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

What separates elite venture LPs from everyone else… and why do most family offices underestimate the governance required to win? In this episode, I sit down with Michael P. Larsen, a longtime Partner at Cambridge Associates, to unpack nearly two decades of building venture and private equity portfolios for leading institutions and family offices. Michael shares why longevity may be the ultimate competitive advantage in asset management, how governance quietly determines venture outcomes, and why portfolio size can matter just as much as manager selection. We dive into power laws, spiky returns, growth equity’s overlooked role, co-invest best practices, and how benchmarking can help LPs stay disciplined during optically challenging cycles.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  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?

• 0:13Speaker 01

  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.

• 0:58Speaker 01

  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.

• 1:31David Weisburd?

  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?

• 1:52Speaker 01

  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 the power law. The results are dramatically different. And so I think key things we're looking for are our 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, you know, in my mind, the most important piece of the puzzle.

• 2:37Speaker 01

  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, as, you know, the selection behind it. And it's somewhat not 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, exceptional manager selection that's only allocated to 30%. The other thing that I think the best performing pools, institutional or family office have

• 3:19Speaker 01

  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, a 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

• 4:02Speaker 01

  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 the commitment to something bigger than than than than yourself and bigger than bigger than

• 4:47Speaker 01

  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 to 2040 will look like. We're trying to make decisions today that will age well over that type of timeframe.

• 5:07David Weisburd?

  A family office comes to you, there's a liquidity event, they're looking to build out a venture capital book. What are the first principles? How should a family office in 2026 build out their venture capital? One of the hardest things of investing is seeing what's shifting before everyone else does. For decades, only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and to stay ahead of consensus. Meanwhile, smaller funds have been forced to cobble together ad hoc channel intelligence or rely on stale reports from sell-side shops. But channel checks are no longer a luxury, they're becoming table stakes for the industry. The challenges has always been scale, speed and consistency. That's where AlphaSense comes in. AlphaSense is redefining channel research.

• 5:50David Weisburd?

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• 6:35David Weisburd?

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• 6:43Speaker 01

  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 know, you can have access to asset classes like venture capital. So that is step one.

• 7:26Speaker 01

  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 have, you know, we've been underwriting for a long, long time. Maybe some new establishment or more emergent groups. You have 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 specialization,

• 8:12Speaker 01

  you know, maybe it's 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.

• 8:39David Weisburd?

  One of the things that I think separates the elite LPs from maybe the good LPs in venture 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?

• 8:59Speaker 01

  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 know, you would, 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

• 9:40Speaker 01

  have this future generation where you don't know if, you know, what percentage of those may wash out or fail to, to materialize as durable brands. But having those options, I think is really an essential ingredient. There's this Andrew Carnegie quote, you know, 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.

• 10:15David Weisburd?

  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?

• 10:24Speaker 01

  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, you know, reduces your risk of capital loss to near zero. So you don't have to have, you know, a lot of, of roster, you know, you don't have to have a very broad roster to successfully diversify and venture capital. That said, I think it is handy to have smaller checks and like 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, you know, a relationship may have started, you know, five, 10 years ago.

• 11:10Speaker 01

  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.

• 11:46David Weisburd?

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

• 11:51Speaker 01

  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, you know, five years or the next eight or nine years is really in the hands of the GP and their kind of 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. Sometimes it'll be deployed faster. You know, one way a family should think about this is the firms, the partners you want

• 12:31Speaker 01

  to have, and then, you know, calibrating as need be, so that if it's a firm you can kind of count on coming back very quickly, 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 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, you know, to the organization. Is there cohesion? Is there continuity there? Is the strategy being like generally adhered to? Is the right to win on display? Things of that nature.

• 13:15Speaker 01

  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.

• 13:21David Weisburd?

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

• 13:25Speaker 01

  One of the most important things to nail.

• 13:30Speaker 01

  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, you know, venture as, you know, maybe one third of the private investment, you know, 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?

• 14:11Speaker 01

  Because we know that there won't be distributions, there won't be realizations, there may not be a ton 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

• 14:55Speaker 01

  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 MAC7, owing to other, you know, forces of correction that's happened since, since 2021. This is a really interesting time to look at, you know, performance on a relative basis. I would say it's the most, one of the more optically challenging times to be an LP in venture land where you have to justify its role in the portfolio. And I think this is where data is incredibly powerful in offering, you know, 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.

• 15:42Speaker 01

  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 have historical data as perspective. You know, when we think about benchmarking, try not to overcomplicate it. We, we want to answer two questions. One, are you getting rewarded for liquidity? And that's where you measure things against an NPME. The second is, are you good at choosing managers? And that's where, you know, our colleagues who run the CA Venture Capital Private Equity Benchmarks, you know, have an immense amount of data that we can measure against. And so you can take all of these, these decisions that have been made, in some cases, like dozens and dozens of decisions over the past several years.

• 16:27Speaker 01

  And you can, 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.

• 16:37David Weisburd?

  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 capitals?

• 16:48Speaker 01

  You know, venture capital is like the engine for innovation and growth. You want to have a material footprint there. I think that there's overlooked food groups also, like growth equity. I think about, you know, beach volleyball. Where do most of the misses happens is when the ball falls on the seam. And if you, if you consider the, the typical design of an investment office, you might have heads of venture capital, heads of private equity. There's, when, when, 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.

• 17:33Speaker 01

  You have capital efficiency. You have entry pricing that typically happens leagues below the entry pricing of venture capital. And the, the, this, the landscape itself has just been, you know, 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 eighties, but have since graduated to, you know, a different weight class. Behind them is this landscape that has been now filled up by a new, new, a whole new generation of growth firms that are a fraction the size, that have check writing ability down

• 18:16Speaker 01

  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.

• 18:54David Weisburd?

  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?

• 19:07Speaker 01

  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, 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

• 19:48Speaker 01

  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.

• 20:12Speaker 01

  So that's one, one big piece of the puzzle is, 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, it matters to have the scale to, you know, be one of the first looks in, in seeing that flow. And that's where, you know, decades of relationship building, decades of supporting EPs through, through, you know, ups and downs of market cycles and creating a, a pretty sizable, you know, footprint as a, as an aggregator or as an aggregate LP earns, earns right to, right to win and right to play and co-investments. And so I think, I think about those two as being like really big factors. You know, venture co-investment is, it's spicy.

• 20:57Speaker 01

  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, to, to deliver all themselves. And so it does create a nice lane for, for clients.

• 21:24David Weisburd?

  I asked this exact question, former CIO of CalSTRS, Chris Elman, who was their, 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?

• 21:51Speaker 01

  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, to get into co-investments. You have to start somewhere and starting somewhere is it's 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're, you can actually understand like the full breadth of what's out there in a population, understand like what quality looks like before you can confidently say,

• 22:33Speaker 01

  okay, we, we know what quality looks like. And so I think starting somewhere is important. I think, you know, honestly, one of the bigger recipes or ingredients there and the CalSTRS, you know, rep said it well. It's like have a plan and stick to it. And so if the plan is to move, you know, capital at scale, then having more, you know, architecture around it, rules of the road, I think is important. If it's, if it's a smaller component of what you're doing, I think that, you know, 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, the operation is and what you want to achieve.

• 23:18David Weisburd?

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

• 23:24Speaker 01

  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.

• 23:30David Weisburd?

  That's it for today's episode of How to 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.