoffs or partnership risks, the returns of that specific fund go down. So you really have to balance this potential like partnership risk with the asymmetry that sometimes in those cases, some of those funds, you know, my joke is always the best venture portfolio was actually the angel portfolio of Mark Henderson David Sachs, which is they were operators, they had finite capital and they were investing to their friends, people that they had either been working with months before or sometimes a couple of years before.
- [38:37]
B
Yes, I think anytime we make a commitment as an lp, we, we do so thinking that this is going to be a multiple fund sort of relationship and a very long term partnership. But things happen, right? Life happens, opportunities happen. So yes, when a DP decides for whatever reason not to raise a new fund, sometimes it's because they don't aspire to build a generational firm. Sometimes it's, maybe it's because of performance, but maybe it's because of a different opportunity going forward. Those opportunities can be, those situations can be tricky for LPs. I know LPs, you know, are pulled into that situation and are sort of asked and forced to be more hands on in that situation because of the ongoing portfolio. And those can be tricky, very time consuming types of, you know, puzzles to, to figure out. But again, as, as, as an lp, who's, who's been in investing for, for decades. You see all sorts of situations over time, none of which are exactly the same. But there are learnings from wind downs, if you will, over the years.
- [39:40]
A
It could be theoretically very, very bad until you see it in real life and then you see the nuance of what happens. Sometimes some of those portfolios are actually really good and it's surprising. What's one piece of advice that you wish you knew going back to when you started at UNC Endowment that would have either accelerated your career or helped you avoid costly mistakes.
- [39:57]
B
I'd like to think I haven't made too many costly mistakes in my career. You know, I think this is more of a an answer on a personal level than anything from an institutional level. But I do think I would encourage my younger self to be a better advocate for myself with, with those that I'm working for and with.
- [40:18]
A
Really being. Yeah. Being your. Your number one fan, to use a sports analogy.
- [40:22]
B
Yeah. Yeah. And I think look as. Not, not. Not to. To turn this conversation on its head, but as a younger woman in this field, I think the importance of showing up, of being in the room, of making sure your voice is heard, I think those are important things that I think to my younger self. I would make sure I understood the importance of my voice. And again, advocating for myself.
- [40:53]
A
You have to be explicit about it. Don't assume that people are just going to. Your body of work won't necessarily stand for self. You have to be explicit about vocalizing your value add. On that note, thanks so much for jumping on the podcast and looking forward to continuing this conversation live.
- [41:08]
B
Yeah, thanks, Darren. It was a pleasure.
- [41:10]
A
That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.