E123: Should LPs invest in Venture Capital? w/Gregor von dem Knesebeck

In this episode of How I Invest, I connect with Gregor von dem Knesebeck, Co-Founder and Managing Partner of Blue Future Partners. Gregor shares the story of building a successful fund-of-funds focused on venture capital, emphasizing brand building, portfolio construction, and navigating the unique challenges of venture investing as a family office. This episode provides insights into venture capital portfolio strategies, the power law of returns, and best practices for fund allocation. A valuable listen for emerging fund managers, family offices, and anyone exploring fund-of-funds strategies.

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

• 0:00David Weisburd?

  What's the best practice for allocating the venture asset class if you're a family office?

• 0:04Speaker 01

  I always, when I talk to people, go with three pillars. You'll have part of your money in fund of funds, you'll have some in funds and you'll have some direct. And depending on where you start your journey, you'll either have, you'll enter one route or the other. The one persona we typically encounter with our LPs, somebody starting out and tipping his or her toes into the space with a fund of fund. Then they use the access they can generate to go into funds. And then you become very excited and they want to go direct. Another persona is the persona going direct, burning his or her hands. Because they did one of five, 10 investments in a very short period of time.

• 0:45Speaker 01

  And then GOs, everything you can be doing wrong on home buyers, on GO, on not looking at vintage diversification and so forth. People typically do on direct investing.

• 0:55David Weisburd?

  Yeah, I think one of the biggest issues with family offices that invest in venture capitals. They have the wrong intuition around other asset classes like private equity, where venture capital is power law driven.

• 1:07Speaker 01

  So I think this is a quite overlooked discussion point in the industry of managing family and the business. And when you start out on a business, on a venture kind of firm, I think it takes you 10 years and it takes all of your energy. If you have kind of young family at the same time, that's a strain, which you probably need to get right. So probably if I hadn't known that before, I would have again timed it a little differently. Then you kind of learn along the way. But that's probably one very personal kind of consideration on understanding when you start, what it's going to entail.

• 1:44David Weisburd?

  What is it like to start your own firm, like Blue Future Partners? Walk me through the founder's story and what it's like to run your own firm.

• 1:52Speaker 01

  So I was co-founder, so I co-founded with my brother Philip. When we sat down with the manager, one of the first funds we've been actually invested in, in the US, in New York, we sat down with him. And he said, if you don't have a brand and you don't have a digital presence, you will not succeed in venture capital. And this was really eye-opening. I recall how we sat down over lunch in 2013. And that kind of gave us the idea to actually build the firm around it and do a lot of activities to actually create a brand. And so we focused a lot on not in scaling people at the firm. It's not about headcount, but it's about brand reliability and everything you need as a good LP to build that firm.

• 2:32David Weisburd?

  How do you go about building a great brand?

• 2:34Speaker 01

  I think it's something which happens over time. And then you need a lot of luck as well. So I think brand and venture capital, especially as an LP, you're judged by the investments you've done in the past. So in the beginning, you haven't done any investments. Therefore, it's a chicken egg problem that you can't really escape. I think that a lot of new components in what you can do for branding purposes. So we have a bunch of initiatives on the GP and LP side, which now help us to more systematically build a brand. But it's about breaking in. And if you look at VC fund managers, they often thrive if they have done a very good deal. Everybody talked about it and suddenly you're on the map.

• 3:17Speaker 01

  And then you need to prove yourself long term, which is the even more difficult part than actually breaking in.

• 3:22David Weisburd?

  How did you solve the chicken egg problem when you started a decade ago?

• 3:26Speaker 01

  So for us, we were very fortunate that we had a trusted circle of LPs. That very early on for our Fund One, which I'd call it the Fund Zero today, kind of by size, took the leap of faith with us and said, okay, let's try this. This happened because we had been co-investing in that circle in other asset classes before. And they said, okay, we'll give them a shot and try.

• 3:50David Weisburd?

  From the Family Office?

• 3:51Speaker 01

  It's Family Office and its other high net worth individuals and Family Offices founders and so forth. That had a good experience with us as partners in other asset classes. And then we moved on to venture together. So we had the trust of people saying, hey, try this. On paper, we understand what you're trying to do. Now show us that you can do it. And then for Fund Two and Fund Three, it was way easier to convince them and scaling up.

• 4:14David Weisburd?

  What percentage of assets do you think a Family Office should have in the venture asset class?

• 4:21Speaker 01

  It really depends on what they do. So if you look at it top down, you'd say typically the one-third, one-third, one-third rule. If you have private markets or private allocation of a third, then within that probably a large majority will be private equity. And then I think, given the kind of endowment style investments, a lot of family offices try to do so to generate liquidity for the family from, let's say, real estate or yielding assets. And then they can actually take this really long-term view. When they deploy in venture, they could then probably go larger. So I have seen families saying, within my private equity allocation, I'll do 60% venture and are super comfortable doing it. I think it is, can be a good strategy, let's say, depending on what your liquidity needs are in the mid to long term.

• 5:06David Weisburd?

  You mentioned 5%. US endowments are anywhere from 10% to 20%. Yale, I think, is mid 20s. Why should family offices allocate less than the traditional endowment model?

• 5:19Speaker 01

  So good one to point out, I'm not necessarily convinced they should allocate less. I was more referring to what I think they're doing at the moment. And probably, if you look at this average, it'll be 1%, 2%, 3% in Europe, depending on which country you are operating in. So I think I'd recommend everybody to grow that allocation, but you need to do it in a very sophisticated way, and that will take time. So the interactions I've had with endowments in the US, I think they really know what they're doing, and many family offices don't. So it'll take time for them to educate themselves.

• 5:54David Weisburd?

  What's the best practice for allocating the venture asset class if you're a family office?

• 5:59Speaker 01

  I always, when I talk to people, go with three pillars. You'll have part of your money in fund of funds, you'll have some in funds, and you'll have some direct. And depending on where you start your journey, you'll either have, you'll enter one route or the other. So the one persona we typically encounter with our LPs is somebody starting out and tipping his or her toes into the space with the fund of fund, then they use the access they can generate to go. Funds and then they become very excited and they want to go direct. Another persona is the persona going direct, burning his or her hands because they did one of five, 10 investments in a very short period of time.

• 6:43Speaker 01

  And then geo, so everything you can be doing wrong on, on, on home buys, on, on geo, on not, not looking at vintage diversification and so forth. People typically do on direct investing.

• 6:54David Weisburd?

  Very common.

• 6:55Speaker 01

  And then you need to kind of unwind that, what they've done and build into a more structured mandate.

• 7:01David Weisburd?

  Yeah, I think one of the big issues with family offices that invest in venture capitals, they have the wrong intuition around other asset classes like private equity. Where venture capital is power law driven, a one or two outcomes drive the entire portfolio and private equity, there's very few zeros, let alone even less than one X.

• 7:20Speaker 01

  I, I think you need to understand how, what a typical fund of fund will be thinking. So the most often I try and open the door to, to an LP and then, then LP will be saying, I don't like double fee layer. What they don't look at is that if they have their own team, they have their fee layer in-house on their own payroll. And they somehow apply different standards to it. And then most of the family office in Europe, they don't deploy large enough amounts to actually build good teams themselves. Because you'd need whatever 25 to 50 million a year to venture to actually be able to do that. And if you look at the maturity of the, of the family office space, a lot of family offices, which are ways smaller and, and don't deploy these kinds of money.

• 8:03Speaker 01

  So the second thing is the fund of fund industry, and I call it kind of a dichotomy. If you go fund of fund and you operate a fund of fund from the inside, you know, either you go large and then obviously returns will come down. And the investor, your LP will be stuck kind of somewhere in, in, in long lockups and, and mediocre returns. Or you go the other route and that's the one we chose to say, here we go small funds. And we try to actually capture this, whatever top 25, top 10% of what's going on in venture. And then we need to work pretty hard and it's not. Going to work well economically on the surface, but then in the long term it will because you

• 8:46Speaker 01

  create that outsized return. And so if we thought about this for quite a long time saying should we run a direct fund? And we actually did a few stints on testing that as well. I personally really prefer the fund of fund model because I think if you look at downside and upside,

• 9:06Speaker 01

  the bet you're taking on a fund of fund as an operator. So as a GP for us is way better than a direct fund.

• 9:12David Weisburd?

  So double click on what you're saying. If you're deploying 25 million a year, you could put that into a fund of fund, pay 1%, which is 250,000 versus hiring one employee at 250,000, which is going to be pretty junior. At 50 million, you might be able to hire somebody more senior, but you only have one person on your staff. Tell me about your portfolio construction.

• 9:33Speaker 01

  Within the portfolio construction, when we invest in fund managers, we look at concentrated portfolios and we want managers to take fairly large positions. So definitely plus 10% ownership, but it could even be 15. And some of our managers have 20% ownership in their companies. And the same thing which we look at when we look at other managers, we apply to ourselves. So our portfolio is very concentrated. Very concentrated means for given kind of fund vintage of ours, 15 to 20 lines in the portfolio. We do concentrate 80% of the capital around, let's say 10 to 12 names or so, and then we take smaller bets with managers we haven't known for so long and build relationship over time. So concentration is super important.

• 10:18David Weisburd?

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• 10:51David Weisburd?

  Come see the new standard in private fund management at z.carta.com/10xpod. That's z.carta.com/10xpod. You're a fund of funds, so you're investing into GP, so you're one layer up. How does your time diversification play into that? What vintages are you getting exposure to as a fund of fund?

• 11:10Speaker 01

  Vintage, we look at three years of deployment period. And then the funds we invest in will have a deployment period of, let's say, something between fast deploying funds, two and a half years or so in the good days. And then you'll have funds going all the way up to five or six years. And so basically on diversification, we'd say typically you'll have seven years of vintage diversification within a given fund of fund with us.

• 11:33David Weisburd?

  How do you deal with an LP that's giving you a lot of trouble? How do you practically deal with that?

• 11:39Speaker 01

  I talk 50% of my time to GPs and 50% of the time to LPs. I use every discussion I have with a fellow LP or potential investor to run my diligence on the funds I can later on invest in and build my network. So it's an information trading game we're in as a fund of fund. So we need to basically make sure that we spend our time well. So if an LP comes up and says, so we have an investor that's in the US and he wants to come to Europe and wants to understand who should I be investing with. If I go direct to fund, then you need to be helpful. And if, and let's say, one of your LPs has a fund position in another fund, he's not really happy with. If you have built a trusted relationship, they'll ask you a favor, you'll

• 12:20David Weisburd?

  Interesting.

• 12:21Speaker 01

  take a look at their position and you'll talk to the manager and try and qualify something, you'll always take something out of it. So this, I think, although it might seem just like work, I think if you play it the right way, you can actually get a lot, a lot out of it.

• 12:35David Weisburd?

  What are some archetypes of LPs that you would want to avoid in the future?

• 12:41Speaker 01

  So in the past, we've always said this and tried to say, hey, we want long-term relationships. If you are in this game long-term, we're happy to engage. And I think the industry term is tourists or tourist LPs, that you want to avoid the tourists. And when markets go up, everybody comes To you and says, yeah, I want to invest and then when the markets go down again, they stop investing. That's kind of wasting your time because we all know if you understand what venture is and we spoke about cyclicality. Um, it just had this up in my, my AGM actually last week. Um, it is about understanding the dot coms and then you go down and then the GFCs and then you go down again. And then you have the next crisis and we don't really know what's when it's gonna happen.

• 13:25Speaker 01

  So I think you need a 20 year horizon or so as an investor in venture. It's not like five to 10. Um, if, if, if, if not, you don't really know, I think what, what, what, what you're getting into.

• 13:36David Weisburd?

  There's a saying in politics, last one in the boat, first one out. The ones that take the longest time to convince that are not true believers are the first ones to leave. It's important to take into account who actually believes in your story and who's underwriting you as a manager versus just trying to get into a market trend.

• 13:57Speaker 01

  Yeah.

• 13:59David Weisburd?

  The other, the other lesson I've personally learned is the, the difficulty of managing small checks. Uh, nothing takes more time to manage than a small check, whether it's 25K into a startup or $250,000 into a fund. And, uh, no good deed goes unpunished when you, uh, bring in a small checks. I'm very vigilant on the small checks as well, not because they're small, but because they tend to be from people that really micromanage their capital.

• 14:29Speaker 01

  Absolutely, and they don't know the processes. If you have kind of institution grade, multi-family office or family office, they just know what you need in data. They have their packages ready, they run through an onboarding process swiftly. Um, chasing people from capital calls, right? With, with, with smaller investors can be very, very time consuming.

• 14:48David Weisburd?

  So what's your value add to LPs as a fund to fund?

• 14:53Speaker 01

  So we have various activities we engage in. Just to mention one which we've done recently is an LP kind of family office academy format, where we bring in 50 LPs, we spend two days with them. We bring a lot of good speakers who know what they're talking about and deep dive on deal sourcing, deal execution, term sheet negotiation and so forth. Just no selling, just providing content. I think that's a super important one, both kind of for building network, but then also for them, and that's the kind of second part. We do apart from kind of events and formats is providing a network with other LPs. As I said, we spend day to day in meeting other LPs. Our LPs typically don't because they're family offices.

• 15:37Speaker 01

  They spend whatever 10% or so of their time in venture. And so they benefit highly from meeting other LPs, being able to talk to them, build friendships and relationships that later on can utilize. So we are basically like the kids throwing a cool party. We have the room, we get in the drinks and then everybody else can take it from there.

• 15:57David Weisburd?

  What's the biggest early mistakes you made founding Blue Future Partners?

• 16:03Speaker 01

  So one of the mistakes we've been dealing with is, what I said earlier, the cyclicality of really understanding what you go into on on on on timing. So it is very difficult on the fundraising side and delivering your product. If you get the timing wrong, right? So you don't actually the last two years, if you if you spend the last two years, let's say on the road trying to fundraise, you wasted a lot of time and you wouldn't have been very successful on it. And so it really depends on when you started your vintage and how long the fundraise was. And that's one of the things with hindsight now, I would have timed the vintages a little bit differently.

• 16:47Speaker 01

  And the second thing is understanding the nature of or complexity of a global approach, which we talked in the beginning. So we said we're going to deploy 50% in the US, 30% in Europe and Israel and 20% rest of the world. That's a very Difficult proposition for investors to digest because they don't really know where to put you. And often they'll say, hey, I cover the US myself, in Europe, I'd be joining you, right? And vice versa. So I think, and we are actually making this adjustment for our Fund Four coming up. We won't go for global, but we'll go for kind of regional mandates with some kind of international component to it.

• 17:28David Weisburd?

  The irony on that is that as you niche down, you get access to larger LPs because there's only, you have to be a certain size to put $20 million in European venture versus global venture. So you get a different quality of LP, paradoxically. What do you wish you knew before starting Blue Future Partners?

• 17:47Speaker 01

  So it's the greatest love of my life to a certain extent because I love technology and I know how

• 17:54Speaker 01

  fruitful it is, the interactions you have every day, right, with people is so rewarding. On the other hand, it's so challenging at the same time. So I think

• 18:06Speaker 01

  being, if I had been more aware of the long-term kind of strain and stress you're putting on to yourself, I could have made a way more decisive decision, right? So I think this is quite overlooked discussion point in the industry of managing family and the business. And when you start out on a business, on a venture kind of firm, I think it takes you 10 years and it takes all of your energy. If you have kind of young family at the same time, that's a strain which you probably need to get right. So probably if I hadn't known that before, I would have again timed it a little differently. But then you you kind of learn along the way.

• 18:46Speaker 01

  But that's probably one very personal kind of consideration on on understanding when you start, what and what it's going to entail.

• 18:54David Weisburd?

  The personal sacrifices. What would you like our listeners to know about you, about Blue Future Partners or anything else you'd like to share?

• 19:01Speaker 01

  Venture is a great asset class and the last four years have been extremely rough. And I think we are seeing kind of light at the end of the tunnel. We're not sure whether it's going to be one year, two years or five years, but it will get better again. And I would really hate to see a lot of talent, which is in the industry now, to leave and actually miss out on the greatest opportunity coming up. Especially if I look at Europe, what's going on here, we have huge kind of tailwinds from regulatory point of view. European Union is really trying everything to get Europe back on the feet and reinvent itself. So from that point of view, I think really the whole industry, I really want to encourage everybody to kind of stick in or hang in and keep going.

• 19:46Speaker 01

  It'll get better again. On a Blue Future Partner level, I'm super open for both kind of GPs and LPs. Kind of two things we are doing. So on the GP side, we just co-initiated a GP accelerator program alongside with Mountside Ventures out of London. And we offer kind of up to 20 per cohort, GPs, 10 week program in person, combined with matchmaking with LPs. So we've kind of put out a program to support fundraising activities from the, from, from fund managers. It's kind of one of the initiatives. You can find that at program.vc/25. And on the LP side, we're kind of very kind of active in engaging with the community

• 20:31Speaker 01

  and running academies and so forth. So if you just get onto our website, you can find kind of what's going on at the time. Reach out to us. We're super happy to engage. We're not always fundraising, but we're always engaging with LPs.

• 20:43David Weisburd?

  Greg, this has been great to chat.

• 20:45Speaker 01

  David, thank you so much.