Superclusters

Fundraising, without a doubt, is tough. Everyone, including those who have been around the block, happens to be equity rich, cash poor. LPs included. There are also a lot GPs also approach LPs purely for their capital, resulting in transactional conversations. A lack of substance and relationship-building. So, With the holidays around the corner, Nakul at Audacious Ventures, Ben at Next Legacy Partners, and I thought it'd be cool to get together and share what makes venture amazing, and why investing is a long game. If you have any of the below on your holiday checklist, THIS is the episode for you! ✅ When an LP passes on Fund I, but says yes for Fund II ✅ Tough conversations with ambitious people ✅ Batman fandom and analogies (ft. Batman) ✅ Tactical advice on pitching individuals vs institutions ✅ Growing up in adversity ✅ Why Ben likes bright socks ✅ And the worst kind of failure out there This one with Ben and Nakul is the sister Superclusters episode to Jeffrey Rinvelt and Martin Tobias' episode in Season 1. While we cover a lot, two of my favorite moments from the episode are: 1/ “The thing about working with self-motivated people and driven people, on their worst day, they are pushing themselves very hard and your job is to reduce the stress in that conversation.” – Nakul Mandan Most of you reading this post here are undeniably ambitious, smart, thoughtful, likely one of the top ones in your peer circle. And you know, better than anyone else, how hard you are on yourself you are. Something that very few others see. And it's for that reason, I love Nakul's line above, that in recognizing that inner voice in others and what the role of you as an investor or as a teammate should be in those is important. And sometimes, it's not to amplify that inner voice. 2/ “Entrepreneurs think it’s going to be like the Michael Keaton version, and the good ones, they actually have to work through the Christopher Nolan version of Batman.” – Ben Choi Most successes look like 10-year overnight successes. Nakul's journey to venture is no exception. And Nakul gets very real with us. And what fuels him may not be something that most people suspect, and it all started from his brother and family. The same is true for Ben who grew up in the community of Chinatown with his parents. All that and so much more in the full episode (in the comments) Again, Nakul, Ben, thanks for making this a truly special episode. I don't know about you but it deeply warmed my heart.

“Many pension plans, especially in America, put blinders on... "‘Don’t tell me what I’m paying my external managers. I really want to focus and make sure we’re not overpaying our internal people.’ "And so then it becomes, you can’t ignore the external fees because the internal costs and external fees are related. If you pay great people internally, you can push back on the external fees. If you don’t pay great people internally, then you’re a price taker.” 🎤 💧 moment! I had a rule for both my editor Tyler and myself that Season 4’s episodes will not exceed one hour, as a forcing function for the quality of content we’d put out there. Ashby Monk at Stanford's Long-Term Investing broke that rule for us. This is the first episode we’ve ever had on Superclusters where the quotes and soundbites we pulled from this episode exceeded the page length of the list of links from the episode. If you don’t believe me, check out the show notes in the comments. And if you don’t have 75 minutes free, I dare you to read the quotes in the show notes and tell me you’re not interested to hear what Ashby has to say. But of all the million things we cover from LinkedIn practical jokes to pension fund compensation structures to who the highest paid government workers are (spoiler: It's not who you think), here are my favorite: 1/ Because net and gross returns differ so much, the goal of hiring someone to run a venture program in-house is not to match a VC fund on gross, but to beat a VC/PE manager on net. For instance, if a VC fund is delivering 22% gross IRR, and 17% net. Your goal when you hire someone in-house is maybe 20% gross, but 17.5% net. 2/ For pension funds, despite being government workers, it's important to build a separate management company, so that compensation comparables are factored by industry, not by level of seniority in the firm. If it's not a separate management company, be prepared to justify to the board who's making $40-50K why the CIO deserves $500K salary. That said, if you're not willing to pay people market standard, you can't attract the best and brightest. And when you don't have the best and brightest, these CIOs won't push back against external fees that create a larger delta between gross and net, and will settle for lower net returns for the public institution. 3/ Pay team members at the 49th percentile. “I often tell pensions you should pay people at the 49th percentile. So, just a bit less than average. So that the people going and working there also share the mission. They love the mission ‘cause that actually is, in my experience, the magic of the culture in these organizations that you don’t want to lose.” All that and lots more below in the full episode + show notes in the comments Also huge thanks to Rebecca G. for the intro here, without which, this episode wouldn't have been possible

“Markets have a mind of their own.” – David York There are some legends who are larger than life. For a long time, I've been a fan of David York's work at Top Tier Capital Partners. Then one fateful day, I got to meet the man, the myth, the legend because of a good friend, Yohei Nakajima, and I knew I had to have David on Superclusters! Today it finally happened! Definitely one of the most in-the-trenches episodes, where David shares how Top Tier started and how David became one of the world's best at fundraising, as well as his expertise as a boulanger. But my hands-down favorite part is where we get really tactical on the relationship-building element, specifically on how to get LPs access to the venture capital asset class. 1/ Different LPs have different liquidity demands. European LPs care a lot more about finality of investments than US LPs. "Endowments are best suited for long equity positions." Probably why we've seen endowments as some of the first institutional movers to VC as an asset class since 2+ decades back. Pensions care a lot about liquidity because boards change quite often. If a family is managing their own FO, there is high turnover in the portfolio between generations as people pass away and new generations with new motivations come in. 2/ When, not just who, to approach certain LPs matter. Here's just a snippet of what was shared in the episode 👇 “Going to see accounts before budgets are set helps get your brand and your story in the mind of the budget setter. In the case of the US, budgets are set in January and July, depending on the fiscal year. In the case of Japan, budgets are set at the end of March, early April. To get into the budget for Tokyo, you gotta be working with the client in the fall to get them ready to do it for the next fiscal year. [For] Korea, the budgets are set in January, but they don’t really get executed on till the first of April. So there’s time in there where you can work on those things. The same thing is true with Europe. A lot of budgets are mid-year. So you develop some understanding of patterns. You need to give yourself, for better or worse if you’re raising money, two to three years of relationship-building with clients." And so much more, plus a small post-credit scene :) Full episode in the comments

“The line that sits for me is you got to pick well, you got to coach well, and then you got to finance well – and the financing includes the exit.” - Jeffrey Rinvelt You know that homecoming feeling or the one you get when you catch up with friends at the 10-year reunion, THIS episode was that for me. We've had Renaissance Venture Capital's Jeffrey Rinvelt on since Superclusters' Season 1 as a post-season episode with Martin Tobias, and 3 seasons later we finally have him back. Jeff, who has every right to be a standalone episode. Let me elaborate. 1/ Who is the exit manager? Jeff may be the first person I've heard this from. The exit manager. Most VCs are geared to be great pickers. Even more so, if you've spent time at another large VC institution, but the difference between a fund manager and an investor is that the former also requires you to "exit well." It's not a "I'll figure it out when I get there." But how will you be disciplined enough to hedge against downside risk without capping too much of the upside. Does your fund strategy include when you'll remit the capital, not just how you'll commit? If not, you need to either hire an exit manager, or be that person yourself. Moreover, Jeff also answers the age-old question: Should VCs be public market investors? Should they hold past the initial liquidity window? 2/ $40M is the minimum viable fund of funds size for 2 people. When on 1% carry, that's $400K a year between 2 people, as well as back office expenses and support staff. The latter 2 often cost more than what thinks. Separate from the episode, a seasoned founding GP once told me to prepare between $150-200K on pure travel expenses per year to meet founders and LPs. Running a fund of funds is no less different. 3/ Renaissance measures GPs on net IRRs, as opposed to net TVPIs. FoF managers are measured on IRRs by their LPs. Jeff did caveat 2 things: a/ As an LP, if you are to measure by IRR, you must do your homework. Where are the gains coming from. Paper marks vs real marks. How much is realized? b/ Net IRRs take about 5-6 years to settle in. Anything before then is too volatile to measure. All this and more! Full episode and show notes in the comments P.S. Jeff may try to break your heart. Trust me, it'll make sense, but you'll have to listen till the end of the episode.

We are back! Season 4 of Superclusters kicks off with none other than the one of a kind Kelli Fontaine at Cendana Capital! From Kelli's origin story as a figure skater to her prowess as a data-driven founder, Kelli is who she is because of who she's been and what she's done in the past. This episode is extra special, not only because Kelli's been on my Mount Rushmore of LPs to invite to the pod since Season 1, but also that this episode hits hard. My 3 biggest takeaways are: 1/ Not all data are created equal. Some data are more equal than others (jk). That said, you can't always trust every piece of data you see online. Consider sampling and survivorship bias. Data in venture is heavily biased towards funds that last. Most funds don't. Funds that don't have no incentive to continue sharing their data. For the same reason, as an LP, it's important to start accumulating your own data sets and not trust public databases blindly. Cendana is lucky to have decades of data. But as the saying goes, the best time to plant a tree is 20 years ago; the second best time is now. 2/ Vintage benchmarking is useful after 7-8 years after the vintage, not before. “Everybody uses year benchmarking, but that’s not the appropriate way to measure. We have one fund manager that takes five years to commit the capital to do initial investments versus a manager that does it all in a year. You’re gonna look very, very different. Ten years from now, 15 years from now, then you can start benchmarking against each other from that vintage.” 3/ Neutral references are worse than negative references. Being forgettable is a sin in an industry where capital is a commodity. Neutral means no one has strong feelings about you. No strong feelings means you're not the first few VCs great founders pitch first. Meaning you get last pick. As a GP, you want to draft your fantasy team early, even if it means some founders will self select themselves from you. Full episode and show notes in comments below!

Succession planning isn't for every VC firm. Not every firm needs to last the test of time. “When you think about succession planning, you actually have to take a step back and think: Is that even going to be my approach? Do I need to think about succession planning or am I really talking about wind-down planning? And when I stop raising a subsequent fund.” – Lisa Cawley, As was the common theme in Superclusters' latest episode - part 3 of the trifecta on firm building and succession planning. Huge thanks to Jaclyn Freeman Hester, Ben Choi, and Lisa Cawley, CFA for sharing their unfiltered thoughts here! But what if your goal is to build a lasting, enduring firm? 💰 You need to think about compensation. For younger GPs, if they cannot fulfill the GP commit for a large fund, offer no interest rate loans to younger GPs paid back through carry. If you want a new addition to the team to grow with the firm long-term, consider compensating the new team member with carry across even previous funds they were not a part of, instead of just the fund they've joined on to align incentives. That said, in the words of Ben, "If somebody is so good that they can raise their own fund, that’s exactly who you want in your partnership. You want your partnership of equals that decide to get together, not just are so grateful to have a chance to be here, but they’re not that great.” 🪟 You need to think about visibility. As Jaclyn mentioned, it’s important to raise people up internally and make sure LPs have enough time with the junior investors to really appreciate the talent that’s brought to the table and to build trust over time, so by the time they are the GPs, it is of no surprise. So much and more in the full episode down in the comments!

Part 2 is in! After all the love we got for Part 1 of this 3-part mini series on Superclusters last week with the amazing Lisa Cawley, CFA, Jaclyn Freeman Hester, and Ben Choi, we can finally share Part 2. First off, part 2 of 3 probably has the best library of soundbites out of the 3 episodes The common thread between Jaclyn, Lisa, and Ben in all of this is... Fund III planning starts at Fund I. 📝 At Fund I, you determine your raison d'etre. Why should another VC fund exist? On the other hand, your Fund III planning must answer why should your VC fund continue to exist? And how does your brand and influence snowball on itself? Why would the best talent and founders choose you? Fund III's strategy doesn't have to be set in stone, but LPs must see that you're thinking about it today and agree directionally for them to be long term partners. On the more tactical side of things, Jaclyn really changed the way I thought about early hires at a VC firm. 🫂 If you don't want to do something at your firm, hire someone senior, not junior. Jaclyn talks about how there’s ROI in hiring senior people at your firm, as opposed to a junior person, if there’s an area of managing the firm (i.e. ops, finance) that you as the GP really don’t want to do. And that’s not just ROI on time saved, but also the creativity that comes with a senior, experienced hire that a junior person is unable to have. “Cleaning up messes can take up so much more time than doing it right in the first place.” More often junior people like the investing part just as much as you do, less of the operations work. And if you're not interested in doing ops per se, then you don't know how to set good KPIs for the junior person. You want to bring someone in who's just as excited about ops or finance or legal as you are about investing. And oftentimes, that's someone more senior. And if you are to hire someone junior, someone who's been battle-tested to know what world-class quality looks like. 💀 "What are your other LPs doing?" is a horrible question You're outsourcing conviction. But even when you do, as Lisa explains, why a pension fund invests may have nothing to do with your motivation to invest. And why an endowment chooses to bow out may have nothing to do with whether the fund is good or not. To make this more concrete, a pension may have too much exposure to consumer, and they love the GP, but just can't invest. Or a family office doesn't do solo GPs, and won't invest until there's a partnership, but that has nothing to do with your set of priorities when underwriting a manager. And of course, I have to call out one of the best summaries of what LPs do. Shoutout to Ben for the one-liner. "LPs watch the movie, but don't read the book." Full episode in the comments

It's not often I get the brain trust of LPs together to talk about how they think about succession planning and firm-building in the best firms. And I love it 10x more when they share real, tactical examples of the best answers to their succession planning questions. The top 3 people I know because in our many conversations, have thought deeply and invested intentionally on the topic are Lisa Cawley, CFA, Ben Choi, and Jaclyn Freeman Hester. And it made me so frickin happy that all 3 said yes to this special Superclusters episode. That said, it was long! So as an experiment of creating shorter episodes, but to keep the essence of their insights, we're doing a mini 3-part series on the topic of succession planning at VC firms. Today is Part 1! What are the intangibles that create a firm with a legacy? 💃 The culture keeper “The job and the role that goes most unseen by LPs and everybody outside of the firm is the role of the culture keeper.” -- Ben Choi It's the person who's usually quite senior who is an embodiment of the culture of the firm even when no one's looking. It's because of those small moments that define the character of a firm, and by nature of that, inspires others and attracts like-minded individuals to join. 🔦 It’s what you do in the dark that puts you in the light Most LPs don't see half the work GPs put in to creating the firm. But the ones that go down in the history books have the discipline to continue practices even if no one else knows about it. It's how people raise their junior team members and empower them. That the brand of the firm is just as much due to the senior talent as it is by the next generation. Spending time with GPs at their offices, observing how different team members interact is one way to see that. But that takes time. And it takes trust for the GPs and the team to lower their guardrails to be honest with you. And as Lisa Cawley, CFA cites from an infamous Michael Phelps commercial. "It's what you do in the dark that puts in the light." 📣 Pre-emptively communicating changes in discipline If one could predict what the every nook and cranny in the world would look like 10-15 years from now, they're gods. For the rest of us mere mortals, things change. LPs, like Jaclyn Freeman Hester, get it. It's not nearly so bad for things to change but that things change, and subsequently you change but LPs don't know about it till post-mortem. There is a product in which LPs buy, and they'd like to be told beforehand if the product is to change during their subscription. All that and more in the full episode down in the comments 👇

From growing up in terror torn Colombia to building robots for theme parks and special effects in movies to working as a commercial attache in Beijing to being a capital allocator in top venture funds, Felipe Valencia’s life is a Hollywood film in and of itself. Couldn't think of a better person to close out Season 3 of Superclusters. The one, the only Felipe from Veronorte! My favorite lessons (and yes, this is the longest episode we’ve put out to date, but there is so much meat to the bone that we chose to create a longer episode): 1/ Funds that have at least one fund in the top quartile are more likely to consistently outperform than funds that have never. If you're never seen excellence, you likely spend most of your time imagining what it would look like. 2/ 17-23% IRR net of fees across 12 years is the minimum a FoF must seek to warrant a fund of funds strategy in Latam. Veronorte achieves this by having an index-like approach to top funds across late-stage, established, and emerging funds. 3/ Bring presents. You’ll find that Felipe is extraordinarily strategic with his relationships and how we won access to some of the most recognizable VC brands today. Start by investing in great companies, then have the founders introduce you to their investors. And for every investor you meet, bring gifts. In Felipe’s case, it was world-class Colombian coffee. Not only does someone get a gift when they first interact with you, coffee becomes an easy topic to follow up on in a follow-up message after the initial meeting. Also huge shoutout to my buddy Enzo Cavalie for the intro! Full episode in the comments!