E318: The Biggest Mistake Investors Make When Building a Venture Portfolio

Summary

Podcast Summary: How I Invest with David Weisburd — Episode E318: The Biggest Mistake Investors Make When Building a Venture Portfolio (March 5, 2026)

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Episode Overview

In this episode, host David Weisburd interviews a veteran institutional investor from Cambridge Associates (referred to as "B") who has nearly two decades of experience advising top family offices and endowments. The conversation explores the nuances of building successful venture capital portfolios from the LP perspective—highlighting the importance of governance, strategic deployment, mindset for spiky returns, and avoiding the most common mistakes new investors make in the asset class.

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Key Insights & Discussion Points

1. The Value of Longevity in Asset Management

• Longevity as a Superpower:
  "Longevity in the role is really the superpower. That longevity gives you the patience, it gives you the perspective that are required for success." (B, 00:12)
• Staying invested through decisions made years ago allows for true learning and the ability to see the fruits (or consequences) of earlier investment choices.
• Viewing years in a high-volume institutional seat as akin to “dog years”: “A year at CA in this seat is a dog year at a typical endowment office or family office.” (B, 00:53)

2. Portfolio Construction: Venture Capital vs. Private Equity

• Key Differences in Approach:
  • Private equity involves more process-oriented value creation.
  • Venture capital is dominated by Power Law returns and requires assembling complementary parts.
• Importance of Size and Governance:
  • Outperformance often stems from a larger allocation to private growth/venture—not just superior manager selection.
  • “The size is just as determinant of success as the selection behind it.” (B, 02:58)
  • Governance is emphasized as "the least sexy thing but...the ability to make a plan and stick with it." (B, 03:24)
  • The investment process is likened to “building Central Park,” laying groundwork for a future you cannot yet see. (B, 04:04)

3. First Principles for Family Offices Entering Venture

• Assess Illiquidity Tolerance:
  • “Step one is figuring out what you want to achieve and the tools you have to achieve it...what is the footprint of tolerable illiquidity you can have?” (B, 06:43)
• Establishing Commitment Cadence:
  • Early portfolios are simple, mixing established and emergent GPs.
  • Complexity increases over time and must be managed actively: "If you're not actively compressing complexity down, it will outstrip the growth of a portfolio." (B, 08:22)

4. Embracing Portfolio “Spikiness” in Venture

• Elite vs. Good LPs:
  • Elite LPs are comfortable with spiky returns—some managers may be up 7x, others flat or down.
  • Portfolios are built like generational succession, with core (“establishment”) and emergent managers.
  • Memorable Quote:
    “There’s this Andrew Carnegie quote, ‘First man gets the oyster, second man gets the shell.’ If you are a family office waiting for obviousness... chances are you will not get the allocation that you desire.” (B, 09:52)

5. Diversification and Deployment Strategy

• Vintage Diversification:
  • As few as six GP relationships can reduce capital loss risk to near zero.
    “You don’t have to have a very broad roster to successfully diversify in venture capital.” (B, 10:24)
• Cadence Management:
  • LPs must adapt to faster fundraising cycles; fund commitments now recur every 1-2 years, quickly scaling particular GP exposures.

6. Long-Term Relationships and “Re-Upping”

• Decisions are About Firms, Not Just Funds:
  • “I think about it oftentimes as decisions around firms, not funds. Funds will happen. Sometimes funds will be raised faster.” (B, 11:51)
• Re-Underwriting Process:
  • On quick fund cycles, “all you can do is look to the organization... strategy being generally adhered to... but you can’t re-underwrite outcomes so early.” (B, 15:55)

7. Major Mistakes When Investing in Venture

• Expectation Setting:
  • Setting clear expectations about portfolio construction, the number and type of managers, and the re-up process is critical.
  • “One of the most important things to nail is setting expectations.” (B, 16:55)
• Benchmarking:
  • Different time horizons present challenges: “On a one or a three year basis right now, [venture] is upside down... this is a really interesting time to look at performance on a relative basis.” (B, 18:36)
  • Importance of longer-term perspective and benchmarking against historical MPME and peer manager results.

8. A Broader View on Portfolio Components

• Overlooked Opportunities in Growth Equity:
  • Growth equity is described as the “magical third bowl of porridge.”
  • Many attractive, capital-efficient businesses are being discovered and funded by new growth firms (e.g., companies with <$1M ARR, multiple expansion opportunity). (B, 20:18–22:10)

9. Best Practices for Co-Investing

• Adverse Selection Risks:
  • “There’s obviously a ton of risk of adverse selection [in co-investment]. Those risks are amplified in venture capital.” (B, 22:37)
• Value of Relationships & Selection:
  • Decades of GP relationships and manager attribution analysis yield high-fidelity selection.
  • Large LPs/aggregators have access to more proprietary co-investment deal flow.
• Venture vs. Growth/Mid-Market Co-Invests:
  • Venture co-investments are “spicy.”
  • There are interesting, less risky co-investment opportunities in growth and lower middle markets. (B, 23:32)

10. Systematic vs. Opportunistic Co-Investing

• Reference to CalSTRS Approach:
  • Systematic, rules-based co-investing works for some, but there are trade-offs:
  • “If it’s a smaller component...you can...be more opportunistic. I think that there's many different ways to win and there’s not one right way.” (B, 25:21–26:31)

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Notable Quotes & Memorable Moments

• On Portfolio Longevity:
  “It’s perilous to move on quickly and not see through the decisions you’re making to their eventual outcomes.” (B, 01:23)

• On Governance:
  “If you have to relitigate your asset class strategy... that is a big point of friction to having a durable footprint in venture capital.” (B, 03:37)

• On Power Law:
  “Venture capital is a completely different animal... The results are dramatically different.” (B, 02:06)

• On Benchmarking:
  “Venture capital is going to handily outperform its public market equivalent [long-term], but on a one- or three-year basis right now, that is upside down.” (B, 18:36)

• On Growth Equity’s Value:
  “Growth equity has been just a magical third bowl of porridge in the typical family office portfolio.” (B, 20:49)
  “Many businesses... haven't even crossed a million in ARR... can be backed by growth equity firms at meaningful levels...” (B, 21:12)

• On Co-Investment Programs:
  “Venture co-investment is... spicy. I think that sometimes less spicy food is also very interesting in that there’s a lot of opportunities for growth equity and lower middle market co-investment...” (B, 23:50)

• On Rules-Based vs. Opportunistic Co-Investing:
  "I think that there's many different ways to win and there's not one right way. A lot of it depends on what the scale of the operation is and what you want to achieve." (B, 26:31)

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Timestamps for Key Segments

• Longevity and Institutional Perspective: [00:12–01:31]
• Venture vs. Private Equity Construction: [01:31–05:07]
• First Principles for Family Offices: [06:43–08:39]
• Managing Spiky Returns and Portfolio Structure: [08:39–10:15]
• Diversification and Deployment: [10:15–11:46]
• Mitigating Deployment Issues: [11:46–15:55]
• Mistakes and Benchmarking: [16:50–20:07]
• Growth Equity as a “Third Bowl”: [20:07–22:23]
• Co-Investing Best Practices: [22:23–24:54]
• Systematic vs. Opportunistic Co-Investing: [24:54–26:48]

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Conclusion

This episode serves as an expert-level primer for LPs building or refining their venture portfolios, with actionable wisdom on governance, risk tolerance, managing manager relationships, and co-investment strategies. The guest’s insights, drawn from thousands of manager meetings and decades of experience, focus not just on selection but on portfolio design, adaptive deployment, and the value of long-term thinking in an inherently uncertain asset class.

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Transcript

[A]

You've spent nearly two decades at Cambridge Associates really building portfolios for some of the top institutional investors and family offices in the world. How has that experience shaped how you look at asset management today?

[B]

I think that longevity in the role is really the superpower. That longevity gives you the patience, it gives you the perspective that are required for success. And when I think about the decisions that I've made on behalf of clients in terms of recommendations or investment action over the last three years, I have no idea yet how those decisions will age. But I have a lot more clarity on how those decisions I made back in 2010, 11, 12 have behaved. And I think it's important that you remain in place to see the fruits of those decisions. I think that culturally too, we're a very open source firm. Every GP meeting we have at Cambridge Associates is an open meeting. And so in 19 years and change, I've sat in on about 5,000 manager meetings. So a year at CA in this seat is a dog year at a typical endowment office or family office. And so the amount of game film, of understanding what works and what doesn't is very formative to how we look at things. Ultimately, you have to have longevity and I think it's perilous to move on quickly and not see through the decisions you're making to their eventual outcomes.

[A]

Venture capital is idiosyncratic in how you create a portfolio versus other asset classes. Because most asset classes, they're not subject to the power laws. A good investment is a good investment, is a good investment in venture capital. A lot of it is about putting the right parts that together make a great portfolio. Talk to me about how you put together a venture portfolio versus say a private equity portfolio. What are the key differences?

[B]

One is what you're looking for. You know, private equity and venture capital, there's a lot of light space between them. Private equity is often about process underwriting, you know, the value impact that you can have on every investment. Venture capital is a completely different animal. It behaves differently. To your point on Power Law, the results are dramatically different. And, and so I think key things we're looking for are right to win, network centrality, brand, both institutional and personal. These are the things that I think will play a bigger role in success. In terms of portfolio construction. Manager selection is not to be underestimated. It's a vital part of the puzzle, but it's not in my mind the most important piece of the puzzle. When you look at how the best performing family offices over the past several decades, what they do Differently. One of the things that they do differently is they are larger in their footprint in venture capital and private growth asset classes than their peers. So the size is just as determinant of success as the selection behind it. And it's somewhat non obvious but if you have a 40% allocation to private growth, inclusive of things like venture growth, equity buyout odds are you will outperform one with exceptional manager selection that's only allocated to 30%. The other thing that I think the best performing pools, institutional or family office have in common is probably the least sexy thing, but it is governance. It is the ability to make a plan and stick with it. And that might sound simple, but simple is not easy because we're all human beings because the world around us is changing a lot and there's, there's always going to be challenges. If you have to re legislate your asset class strategy when you're trying to make a manager recommendation or re up decision, then that is a big point of friction to having a durable footprint in venture capital. It can break continuity, it can sever your credibility, your relationships. And so it's really important, I think, to have the governance very, very thoughtfully put together that affords you a chance to build. It's like building Central Park. You're building Central Park. What you're doing is you're, you're trying to build a future you can't see yet. And that's, that's, that's the daily job of implementing venture capital. You're laying the groundwork, knowing that it's going to be years before you have real good visibility into how well it's going or how you know if you've achieved your objective. And so it's the ability to withstand all of those outside pressures, pressures on, you know, it being too illiquid, too expensive, coming at the expense of other parts of the portfolio that may be doing very well. It's, it's, it's the commitment to something bigger than, than, than, than yourself and bigger than, bigger than the, the, you know, the task at hand and seeing, seeing a future that you can't really quite visualize yet. And so we have no idea what 2035, 2035-2040 will look like. We're trying to make decisions today that will age well over that type of timeframe.

[A]

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[B]

Step one is figuring out what you want to achieve and the tools you have to achieve it. And one is establishing like, what is the footprint of tolerable illiquidity you can have? And that's a function of everything. It's a function of size, spending, the generational setup of a family. But ultimately we want to use our first interactions to determine the rules of the road and what flexibility we have to tolerate illiquidity. And generally speaking, the more illiquidity you can tolerate, the longer out your horizon can be and the more you can have access to asset classes like venture capital. So that is step one. Step two is establishing the cadence by which you're going to commit. In the early days of a portfolio, life is fairly simple. You have a pipeline of potential opportunities. Oftentimes these opportunities represent a mix of establishment firms that we've been underwriting for a long, long time. Maybe some new establishment or more emergent groups. You have, you know, establishment and emergent. You have generalists and specialists. And so if something is an establishment and it's generalist or like a core role player, that is a larger commitment opportunity. Whereas if something is like hyper focused as in A specialized GP that's doing one thing specifically, maybe it could be biotechnology, for instance. Then that special specialization, you know, maybe is like combined with, if it's an emergent idea, is going to conspire to make that a smaller initial commitment. But life starts out fairly simple. What happens over time though is the complexity. If you're not actively compressing complexity down, it will outstrip the growth of a portfolio. And when we onboard a new client that's been at this for a long time, that's one of the first things you typically notice is the complexity.

[A]

One of the things that I think separates the elite LPs from maybe the good LPs, inventor specifically, is that the elite LPs are willing to have spiky portfolios in terms of some managers might be up 7x, some might be, you know, flat or even slightly down. Rare cases. To what extent is that true versus say private equity?

[B]

When we're implementing a venture capital portfolio for a family, you know, over time you have power law outcomes that generate spiky, spiky, you know, company level returns, spiky fund level returns. And so it's, it is going to be lumpy. The impairment ratios are higher, the lemons will ripen earlier. One of the things that I think really successful LPs do is they construct portfolios that resemble a generational succession, the same way that you would build. If you're constructing an investment firm itself. You have the establishment, senior partners, you have a middle band of new establishment in the making. And then you have this future generation where you don't know what percentage of those may wash out or fail to materialize as durable brands. But having those options, I think is really an essential ingredient. There's this Andrew Carnegie quote, first man gets the oyster, second man gets the shell. I think if you are a family office and you're waiting for obviousness to emerge on who the strongest GPS are, chances are you will not get the allocation that you desire.

[A]

When you look at deployment, typically funds are deploying over two years. Sometimes it used to be three years. How diversified do you have to be as an LP when you're investing into vintage funds? How important is that?

[B]

It's important, but the number of funds can, can vary materially. I think we demonstrated some time ago that as few as six manager relationships effectively reduces your risk of capital loss to near zero. So you don't have to have a lot of roster, you don't have to have a very broad roster to successfully diversify in venture capital. That said, I think it is handy to have smaller checks and a commitment to effectively a next generation basket of names that positions you well for future access. One of the challenges I think a lot of families face right now is this wavelength between funds. A relationship may have started five, 10 years ago in another era when funds are coming back to market every three years, sometimes every four. When that wavelength condenses down to two years, a year and a half, one year, then it becomes a whole different challenge because one, the commitment you made to the last fund may have presumed some cadence. And when that cadence is a lot faster than was initially forecasted, that means the size of that relationship is now growing. Its role in the portfolio is expanding perhaps beyond the intention.

[A]

What action could an LP take to prevent issues with deployment?

[B]

A really simple way to approach this is not to make any investment decision without the understanding and the expectation that you're going to be committing to several funds. Whether those several funds come in the next five years or the next eight or nine years is really in the hands of the GP and their established hull speed for putting capital to work. And so I think about it oftentimes as decisions around firms, not funds. Funds will happen. Sometimes funds will be raised faster.

[A]

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[B]

Sometimes it'll be deployed faster. You know, one way a family should think about this is the firms the partners you want to have and then, you know, calibrating as need be so that if, if it's a, it's a. If it's a firm, you can kind of count on coming Back very quickly. You, you want to have the horizon in front of you to think, you know, we can commit to these three funds, this next series of funds that they raise and you know, reassess some years down the road. I mean, obviously we're going to re underwrite, but when you raise a new fund two years on the heels of its predecessor, there's not a ton of information to re underwrite. All you can do is look to the organization. Is there cohesion, is there continuity? There is the strategy being generally adhered to is the right to win on display things of that nature. You can kind of re underwrite a process, but you can't re underwrite the outcomes because those outcomes are so early in their lives.

[A]

What are some mistakes that family offices make when they first invest in venture?

[B]

One of the most important things to nail is setting expectations. And so when we sit down with a family office for the first time and we lay out an asset allocation that has venture as maybe one third of the private investment allocation, maybe it's a quarter and it's complemented by growth and private equity and maybe opportunistic investing. I think a really important conversation is setting expectations on in five years time, what will this look like? What will the average commitment size be? What will the range of commitment amounts be? How many managers in each of these categories should they expect? And importantly, when it comes time to make a re up decision, what will the basis of that, what will be the basis of that re up decision? Because we know that there won't be distributions, there won't be realizations. There may not be a ton of, of new information. Oftentimes the information gleaned is actually from a prior body of work. You know, a company from a fund that like long predated this relationship has generated liquidity and that liquidity is great. And it's kind of creating more clarity on their, on their pattern recognition as a team or their, their abilities as a brand. But I think setting expectations is really important. Another important factor is how do you benchmark it? How do you know if you're actually doing any good? And this is a really interesting time in benchmarking territory because often if you look at like since inception returns over like long periods of time, Venture capital is going to handily outperform its public market equivalent. If you look at a one or a three year basis right now, that is upside down owing to, you know, the Max 7, owing to other forces of correction that's happened since 2021. This is a really interesting time to look at performance on a relative basis, I would say it's one of the more optically challenging times to be an LP in Ventureland where you have to justify its role in the portfolio. And I think this is where data is incredibly powerful in offering a defense of its role in the portfolio. If you look at all of these periods in history, post GFC, post TechRec, when you see this inversion happen where publics are handily outperforming their venture capital or their private equity brethren in the rolling three year average, following those correcting periods, it reverts right back, oftentimes with even greater premia than before. And so it's really important to, I think, you know, have a benchmark and to, to have historical data as perspective. You know, when we think about benchmarking, I try not to over complicate it. We, we want to answer two questions. One, are you getting rewarded for liquidity? And that's where you measure things against an mpme. The second is are you good at choosing managers? And that's where our colleagues who run the CA venture capital and private equity benchmarks have an immense amount of data that we can measure against. And so you can take all of these decisions that have been made in some cases dozens and dozens of decisions over the past several years and you can basically use that as, as the scale for whether you're adding value in your manager selection because you can measure everything back to a median.

[A]

You're approaching 20 years at Cambridge. So you've seen these dynamics change over time. What are the games that long term LPs are playing in order to win in venture capital?

[B]

You know, venture capital is like the engine for innovation and growth. You want to have a material footprint there. I think that there is overlooked food groups also like growth equity. I think about beach volleyball. Where do most of the misses happens is when the ball falls in the seam. And if you consider the typical design of an investment office, you might have heads of venture capital, heads of private equity. When a ball is missed, it's usually under the presumption that someone else is taking priority on that idea. And growth equity has been just a magical third bowl of porridge in the typical family office portfolio. You have immensely high growth, you have capital efficiency, you have entry pricing that typically happens leagues below the entry pricing of venture capital. And the landscape itself has just been radically transformed over the past 20 years. A lot of I think investors, when they think about growth equity, they might think about these big established brands that began as growth equity investors, minority growth investors, at a small scale in the 80s, but have since graduated to a different weight class. Behind them is this landscape that has been now filled up by a whole new generation of growth firms that are a fraction the size of the, that have check writing ability down to in some cases, you know, $5 million levels, that can have really powerful originating platforms to discover companies that are bootstrapped or very lightly funded that haven't even crossed a million in ARR. Those businesses can be really attractive investment opportunities. They can be backed by, you know, by growth equity firms at meaningful levels with, you know, entry error multiples of anywhere from, you know, eight to 12 times. And they can grow, and they can grow without having to pivot into focusing on capital efficiency. Oftentimes because they were born with capital efficiency.

[A]

One of the trickiest things for family offices to get right in venture is co invest. Sure, over several decades you've seen many variations of co invest programs for family offices. What's the best practices?

[B]

So much of it begins with establishing the strike zone of what you're after. And our co investment team here at CA studied this for so long before getting into the practice of doing it. But the observation, like one of the most core observations around co investments is that there's obviously a ton of risk of adverse selection. I think those risks are amplified in venture capital. Again, coming back to the why you challenge, right the, the way that our team has, has addressed that is so much of the history of our firm is in underwriting managers. And when you underwrite managers serially and you get to know the people and the, the partner level attribution and the sector level attribution of how funds funds deliver, you start to develop a very high fidelity picture of what types of investments will odds on be successful investments for every gp. So that's one. One big piece of the puzzle is understanding the selection. Another part of the puzzle is having access in the first place. And as a flow through entity, you know, investing on behalf of our clients, it matters to have the scale to be one of the first looks in seeing that flow. And that's where decades of relationship building, decades of supporting through ups and downs of market cycles and creating a pretty sizable footprint as an aggregator or as an aggregate LP earns right to win and right to play and co investments. And so I think about those two as being really big factors. Venture co investment is. It's spicy. I think that sometimes less spicy. Food is also very interesting in that there's a lot of opportunities for growth equity and lower middle market co investment that that can be found again because there's massive diffusion in those markets. And then the companies that inflect, you know, those are, those are machines that will benefit from more capital. And sometimes those capital needs outstrip the GP syndicate's ability to deliver it all themselves. And so it does create a nice lane for clients.

[A]

I asked this exact question, former CIO of CalSTRS, Chris Ellman, who was their CIO for 23 years, and he said they tried everything at CalSTRS and the thing that really worked was systematic and rules based co investing. Do you subscribe to that belief that it really needs to be on the GP level? And can you build a co invest program on the investment level?

[B]

It's an interesting approach. I don't think I have a firm point of view to challenge that necessarily. However, one thing I think is an interesting quirk is to get into co investments, you have to start somewhere. And starting somewhere is kind of its own mathematical challenge in the first place. You're probably familiar with optimal stop theory, which is you need to see 30, I think it's like 32 different samples of something before you can actually understand the full breadth of what's out there in a population, understand what quality looks like, before you can confidently say, okay, we know what quality looks like. And so I think starting somewhere is important. I think honestly one of the bigger recipes or ingredients there, and the CalSTRS rep said it well, it's like, have a plan and stick to it. And so if the plan is to move capital at scale, then having more architecture around it, rules of the road, I think is important. If it's a smaller component of what you're doing, I think that you can probably maneuver without a systematic allocation policy and be more opportunistic. I think that there's many different ways to win and there's not one right way. I think, and I think a lot of it depends on what the scale of the operation is and what you want to achieve.

[A]

Well, Mike, this has been an absolute masterclass. Thanks so much for jumping on the podcast and looking forward to continuing this conversation live.

[B]

Thanks for having me and thank you for what you do. Really, really great conversations you've been staging. So thanks. Thanks again for the opportunity.

[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. Share it 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.