20VC: Are LPs Open For Business? What Does it Take to Raise a Fund Today? How Has What LPs Want to See in Fund Investments Changed? Why Do LP Incentive Mechanisms Need to Change? Which Funds Will be Hit Hardest with Beezer Clarkson @ Sapphire Partners

Beezer Clarkson leads Sapphire Partners‘ investments in venture funds domestically and internationally. Beezer has invested in some of the best firms of a generation including USV and Point Nine to name a few. Beezer began her career in financial services over 20 years ago at Morgan Stanley in its global infrastructure group. Prior to joining Sapphire in 2012, Beezer managed the day-to-day operations of the Draper Fisher Jurvetson Global Network, which then had $7 billion under management across 16 venture funds worldwide. In Today's Episode with Beezer Clarkson We Discuss: LP Landscape: WTF is Going On: Are LPs really all closed for business? What has changed in what LPs want to see from managers they are looking to invest in? What has changed about the size and pace of new commitments for LPs? Are all LPs moving away from growth? 2. 2020-2022: Years in Review: Are LPs frustrated by managers who reduced deployment timelines to 12-18 months? Are LPs frustrated with managers who did not take liquidity when they could have done? How does Beezer advise managers on when and how to take liquidity in their best positions? Are managers accurately marking their portfolios to their LPs today? Why does Beezer believe the incentive mechanism for LPs is broken today in many ways? 3. How To Build a Top Decile Firm: Why does Beezer believe if you want to have the best returns, you have to have one company that returns the fund? Can you not do it with multiple half-fund returners? Is ownership core to all the best firm's top performance? Is it the size of outcome or the size of ownership that drives the best performance across the board? What does data show on how the best funds take significant risk? What are their loss ratios? What are the core tradeoffs to Beezer between scaling AUM and providing top decile returns? 4. LP Markets: The Times They are a Changing: Does Beezer believe LPs will remain cold on large $1BN+ growth firms? Which segments of the market are hot? Which are cold? What are the most significant changes we will see in the LP markets moving forward? Is today the new normal or are we in a downturn that we will come out of?

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

• 0:00Speaker 00

  Let me tell you another thing. LPs, some get paid on DPI, some get paid on TVPI. Meaning that how they're holding their portfolio is relevant to how they are viewed, not just for their personal paycheck, but how they might be measured by an external US News and World Report. A lot of LPs also pre-spent future budgets. If you were raising a fund every 18 months and I thought you were raising every three years, I had two choices. Either I pull from future year budgets, or I reduce my check. Right now, given what's going on in the markets, a lot of LPs are feeling liquidity strains. I wouldn't say a crunch, but there's different demands on those dollars.

• 0:31Harry Stebbings?

  Welcome back. This is 20 VC The Memo with me, Harry Stebbings. Now, The Memo is the monthly show where we focus on a specific topic or company and really go deep on that one area. Today, we go deep on the core topic of are LPs closed for business? Orders changed in what they want to see from managers that they look to invest in? And how do LP markets change over the next 12 months? Joining me is a dear, dear friend, Beza Clarkson. I've known Beza for eight years. She's one of the best LPs in the business. She leads Sapphire Ventures both domestically and internationally, and she's backed the best funds of our generation. This was so much fun to do. Beza was amazing. And you can watch the full episode on YouTube by searching for 20 VC. But before we dive into the show's day, I've always been a big history man,

• 1:14Harry Stebbings?

  and so I want to talk about Cooley, the global law firm built around startups and venture capital. Since forming the first venture fund in Silicon Valley, Cooley is one of the most active firms in advising in both early and late-stage financings, handling more than 1,600 private financings every year, with an equal split of investor and company clients. So to learn more about the number one most active law firm representing VC-backed companies going public, head over to Cooley.com and also check out CooleyGo.com, Cooley's award-winning free legal resource for entrepreneurs. And then, HMC, or Harvard Management Company. They're constantly seeking out the next generation of truly great investors and entrepreneurs.

• 1:56Harry Stebbings?

  HMC has managed Harvard University's endowment for nearly 50 years and was one of the first institutional investors in venture capital. Their experience and long-term investment horizon make them ideal partners to get world-changing ideas on a path to Viability and success, they work as a true partner, providing insightful perspectives to help managers succeed. I personally have had the pleasure of working with the HMC team and can say that they're truly exceptional partners and just great, great people to work with. Whether you're launching your first fund or your fifth, HMC welcomes the opportunity to partner with both developing and established managers. Have an idea you want to share with the team? Just send it to [email protected].

• 2:42Harry Stebbings?

  You have now arrived at your destination. Beezer, I am so excited for this. Thank you so much for joining me today.

• 2:49Speaker 00

  Thank you so much for having me. It's awesome to be in your new office.

• 2:52Harry Stebbings?

  Isn't it nice to do it in person? Now, I want to start that just baseline as blunt as I can be. Who are you and what do you do?

• 2:59Speaker 00

  Well, I'm Beezer. So I manage Sapphire Partners, which is the LP strategy of Sapphire. And we invest in early-stage venture funds, US, Europe, and Israel. And that's what I do.

• 3:09Harry Stebbings?

  Okay, so you've been an LP for many, many years and you have the chance now to cool yourself up the night before your first day as an LP. Knowing what you do now, what would you advise yourself?

• 3:19Speaker 00

  I would say really understand the importance of the power law, which I know sounds like a bit of a nitty gritty. And I'd gotten this advice from other LPs, which is the difference of having a power law-defining company in your portfolio and the experience of that for the GP along with the entrepreneur really changes the understanding of how a venture works. And you really just can't one-z, two-z, z it to outperformance. It's hard to walk that until you really feel it. And then you see these activities, you see the companies taking off, you see the difference in what it looks like to have that kind of a power driver in your portfolio.

• 3:52Harry Stebbings?

  I have so many things to unpack from such a small segment. This will be a short show. One-z and two-z it to outperformance. What do you mean by that?

• 3:59Speaker 00

  If you think of a growth-stage portfolio, it's not that one doesn't want to have a power law company and have it return 100X and be two to three times your fund. It's just much harder when you have a large fund. So a lot of those funds end up having a number of exits that then end up adding up to driving performance. In a early-stage fund, we've yet to see a fund that's returned three or more X that does not have a company that's returned at least one time the fund. And that's what I mean by like you can't do the single and base hits. Like, oh, I got a 2X on this deal, I got a 3X on that deal. Those are all great to add to the portfolio, but if you don't have a fund returner or a couple of half-fund returners, we haven't seen a fund that's hit out performance.

• 4:34Harry Stebbings?

  Speaking of the importance of power laws within portfolios there, I often think that actually LPs are too diversified, given the breadth of venture portfolios, thirty to fifty companies most often. If you have ten managers, you have three hundred to five hundred underlying portfolio companies. I mean, that's a lot of diversification. Do you think that LP portfolios are too diversified? Or do you actually think that they're not diversified enough, given the importance of having just one of those power law?

• 4:58Speaker 00

  LPs are like snowflakes. No two are the same. So some people do like diversification. I know some LPs that specifically look at the overlaps or the lack of overlaps between their managers and what they really are trying to do is they cover the seed market for exactly this point. And they want to make sure if they catch something, it happens. And then what the LP does is sort of a look through on the math and says, well, what if I'm putting X dollars into this fund and they're putting Y dollars into this company? What needs to be true for those companies to be productive on my side? And I know other people that say, hey, I think this area is really interesting, so I'm fine if I've got two or three managers that invest in the same area and even in the same company, because if they hit one, it's going to be that much more productive. And it really comes down to how the LP wants to build their portfolio.

• 5:39Harry Stebbings?

  Do you think about it in buckets? I see so many LPs that think about it through like, oh, I need early-stage consumer. I need, you know, series A and B enterprise. Do you think about it through that bucket?

• 5:49Speaker 00

  Well, we just do early-stage. So we've, which in our definition, that means we started out originally with series A and we've now moved down into seed and pre-seed. So within that area, we then look at what is the overall underlying distribution of companies that we have. We are proud venture geeks and we do publish some of our findings. So last year, we ran our consumer enterprise report. And enterprise does tend to have more consistency of exits, but you get the big spikes in the consumer ones. So if you, Coinbase, for example, you don't get ten of those at the same time historically, but you will get just more enterprise exits, but lower typically exit size. Yes. But consumer can too. If you, again, if you do look at the returns, if you consider the Facebooks, the coinbases, but they are fewer and far between.

• 6:33Speaker 00

  What we saw in twenty twenty to twenty twenty-two. Again, you have the Coinbase, you had a couple more. If you got out when Peloton's stock was high, like there were ways of making money, but it's not as consistent as the enterprise. So we do want both in our portfolio, but we're conscious of the exit dynamics.

• 6:47Harry Stebbings?

  When we look at like Allbirds, you're like, wow, this wasn't in the schedule, Harry. Thanks.

• 6:53Harry Stebbings?

  But like, you know, when you look at Warby Parker, when you look at Away, when you look at Allbirds, Sam Lessin said on the show that actually a lot of these companies show that early-stage venture models that have been so prevalent don't really make sense. Even your Robin Hoods as well, which were supposed to be at 30, 40 billion. Do you think Sam has grounding for that?

• 7:11Speaker 00

  I understand his point. I think from a very specific LP, GP perspective, it's hard to find on when you'd get out of the investment. We have managers that would have potentially sold into some of those later rounds because if they could sell, I'm making up the numbers, but 10 or 25% of their ownership and return a fund or half a fund and still hold some for the upside and then potentially distribute the stock when it's high. Again, you have to wait for a lockup and there's all these parameters that might not make it possible, but you can make money on those deals, absolutely.

• 7:40Harry Stebbings?

  I mean, we're going to get into kind of lean in versus lean out. I want to start though from the top because there's a lot of negativity and doom and gloom and like no LPs are investing and like, you know, this is the end. Is it true that no LPs are making new commitments? How do you think about that statement?

• 7:53Speaker 00

  That's not true. I think LPs are being more selective and making new investments, but they, they're absolutely making new investments. All the data's not in yet, but it doesn't look like the volume of dollars being invested this year into funds is anywhere near like last. Your last year was a peak, so that's not wildly surprising, but they're still making investments.

• 8:10Harry Stebbings?

  It's a question of like, no managers are raising though, really. I mean, there's a huge withdrawal in terms of net new manager raisings. Yes, there are still some, but the amount that have come back to market has changed significantly, which might correlate to the reduction in dollars. Do you think that's fair?

• 8:23Speaker 00

  I think it's kind of all tied together, right? If the entrepreneurs are slowing down their fundraising so that they can produce the metrics necessary to convince a GP to invest, then the GP is going to call less capital and then deploy their funds slower and then LPs are going to be slower. We saw numbers about like 12 to 18 months, which is historically atypical, right? Usually it's three years. So if now they're lengthening back out to three years, yes, there's fewer funds being raised. And I think there's a lot of, we can get into this or not, of people trying to figure out what is the health of the underlying companies, what's really going on and. There's so many things going about why LPs are slowing down. A lot of LPs also pre-spent future budgets, if that makes any sense. Like, if you were raising a fund every 18 months and I thought you were raising every three years, I had two choices.

• 9:05Speaker 00

  Either I pull from future year budgets or I reduce my check so that I stay consistent in my deployment, even if you're raising faster, or I end up spending money or committing money earlier than I anticipated. And then, right now, given what's going on in the markets, a lot of LPs are feeling liquidity strains. I wouldn't say a crunch, but there's different demands on those dollars.

• 9:23Harry Stebbings?

  And so what you're saying is that most actually just pulled forward dollars from the future. They didn't reduce commitment size.

• 9:27Speaker 00

  People did both.

• 9:28Harry Stebbings?

  And now they're feeling the pain.

• 9:30Speaker 00

  Correct. Because you also, what you have at the same time is not only is people that are, say, existing established venture investors know that it can take 10 years for an exit to happen. Like, that's not a surprise. But if you've built a portfolio and you've got publics and privates and other areas, you can manage your liquidity by taking money from other places as it comes in. But if the exit markets are generally shut for everybody, you're not getting your private equities necessarily distributing capital. So you can't use that to make your capital calls either. And you don't want to sell your stock when it's down if that's not part of your strategy. So there's just a lot of varying things going on that are hitting budgets. And a lot of LPs that manage endowments or foundations have an annual budget that they have to spend money on, right, for whatever their business is. So they still need to figure out how to make those payments.

• 10:14Harry Stebbings?

  Yeah, and like mandated outflows for scholarships or for university reimbursements or for like educational grants or whatever.

• 10:20Speaker 00

  Correct. So I've sat through multiple investment committee sessions with larger funds, so larger LPs managing multiple funds who are looking at, well, how do you manage this? You also have liquidity profiles that you have to keep. Like, you can't be too illiquid because it violates their rules. And just where are you going to clip your coupons, so to speak?

• 10:36Harry Stebbings?

  I've met quite a few endowments who are 35% plus weighted in venture. Where do you think it's kind of reasonable?

• 10:41Speaker 00

  So it's hard to give a common answer. I do know when a lot of endowments started looking at the EL model and being willing to go very long on that, they shifted to that and maybe some people are rethinking it. I do know there are some managers, some LPs, sorry when I say managers. We're like, we're just going to have to pause for a bit while it rebalances, which also has its own dangers. I mean, there is a very long history of looking at venture returns, which says if you're not in the market, you just don't know how to call the exit. So you have to be consistent about committing. But if you have a bunch of existing managers who are still putting money in the ground, you could probably skip a year and still have money going in, just not be re-upping or making new investments.

• 11:17Harry Stebbings?

  The hard thing is if you skip a year and you skip a year on the best managers, they're not going to take you back.

• 11:23Speaker 00

  Correct, that is one of the concerns.

• 11:24Harry Stebbings?

  So what do you do then?

• 11:25Speaker 00

  Everybody has to decide. Some people just make it work with a smaller check or they take it from somewhere else. Some LPs will say, we believe we can get back in later. Some LPs have to exit.

• 11:36Harry Stebbings?

  In terms of the liquidity problem, what do we think happens then? Because I take actually longer view. I don't think IPO windows will open for longer than people think. Jason.

• 11:44Speaker 00

  Jason thinks it's back half of next year.

• 11:46Harry Stebbings?

  And he's got 100K bet with me on it being the back half of next year, one a week for the back half of next year. I thought my mother's going to love this Chanel shopping, but.

• 11:53Speaker 00

  I love how much you love your mother.

• 11:55Harry Stebbings?

  Oh, yeah. She loves Jason with that deal, trust me. But I think it's going to be longer. You'll see it in the update coming out this weekend. But it's like, you know, data breaks, Stripe. It's not going to be enough to actually crack open the IPO markets like we think it will be, I don't think. And I don't think it'll come out next year. And so I think it's going to be like H2 2025. So what do we do then when liquidity is actually that far away?

• 12:16Speaker 00

  It's going to be tough. I mean, people will probably have to keep tightening their belts. I mean, we've seen this before. It took a number of years post 2000. It did take about three years to correct and for venture to come back in. And there was just a lot less money being committed to funds. And so you'll see a winnowing out. But you also, as a fund manager, if you wanted to wait an extra two years before you raised, you can, but you can still manage your portfolio and wait till it develops and then come back.

• 12:41Harry Stebbings?

  Do we think we'll see strip sales? Do we think we'll see selling fund positions? I'm seeing fund positions now being 80% discount. I mean, like, it's a great time to be a buyer.

• 12:49Speaker 00

  Yes, we are seeing that coming together in the market. I think the challenge is exactly what you said. Somebody wants the 80% discount and the person selling might not want to sell at an 80% discount. So I think the market is still hasn't fully connected. I think we're seeing some, the tip of the iceberg. And if the market doesn't come back, there could be a lot more. And that is when, to your point about when endowments and foundations and other LPs have to make some really hard choices about what they keep in their portfolio and what they don't.

• 13:15Harry Stebbings?

  Do you think emerging managers who have maybe some really promising, exciting early positions that they could sell, but at a steep discount, should they sell them to get the DPI to raise the next funds? Or should they stay true, hold them because they are long-term winners, but then have TVPI, not DPI?

• 13:32Speaker 00

  Well, that is a tough question. Can we start with an easier one? No.

• 13:36Harry Stebbings?

  Say you have an OpenAI in your portfolio or an absolute kind of a home run, but you need DPI and actually to get that next cohort of LPs, you need to do the sell.

• 13:47Speaker 00

  I bet some will. And but again, to the point of if you can sell 10 or 20%, let's say you got in what was OpenAI's first round, but it was not $100 billion, right?

• 13:55Harry Stebbings?

  No.

• 13:56Speaker 00

  So whatever was some smaller number. And if you could then sell in the $100 billion round and 50x your money, 20x your money, that doesn't sound any different from what we've said in the past, which is that people sell into these high rounds and make money. That's not illogical. It's like anything on Twitter. If people say, hold on to your winners, there's usually a sub-bullet that's not making its way out on Twitter. But like, so I think originally when a lot of that language was stated, it was because people were selling dramatically earlier. I'm going to make up numbers, but let's say 200 million or 400 million versus 10 billion or 5 billion or even a billion. But the idea of taking some money off the table, those two are not diametrically opposed. And I've heard LPs that used to say, hold on to all your winners all the time are now saying, well, I meant that. But in context, there are times when it could be useful.

• 14:39Harry Stebbings?

  You mentioned kind of the tightening selection for LPs in terms of managers they back and who they're invested with. What's changed in terms of what they want and what they don't want?

• 14:49Speaker 00

  I think if you went back to 2018, it wouldn't be that wildly different. I think what we saw was that the whole world kind of got caught up in this idea of you have to play the game on the field in 2020 and 2021. And I think LPs can be just as susceptible as GPs are. I mean, we are all, at the end of the day, human. I think today, you want to see what you've always wanted to see in the past, but people released a bit on the aperture around it, which is you want to see people that are going to be getting into great companies, good fiduciaries, and managing their team. I don't think it's actually different. I just think back when it was sort of this big run-up when we were in the bull market, it looked like there were a lot more nodes in areas that could be very productive. And people went for it because there's a lot of FOMO, LPs and GPs alike. And now, on the other side of that, a lot of it looks like it was a lot of momentum, and it may or may not convert.

• 15:33Speaker 00

  And now, people are reconsidering, well, if in down markets, do I want to reconsider how I'm doing this? The same three buckets, but maybe I need to be a bit more astute about what they mean to me.

• 15:42Harry Stebbings?

  Well, we see a lot of LPs not do Fund I's of GPs they got exuberant with in the boom times and not do the Fund I's they would have normally done.

• 15:52Speaker 00

  If you're an institutional LP coming into a Fund I, I'm going to caveat this and say, most of the institutional LPs I know that do Fund I's tend to do spin-outs. And then, the LP base is usually more institutional than the Fund I that's coming up out of Angelus, just to draw a comparison. So I think those institutional Fund I's from day one will have a much easier time raising Fund II, because most LPs who've been in the venture business for a while know that there is only so much you can show in two to three years of work. So barring something going really awry, a change in strategy, a breakdown in team, whatever, something really falling apart, they will do Fund II because you just will not have enough data to know until Fund III. I think it's different for the smaller, newer funds.

• 16:28Harry Stebbings?

  What's insane is I was brought up on the three-year deployment cycles, and Fund III is your fund where you prove it, or you're out. Not true when you're deploying in 12 months and your Fund III is actually three years in.

• 16:40Speaker 00

  Correct. So you might see some more wobbles, but I would say, even for some of those funds, I've seen other LPs come in to fill it, or they're taking down their fund size. So there's ways of managing that is my point. I'm seeing more fund threes and fund fours where this is coming up as a conversation because you do have a bit more data and you're trying to think through the pacing of it.

• 16:59Harry Stebbings?

  Do you think we'll see people reduce fund size?

• 17:01Speaker 00

  We already are. I'm just looking at the early stage, but the growth has been very.

• 17:04Harry Stebbings?

  You're seeing it in early?

• 17:05Speaker 00

  Correct.

• 17:06Harry Stebbings?

  From 100 to 50, say?

• 17:07Speaker 00

  Not quite that dramatic, but maybe it's not 250, maybe it's 150. Because the math kind of goes two ways, which is if the round sizes are getting a little bit more decreased or they can go earlier, they can find other ways. I think people are pulling it in.

• 17:20Harry Stebbings?

  I don't think you can do it. I mean, C pricing is higher or as high as it's ever been.

• 17:25Speaker 00

  Depends on where you're shopping and who you are. I don't need to detail this. I mean, all of the good journalists are out there detailing all the large growth funds and there are changes in sizes for us. So those are, those are known and out there.

• 17:35Harry Stebbings?

  Yeah, I think we're seeing this, and introduce your thoughts on this, a movement away from the billion dollar plus funds and the realization of just how hard it is to do good numbers on those. And then also a movement away from the sub 100 million dollar where it's like, we've had a lot of work to underwrite them. There's not a huge amount of data. There's definitely no DPI and there's not the established brand. You could get fired if you recommit and it's a dud. Let's just go in the middle. Let's go for the 300 to 700, solid. We can get good numbers, we're good DPI, we're good teams, game on. That's where I'm seeing the concentration of capital.

• 18:03Speaker 00

  Yes, I hear the same thing. I hear a lot from LPs, I would like to be able to write a 20, 25 million dollar check. I want to be able to grow it over time. I want somebody who's up and coming, so not too large and potentially whatever comes up with a large platform, too big of a fund size, or maybe it's too diffused, or maybe it's too many strategies for their taste, but I don't want to take a ton of risk on not knowing if they can't pick. That's Goldilocks. I mean, it's lovely, we like that too, right? There's all sorts of positive things there, but if you weren't in them earlier, it's hard to sometimes to get in then because the existing LPs are thinking the same thing.

• 18:34Harry Stebbings?

  Totally.

• 18:35Speaker 00

  Right? So there's a little bit of timing muddle on that and then there aren't that many. A lot of the folks that were in that size have grown up into bigger funds. And so unless they, to your point, unless they want to have their fund size or whatever, 40% lower, I don't know if they'd go back out and raise that because they also have people in their firm that want to build their careers and want to invest capital. So if you decrease your fund size, that has a material impact on what your investing team is doing.

• 18:58Harry Stebbings?

  So are we going to see a pull away from the large multi-billion dollar funds?

• 19:01Speaker 00

  There is a class of LPs that need to write very large checks. Those are vehicles that work for that fund size. We also have to understand, I mean, I know you get this, but I think sometimes other folks forget that LPs are not in the same business of risk-taking the way that GP's are. You're trying to preserve capital at some level for all the various reasons. So there is a logic to if you need to write a hundred or a hundred and fifty million dollar check and you want some alpha, but you don't want to risk losing it. Why the larger vehicles can be a place to put your money.

• 19:28Harry Stebbings?

  And actually, return rates comparative across macro industries, whereas compared across real estate, it's compared across credit, da, da, da. Your 12 to 15 percent is actually not bad.

• 19:38Speaker 00

  Yes, the 7 percent interest rate market is playing with it a little bit, but we have a magic wand and take that out of the equation. There is that way of looking at it. If I'm an LP that has to write a hundred million dollar sized check, unless you want to be 100 percent of a fund, like you just, you can't do it. It's really hard.

• 19:51Harry Stebbings?

  Jean, we'll see the death of micro funds. We saw so many five to 15 million dollar angel list funds where everyone was doing a fund. I had one call where I was pitched a company and a fund by the founder in the same meeting.

• 20:02Speaker 00

  Oh, so we've done reference calls with CEOs that pitch us their fund in the same meeting.

• 20:06Harry Stebbings?

  I mean, it's just like.

• 20:07Speaker 00

  We haven't seen it yet, and I really don't wish the death of the micro funds. We are big believers in the power of small vehicles and it can work. I think also what you have in the market today, the number of VCs who have built really replete LP programs. They've made investments in 50 plus VCs. And granted, these are deal sourcing strategies. They aren't necessarily launching funds.

• 20:26Harry Stebbings?

  Can you guys buy that? Like, if you're investing in a fund for a deal sourcing strategy as a VC, you should hang up your boots. That's like admitting defeat.

• 20:34Speaker 00

  I don't know. I think it's hard, right? I don't know. We'll have to wait and see how many deals come out of it that they find really useful. I mean, back in the day, like Sequoia Scout program was very famous for them. But I do think one of the upsides to that, regardless of whether or not it's working out for the VC doing that program, a lot more smaller funds have been able to be stood up because they have them. I've seen decks where really all of the LP capitals come from other venture funds or other venture people as other as individuals or off the funds dollars, and they're now in business. We saw decks in the beginning and it was notable, there were one or two people be like, oh, look, Mark Andreessen is an LP. And then you get your 30th deck that has, Mark is an example, but there's many others. And it no longer is the same signal that it was before. But still, your point about the death of micro funds, like, there's just a lot more

• 21:18Speaker 00

  ways of starting a fund now, which is great.

• 21:21Harry Stebbings?

  I agree with you there. And actually, just on that thread, you mentioned kind of, oh, like the signal that one derives from a certain investor. Investors do derive signal from other investors. Which investors derive the most signal or give out the best signal? Is it endowments and foundations? Is it a certain type?

• 21:36Speaker 00

  I think I used to have a less nuanced view on that. And you would think, yes, pick a wonderful endowment that is a great name and is a great portfolio. You'd say if they invested, obviously, it's a great fund. But you have to understand why it works in their portfolio versus our portfolio. And so it's not necessarily playing the same role. And so you have to dig a little deeper and say, well, who are they and why are they doing this? Right?

• 21:57Harry Stebbings?

  You buy that? I love you. But I'm like, I know so many where it's like, oh, Yale, oh, AXA invested.

• 22:05Speaker 00

  Correct. No, no, it's a thing. I'm not saying it's not a thing. We just do our own work and want to have our own opinions. A lot of the other LPs are doing ventures to the earlier conversation against a myriad of things they're doing. And they don't, with some exceptions, have huge teams. So you, people have to pick ways of making decisions. And if they know, if they co-invest with whatever endowment or foundation frequently, they probably know them as people. Like, there's definitely folks that refer us deals that we co-invest with. And you're like, oh, I know how they process. I know how they think. That at least gives me some level of understanding versus somebody who, when you call them and you say, why did you invest in this fund? And they say, oh, I'm only here for the direct deals. I don't care about the return as much. It's not that it doesn't matter. It's just they're not doing it for the fund return. They're trying to write a 30 or 50 million dollar direct check. We may like the same fund, but we're liking it for different reasons.

• 22:50Harry Stebbings?

  What's the separator between those that are able to make it from emerging manager Fund One to like, blue chip institutions come on, Fund Two, this is actually happening?

• 23:00Speaker 00

  There is. So there is the whole myth or not myth of the persistency bias in venture, right? When you're with 20 VC, if you get these wonderful companies, other entrepreneurs can be like, oh, Harry's a great investor. He's got these wonderful other entrepreneurs that I know, these great companies that I know. And so they'll bring you deal flow. And then LPs see that. And they say, oh, Harry has this great deal flow. It might not be proprietary deal flow, but it's proprietary access. And then the LPs want to join the party. And they come. And then that gives you capital to keep going and running your business. And even though everyone always has a caveat of past performance does not guarantee. Future, there does seem to be, and there's been a zillion people studying this, so I can't quote them all, but trying to figure out, is there a persistency bias in returns? Again, people have disputed it, people believe in it, you have to pick your side of the table.

• 23:42Speaker 00

  But enough people invest believing that once you get that flywheel going of the best entrepreneurs coming to you, that they will persist. And that's why the LPs then also want to work with the same managers and that. So you just need to sort of figure out a way to get that going.

• 23:55Harry Stebbings?

  Yeah.

• 23:55Speaker 00

  And it takes a little bit of time. I mean, it's not going to happen, it's not that it can't. It's just very hard to do in your first fund cycle, because there's just not enough time.

• 24:03Harry Stebbings?

  The biggest thing I see with that mindset on the cyclicality of success is like, we obviously, we've worked very closely with Socorro and found this fund before. And when I think about Brian Singman and Pat Grady, they're not worried at all about it going to zero, but they are very worried about upside maximization. And I think you get that uncapped upside, lack of fear of downside through immense success. When you don't have that immense success, you're much more worried about getting fired, so to speak.

• 24:27Speaker 00

  Well, you just talked about the attitude around Powerlaw much better than I did. And yes, I don't disagree with you. I remember I used to work at DFJ many years ago, and somebody had this perspective on Tim Draper. They just said he sees fear very differently than the average person.

• 24:40Harry Stebbings?

  He's the risk master.

• 24:41Speaker 00

  He's the risk master. And it just, but it was a really nice framing of your point about how do you take risk? And what's your appetite for risk? And how do you think about it? And it's, yes, when you're swinging for the fences, you, going back to what I said before, it is incredibly hard to be an early-stage fund that has outperformance without a couple fund returners. You have to shoot for outperformance. You can't be like, oh, my TAM's five and I'm going to get all of it. Like those, that might work in private equity, it might work at growth stage. It does not work if you're trying to drive for outperformance in your fund.

• 25:08Harry Stebbings?

  Do you have to have ownership to have outperformance?

• 25:10Speaker 00

  Oh, it's such a good topic. You can do it, you can certainly do it on a smaller fund. You have to then have a very high hit rate. Or I should say this way, the companies that exit have to exit even bigger. Vis a vis your fund size. So a lot of those funds that have the small

• 25:24Harry Stebbings?

  When we say small fund size, we're saying

• 25:26Speaker 00

  Forty, forty five. We've yet to run the math and see a fund that's gone over fifty million that doesn't have to start having some trade off between ownership and AUM. I mean, again, like you can get a Coinbase in your fund and then, yeah, it moves the dial, even if you have a hundred million dollar fund, right?

• 25:41Harry Stebbings?

  But it actually doesn't. My point is, it actually doesn't.

• 25:44Speaker 00

  Well, if you have a fifty billion dollar exit.

• 25:46Harry Stebbings?

  Well, if you have a fifty billion, sure, but if you have a ten billion, which

• 25:49Speaker 00

  No, it doesn't.

• 25:50Harry Stebbings?

  You're locked up and actually you put a hundred K check in

• 25:53Speaker 00

  I don't disagree.

• 25:53Harry Stebbings?

  At a twenty mil pre like it is today, shit, you're naught point five percent on entry. You'll be naught point two five percent on exit.

• 26:02Speaker 00

  I don't disagree. We've run, I know this sounds so boring. Investing in a fund is art and science and the science part cleans the deck very, but the art is very hard on the people, right? That's a people business. You have to go and spend time. But on the math of it, we just underwrite a series A fund to a three X and C to a five X. And you just look at what the numbers line up at and you say, okay, so given the ownership and given the AUM, what needs to be true to return the fund one time, half a time? And then you say, okay, let's say the number is two billion. How many two billion dollar exits do you think you're going to get in your fund? And you can tell me what you think. And then, again, history's not always the same. But you look at this and you say, okay, to your point, you go back and you look at some very strong performing funds and you say, how many did they have? And what was the percentage of their companies? And you apply that math and again, like the future could be different.

• 26:45Speaker 00

  But you realize just how hard it is. It's really hard.

• 26:48Harry Stebbings?

  Should we be more honest with LPs about our performers and underperformers? I think often managers are a little bit like, you know, they're finding their way.

• 26:55Speaker 00

  I think there are ways of saying it that LPs can understand. We have managers who are very good at showing us like, hey, here's the ones that we have questions on. They could turn it around. You never know. Here's the metrics. Like you just go through the metrics and you talk about it. What's going on at the teams and you know where they're at. And venture is a risk business. Like you're not, you don't go into early stage and expect every company to work. And one of the weird things about the market for the last twenty twenty to twenty twenty two, we did not, as an industry, have the loss ratios, even probably back earlier, that one would expect in venture. Like you just had all these companies getting funded so they could continue to try. And then it even became more relevant, actually, for the GPs to be able to talk about what was going on in the company. And now there's, it's clear if product market fit's been hit or if companies have just a ton of money and might spend time trying to find it.

• 27:38Harry Stebbings?

  Do you think Eric Paley is right to say that this will be the biggest chasm ever between TVPI and DPI?

• 27:44Speaker 00

  The only other time there would be equivalent would be about 99, 2000. And I don't know if there is the volume of funds in the market then. So an absolute number, she's probably right. It's entirely possible.

• 27:54Harry Stebbings?

  So the question then is, how on earth do LPs value their books? You know, I meet a lot of LPs and walk around Hyde Park and they always say to me, I just don't know what I'm seeing on, Harry. How do you advise me? I know what I say to them, but I'm intrigued to hear first what you say to them. How do you advise LPs on how do you value your books, given the ambiguity?

• 28:11Speaker 00

  Well, I know a lot of LPs that will ask their managers and then go back home and take another 20 to 25% off the top because there's things that nobody knows. And then sometimes you're just, we're just all wrong. And something turns around, like AI happens and some companies become rocket ships because they've managed to do something with AI that works in the market and other companies not. The AI intelligence software has just so changed the market and what people are looking for that their companies now seem out of date. And it was really strong, but the customers aren't buying the same way because the product doesn't compete as effectively.

• 28:41Harry Stebbings?

  Do you find that there's a differing level of transparency around book value across managers?

• 28:47Speaker 00

  Well, everybody shares it. But if what you're asking is do people value their companies differently? Yes. If you're an LP that has a existing book of venture business and you've got it over different times, you will 100% see that people will value their companies differently.

• 28:59Harry Stebbings?

  Do you communicate that to the managers who are overvaluing their portfolios?

• 29:03Speaker 00

  Well, overvalue is a relative term. I mean, I think if they ask the question, I think one of the things that GPs forget is that they can ask the LPs what they think. And you'll learn incredibly interesting information like, no, your colleague, they might not. I do know, I do know the auditors. I know, I know, they might not. But I'm saying like, you could ask your LPs and say, are you seeing these companies being held differently? And I would like to think the LPs would answer.

• 29:26Harry Stebbings?

  If so, don't tell me, don't tell me.

• 29:28Speaker 00

  Well, and then I heard stories and this is the story, so put it under the rumor and hearsay bucket, but that last year, the end of 2022, when the auditors were getting involved, they were telling GPs to talk to each other to try to figure out how to value things. Because if you weren't close enough to a public comp, you had to value it off of like the last raise, which is a logical method. But if a company had raised three times in 2021 and was, you know, 100x multiple on revenue and the company hadn't grown that much, it raises a lot of questions.

• 29:55Harry Stebbings?

  Listen, as you know, we get the track record from every GP before they come on the show. The disparity in numbers is enormous. We had one last week, which was a $6 billion company in one book. And then it was sold for about 300 the next week.

• 30:07Speaker 00

  So let me ask you a question. Was it a seed manager or a series A manager that had the highest holding?

• 30:11Harry Stebbings?

  It was a series B manager.

• 30:13Speaker 00

  Oh, okay. That disputes my theory because a lot of times, seed managers, they only might have information rights by the time a series B or C comes up. So they might not have all the information that someone in the boardroom has.

• 30:23Harry Stebbings?

  I know the series B manager, I think, was delaying the notification of that over payment of price.

• 30:29Speaker 00

  Well, let me tell you another thing. LPs, some get paid on DPI, some get paid on TVPI, meaning that how they're holding their portfolio is relevant to how they are viewed, not just for their personal paycheck, but how they might be measured by an external US News and World Report and other things. There's a whole push-pull in the market.

• 30:45Harry Stebbings?

  Is that not completely skewed the incentives?

• 30:46Speaker 00

  Yes.

• 30:47Harry Stebbings?

  Should that not change?

• 30:48Speaker 00

  Potentially, but I'm not sure what the magic wand will be that'll change that.

• 30:52Harry Stebbings?

  But that seems so ineffective to me as an efficient weighing mechanism. Why would, why does that exist?

• 30:58Speaker 00

  Well, back in the old days of venture, TVPI didn't rocket up in one year as quickly as it is now. So a lot of these systems were put in place when things were a little bit more prosaic in how they managed along. TVPI used to be a pretty decent signal, not perfect, to see what DPI was coming. That, I would think to Eric Paley's point, got a little broken recently because it was just very hard. If your company has raised three times in a year and is now worth 10 billion and you're a 50 million seed fund, that's a huge change, right? And up and down. And so there was a number of LPs that were telling their managers, just don't mark it up, or mark it up a little bit, like be really conservative. But it's hard to then argue to the auditors, you can't mark it to the last round if it was like two months ago. Because the auditors will say, typically, they'll like use the most recent last round, it's in the last six months.

• 31:42Harry Stebbings?

  Especially if it's a very legitimate top-tier firm.

• 31:44Speaker 00

  Totally. My most benevolent answer is a lot of these things were probably put in place when TVPI and DPI were not so dissimilar. And so these things made more sense. And now, just the last few years, made it look really just a lot more confused.

• 31:56Harry Stebbings?

  And there are any other big misalignments? That's a really cool one.

• 31:59Speaker 00

  I think depending on who you are as an LP, the fund size can drive some misalignment, right? To your point about much larger funds and what they're trying to do and how they're trying to create returns and financial stability. But that also comes with, and this has been discussed on Twitter ad nauseam, if it comes with a lot of management fee, and if you are able to work in a fund and make millions of dollars per year in management fee, that's very different from an LP who needs the money back to fund whatever it is they're trying to fund with it.

• 32:26Harry Stebbings?

  Do you care about fees? Honestly, I hate the discussion on fees. So I hate the discussion on GP commits. It's like, you know, respect for as many billionaire founders of funds, they can put in a lot more money than me. Doesn't mean they're more committed than I am. It's ridiculous.

• 32:38Speaker 00

  I agree. I think there's no one size fits all. And I definitely think for emerging managers, the management fee and the GP commit need to be looked at in the business case. Like, what are they using it for? We've had some funds in our program where I'm a little worried they can't pay their rent. Because you're like, there's no way this management fee can pay for it. So it doesn't surprise me when smaller funds have a 2.5 management fee because you just have fewer dollars. What you typically as an LP like to see is as you layer the funds, the fees come down or you stop pulling fees on some vehicles. But again, it's always in the context of what's the fund trying to do? How many people are there? What is the cost structure? And to your point about GP commit, yes, it has been an unnecessary barrier to entry for too many.

• 33:14Harry Stebbings?

  I think you and me have a different view of what fund size you need to do a seed fund today. But I think if you're leading seed rounds today, you can't have less than $100 million.

• 33:23Speaker 00

  I agree, but then you need to be leading and getting, what we're seeing is leading and getting low 9% to 11% to 12% ownership.

• 33:32Harry Stebbings?

  A thousand percent, I agree.

• 33:33Speaker 00

  But many people raise bigger funds and have 5% ownership. You end up with the like, well, then now you need this very large exits, which I wish everyone gets. Like, there's no but, there's no shortage of wishing this works, but it just historically, you're like, well, you're going to have an incredible batting average. And again, we want that to be true. That would be lovely. History would argue that's very unlikely.

• 33:51Harry Stebbings?

  Okay, a manager is getting ripped apart for the deployment timelines?

• 33:54Speaker 00

  I think there's been many conversations with LPs suggesting GP's slow their roll. If a fund came to you in the beginning and said, we're going to do an annual raise, I know some funds who say this, and the LPs understand it and they sign up for it, then they understand they sign up for it. Yeah, so I see that happening. I see a lot of other funds saying, you know, this is going to be a two to four year raise, or the LPs are like, hey, we'd like to see a bit more traction in your companies. Could you delay your fundraising? Or just slow it down and see what happens? Give it another six months. Like, getting through this market, to our earlier conversation, is not going to be necessarily easy and seeing how it rolls. I think those conversations are happening. You don't get fired for buying IBM. I'm using Chris DuVos' line, so I always want to give credit when I'm stealing some of his words. No, I was not going to say. I tweet it every day. No, he talks about is someone, someone sort of investing the capital they're really

• 34:38Speaker 00

  a manager of, or are you sort of an employee of a firm? And you need to manage the business, so it's not saying they're not making thoughtful decisions, but it's a different viewpoint if you're like, oh, I'm going to be here for three years. Do you know the average CIO is like a five-year tenure? I actually thought they were like 15 years. But no, a friend of mine was like, oh, no, it's three to five years. I'm not picking on those individuals, but I'm saying if you're then in the stack and you're working for a firm and you're deploying capital as an LP, you're taking, you might be taking a different risk appetite than if you're someone who's like, hey, listen, we're going to go find the next amazing fund and we're going to be with them for a long time. And this is a very different mentality.

• 35:11Harry Stebbings?

  Do you find it hard not doing a new manager's new fund? When you have to not do a new fund and you've been in prior funds?

• 35:17Speaker 00

  Oh, it's very hard.

• 35:18Harry Stebbings?

  How do you have that discussion?

• 35:20Speaker 00

  It's delicate. We should have good reasons to start with. That is like the first principles of it. And then you share your, you share your thinking. You say, here's what needs to be true for us to be able to come back, and we want to come back. We've shown people TVPI charts and say, we have to choose based on productivity. And it's not that we don't believe in you, it's just taking longer. Or some people graduate out of our program because they get launched, for example, right? So we'll do emerging and established, but if you're going to go on and raise a $1.5 billion fund or something, that's outside of our program. I mean, we think that's great that they've grown up and done that, but that's not in our program.

• 35:51Harry Stebbings?

  Final one. In terms of feedback to the GPs on distributions, whether to hold or to sell. I think we've been lied to for a generation where it's like lean in, lean in, and the best strategically lent out over time. Is there retribution from LPs who are saying managers, you didn't take anything off the table in the good times?

• 36:09Speaker 00

  I don't know if they're saying this to their GPs, but you hear a lot of people having concerns that they're now going to ride the TVPI all the way back down. To your point, you can manufacture some distributions, right? Like you can find if a company's not working, I think managers are now, I'm having more conversations with more managers who are like, hey, we're going to try to find some soft landing for these companies. It's just not going to work, which we've been expecting for years, to my point about loss ratios. So that doesn't wildly surprise us. But you're not going to 3X your fund that way, right? You'll retain more than zero, but it'll kind of creates fodder on the bottom. You can't force a company to go public.

• 36:42Harry Stebbings?

  But when you have a chance to sell secondaries, when you have a chance to distribute.

• 36:46Speaker 00

  I really do think these conversations are happening either with the GPs or amongst the LPs. I hear people talking about it and just sort of understanding why the manager did or didn't. And is that, is there a cogent reason? Whatever that reason is that makes sense, like there's definitely times when there were small floats. And if you sell, it could be detrimental to the company. There were the times where it sort of gets at the, are you a fiduciary in the kind of way that I want to be associated? And people will make choices. And then there are always going to be some managers that have that kind of LP pool that people will just keep working with. I think that list is getting smaller and I think the names are switching around.

• 37:18Harry Stebbings?

  Which names are the hottest?

• 37:19Speaker 00

  Well, I'm going to give a shout out, PitchBook just did a new ranking for, based on, I'm not sure what metrics they pulled. It was like capital calls versus distributions. And I don't know how they knew this, but Yuen Square had the first and the third spot. So shout out to them.

• 37:31Harry Stebbings?

  I think Founder's Fund, having a moment in the sun, and then just index for consistency of DPI.

• 37:37Speaker 00

  Yes.

• 37:37Harry Stebbings?

  Right. And we're going to do a quick fire round.

• 37:39Speaker 00

  Okay.

• 37:40Harry Stebbings?

  So what others not know that you know to be true?

• 37:43Speaker 00

  Okay, I'm going to kind of take a sideways answer to this. I have always really just. Grates me when people say some things can't be done. I hate being told something's not possible and that you can't do it just because it just because someone hasn't done it before doesn't mean you can't do it. It just means it's harder. You are a case in point on this, right? I mean, what you've been taking to the market with the intermix of media and venture hasn't been done before. People have tried in different respects but haven't nailed it the way you have it. I'm sure millions of people told you it couldn't be done, which just takes hard work.

• 38:09Harry Stebbings?

  What would you change about the world of LPs?

• 38:11Speaker 00

  I wish the LPA was better. That's such a small, little wiki.

• 38:14Harry Stebbings?

  The LPA was better?

• 38:15Speaker 00

  Was better. It's so hard to read. It's so complicated. It's so not useful. It's supposed to be a tool to understand how our relationship works and it's just a big legal pile of documents. But I think some of these things just end up in log jams in the ecosystem and the point is that's just not the point. If you get to that place, it's a big mess anyways.

• 38:30Harry Stebbings?

  What would you guys change in the world of managers most?

• 38:32Speaker 00

  The great managers understand this. Who they are as an investor and how they build their firm is so specific to them. And then you have to have that. I really do think there has to be that interplay of the two of them for it to become a great firm. And I think a lot of people don't realize that and they think it's just a, an easy business to pop up. And it can be, but then that's a smaller business and it's not necessarily going to become a long enduring firm.

• 38:54Harry Stebbings?

  You said pop up, but I just think everyone misunderstands just how long this is. Everyone says 10 years. It's not 10 years. It's like 15, 20.

• 39:04Speaker 00

  And that's just one fund.

• 39:06Harry Stebbings?

  Yeah.

• 39:06Speaker 00

  Let's be clear, that's one fund.

• 39:07Harry Stebbings?

  Yeah, yeah.

• 39:08Speaker 00

  I find it actually a bit mind boggling that people, I mean, if you want to have a pop up business, do something direct because even then it's not sure. Like a job can be four or five years and you can try different things, right? With the way compensation and equity structures work. But becoming a GP, like, yeah, it is. Assuming you're not doing off Angelus and it's not a small endeavor, if you're trying to bring in other people and other LPs, it's a very wide financial services business.

• 39:31Harry Stebbings?

  What's the biggest manager miss you've had?

• 39:33Speaker 00

  Oh, this kills me. So I passed on the initialized fund one because we had just launched, yes, I know, I know. It was bad. But the reason-

• 39:43Harry Stebbings?

  You know, I have 300 and-

• 39:44Speaker 00

  I know, I know. No, trust me, I know. But we were Series A and we were looking for 75 to 200 million dollar fund sizes and they were sub 10 and seed. So it was outside of scope, but I-

• 39:55Harry Stebbings?

  I get it.

• 39:56Speaker 00

  It was outside of scope, so it's-

• 39:57Harry Stebbings?

  It's way outside of scope.

• 39:58Speaker 00

  It was early, so doing a couple of things being super exceptions early on. But to the point of, I'm going to quote Nikhil from your last podcast with him from Footwork, "Exception should be made for exceptional people." And yes, to this day, that always sticks in my head.

• 40:12Harry Stebbings?

  What's the strongest belief you had, which turned out to be wrong?

• 40:15Speaker 00

  We've definitely tested a bunch of hypotheses and different things. And I keep going back to this, but it's so clear in early stage. If you're not taking a big swing for the fence, which doesn't mean saying taking like ridiculous, I haven't thought about it risks, right? But you just have a lot of people that think that they can do sort of smaller investments. Like I call the growth equity mindset in a smaller, earlier fund, which probably can work in some scenarios and it works for some LPs that want to do direct investments. I just don't think that's where you're going to get the long term performance.

• 40:40Harry Stebbings?

  If you're investing in a sub 50 million dollar fund, what's a good performance?

• 40:44Speaker 00

  If it's seed, we're going to try to underwrite to a 5X.

• 40:46Harry Stebbings?

  Because people throw out big numbers. You often hear that, you know, I'm going to definitely be a 10X. You know how fricking hard it is to a 10X site?

• 40:53Speaker 00

  There's so many fewer of those than people thought. I appreciate because TVPI looked bonkers. The last few years, people thought it looked different, but I think maybe this is the value of being old. I mean, I've been playing in venture in some form or another since 2000 and I was doing emerging markets in 94 for project finance and I can tell you, it is hard.

• 41:11Harry Stebbings?

  Who's the most consistent DPI returns?

• 41:13Speaker 00

  Oh, well, you'd have to pull into so many different books, but I think the numbers will tell you if you ask different LPs, if you can get three or four funds in a row with strong DPI, that is world class. Usually there's a fund or two which has a tougher time, like no surprise, 2021 might be a tough vintage.

• 41:27Harry Stebbings?

  Someone's told me that LPs invest for a banger of a fund, a meh fund, and they're aware that it's going to be a dog fund.

• 41:33Speaker 00

  That's not untrue because there's sometimes things just mess. But if there's consistency elsewhere, there's consistency of theme, consistency of thinking, consistency of team, just going back and asking different LPs in their portfolios, it's very hard to have three or four funds in a row that'll be called a 3X.

• 41:48Harry Stebbings?

  Unless you really fuck up, do you still have three funds? Does that rule still hold true? Would you think people are much more fund by fund dependent?

• 41:54Speaker 00

  Oh, to our conversation before, institutional LPs, this is why they don't make a lot of new bets every year is because they're looking for managers they think they can be with over multiple fund cycles. But I can tell you, if you want me to digress into graduation rates, we've been looking at data going back to 1995. I was shocked at the breakage. The breakage between fund one and fund two is not every year, but averages out to be about 50%. Well, again, because you've got the law of large numbers coming in at Fund One. There are so many smaller funds.

• 42:20Harry Stebbings?

  And the reason for that is because the small fund LPs, often being individuals, don't scale into institutions.

• 42:26Speaker 00

  Yeah, sometimes people don't realize if I'm making a personal commitment every two or three years, that can be expensive and you might not understand that. It could be the GP themselves don't really want to do it. What was also sort of heartbreaking was the Fund One to Fund Four, on average, again, these are averages, some years are better, some years are worse, is 17%. So it's not a slam dunk, but even if you get to-

• 42:47Harry Stebbings?

  That doesn't surprise me as much.

• 42:48Speaker 00

  Doesn't surprise me as much. What I think is also interesting is just if you play out one, Fund One to Fund Eight, the numbers are terrible because you've got such large breakage in the early years. But even if you get to a Fund Four, there's still pretty significant breakage going on to the other years because then performance can be seen.

• 43:03Harry Stebbings?

  What's a bigger reason for funds to not make it, do you think, from Fund One to Fund Four? Team breakage and partnership breakdown or performance?

• 43:11Speaker 00

  Back in the day, if you had three years between funds, you're talking about a decade of investing. So I think performance would be able to be being seen and then tied into that is like strategy and all those things. And then I think team, it's very, very hard to do this because no one documents it. But you could see, we ran the numbers on funds that from every year, who was the one that has gone on to raise the most vehicles? Core vehicles, not all the other layered. If they went multi-strategy, we didn't track all that. I was shocked the fund sizes didn't balloon as much as I thought they would because the dollars were going into these other growth vehicles. But you see these funds that got to, you know, Fund Four, Five, Six, and then never raised another fund. It would have to be some combination of team and track record. Maybe you did so well, you didn't want to keep going. There's a positive side of that, which is it's good.

• 43:52Harry Stebbings?

  Roger, I'm right.

• 43:53Speaker 00

  I think we should celebrate more as an industry.

• 43:55Harry Stebbings?

  Amazing.

• 43:56Speaker 00

  It's fantastic and it's great. And, I mean, to a point about it's 15 years per fund. I mean, this is like a body of work for 30, 40 years. That is a long time to do one job. People should be allowed to stop.

• 44:06Harry Stebbings?

  Do LPs mind opportunity funds?

• 44:09Speaker 00

  I think you have to ask each one's. I'm always surprised at the different viewpoints around the room on any given opportunity fund. I know some people that do it to try to get into the core fund, Segway and they used to be, oh, the other thing we're seeing in this market is people are un-stapling their funds because a number of LPs felt dragged into it to the point of, I want to support you. I'm not so excited about this other vehicle, but I want to support you, so I'll write a smaller check. But yes, I think it's a combination of things. I think that's also why Fund Four to Seven has the same challenges. And people also, you have to bring up the next generation and people management. If you're doing deals, who in the firm is also thinking about people management and people training? And all these things come into play that is much more about managing a firm than just investing. But you need to do both if you're going to be that kind of long term.

• 44:54Harry Stebbings?

  Well, we see un-stapling continue, do you think?

• 44:56Speaker 00

  I would suspect for at least the next 12 months. To the extent that people feel pressure to raise, they're going to try to be more LP-aligned. And if folks don't want to do it, there's a couple in the market now. SUSE have very publicly tweeted about changing, it's not an opportunity fund per se, but changing out their, I think they had two funds and now they're having three. They're raising independently. So folks are looking at it and talking about it.

• 45:17Harry Stebbings?

  Is this the new normal? Is this return to old?

• 45:19Speaker 00

  I think this feels a bit more traditional venture, which doesn't feel terrible to me. I think the industry is still healthy. I think it's going through, the world's going through a bit of a rough patch. This is not a fun time. I think we're bumping along the bottom. I think it should start coming up at some point. I don't know if Jason's right, back half of '24, or you're right in his 2025. At some point, it will come back up. That's broken clock, like me, can we write twice a time a day?

• 45:42Harry Stebbings?

  Listen, if Birkenstock's getting public, maybe Jason's right.

• 45:45Speaker 00

  I love my Birks, I do have to say. They're very comfortable.

• 45:48Harry Stebbings?

  There we go. Can you talk to me about the news with CalSTRS? We mentioned it before, and it's been discussed in obviously the media recently. What does that mean and what changes?

• 45:56Speaker 00

  Yes. So we were very excited. We announced this about two weeks ago, that we've taken over the early-stage venture fund mandate for CalSTRS. And what this means, so for folks that aren't familiar with CalSTRS, they're the world's largest educator pension fund in the world, which is pretty cool. And they've been, to their credit, running an emerging manager program now for decades. And back in the day when they started, it was a mix of private equity, some healthcare. There's some venture and going forward, they had now picked us to work with them on the early stage venture fund. And they have pivoted to focus on specialized managers and we're their venture specialist. Which means we now are going to take their money, which we're very grateful for them trusting us with, and deploy it into US early stage venture funds, emerging, so that's funds one through three, which then adds additive to our existing programs. So the answer is yes, we're deploying more.

• 46:41Harry Stebbings?

  Ten years time for Beza, what would you like then? You've obviously just launched CalSTRS new program as well.

• 46:46Speaker 00

  Doing this? No, this is my, this is, I know it sounds-

• 46:49Harry Stebbings?

  You love this more than ever.

• 46:50Speaker 00

  Yes.

• 46:51Harry Stebbings?

  Why?

• 46:51Speaker 00

  So I started at Sapphire 12 years ago now. And I always thought this is what I wanted to do, but then when you get into the doing of it, no, this is like my life's work. If you said to me, what else do you want to do? I used to kind of think I wanted to be Secretary of State, that is so never, ever, ever happening. We tossed that idea out when I was about 24.

• 47:08Harry Stebbings?

  Looked great in the movies.

• 47:09Speaker 00

  Looked great in the movies. I thought Marilyn Albright, whatever, edit out the names. I thought it was a fascinating position for the US government, but now, no. Like that was said, that was like when college and I was like, what could I be? And then I was like, no, this is definitely about the private world. I love it. I love being an LP. I love working with early stage managers, the emerging and the established.

• 47:26Harry Stebbings?

  I think what people don't know about us is we first had a call in, I think it was 2016. And it was at 10pm in London and I remember I was still living at home with my family. And you need a call, it's like half an hour for an intro call. And I remember their call ended at like 1, 1.15. And I was like, I really enjoyed that call. That was a great call. And we've been friends ever since, which is like eight years, seven years now.

• 47:45Speaker 00

  I know. I love it.

• 47:46Harry Stebbings?

  I was young.

• 47:47Speaker 00

  You were, you were younger.

• 47:49Harry Stebbings?

  I was much younger.

• 47:50Speaker 00

  We were all younger eight years ago.

• 47:52Harry Stebbings?

  For your friendship and I love doing this.

• 47:54Speaker 00

  Oh, thank you for your friendship and thank you for having me.

• 47:58Harry Stebbings?

  As I said, that one was so much fun, Stu. I loved having Beza in the studio. It made such a difference, Stu, in person. If you'd like to see the episode in full, you can check it out on YouTube by searching for 20VC. But before we leave you today, I've always been a big history man. And so I want to talk about Cooley, the global law firm built around startups and venture capital. Since forming the first venture fund in Silicon Valley, Cooley is one of the most active firms in advising in both early and late stage financings, handling more than 1,600 private financings every- Every year with an equal split of investor and company clients. So to learn more about the number one most active law firm representing VC backed companies going public, head over to coolie.com and also check out cooliego.com.

• 48:42Harry Stebbings?

  Coolie's award winning free legal resource for entrepreneurs. And then HMC or Harvard Management Company. They're constantly seeking out the next generation of truly great investors and entrepreneurs. HMC has managed Harvard University's endowment for nearly 50 years and was one of the first institutional investors in venture capital. Their experience and long term investment horizon make them ideal partners to get world changing ideas on a path to viability and success. They work as a true partner, providing insightful perspectives to help managers succeed. I personally have had the pleasure of working with the HMC team and can say that they're truly exceptional partners and just great, great people to work with. Whether you're launching your first fund or your fifth,

• 49:24Harry Stebbings?

  HMC welcomes the opportunity to partner with both developing and established managers. Have an idea you want to share with the team? Just send it to [email protected]. As always, I so appreciate all your support and stay tuned for a very special episode coming on Friday, a first of its kind, and I cannot wait to hear your thoughts.