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We are frequently asked what drives #outperformance for a #VC
To answer this we created a database of enterprise vs consumer performance što spot patterns & analyze returns
š§µto share high level findings, but to dig deeper, download the full reportš
šbit.ly/3Cf17Uv
To answer this we created a database of enterprise vs consumer performance što spot patterns & analyze returns
š§µto share high level findings, but to dig deeper, download the full reportš
šbit.ly/3Cf17Uv
First, letās define a power law::
We mean that only a small percentage of returns is responsible for a large percentage of overall return value, either for a specific fund or the industry as a whole.
We mean that only a small percentage of returns is responsible for a large percentage of overall return value, either for a specific fund or the industry as a whole.
TL;DR: Both enterprise and consumer exits can produce power law returns, but the nature of them vary considerably.
3 Key Points š½ š½ š½
3 Key Points š½ š½ š½
To reserve or not to reserve, that is the questionā¦ and a question we are asked frequently by #VCs.
The answer? It depends on your investing strategy, but TBD on results.
š
The answer? It depends on your investing strategy, but TBD on results.
š
#VCs take a couple different approaches in their initial check vs follow on strategies. Hereās what we see in our database ā”ļø
#OpenLP
#OpenLP
First off - what is the rationale for optimizing for initial dollars into a company vs saving follow on dollars in āreserveā?
Best wishes for 2022 everyone! š
As we enter the new year, I wanted to share a bit of LP perspective.
We all know the venture market was on š„ in 2021, but how is that actually manifesting and what does that mean for how the proverbial table is being set for 2022?
As we enter the new year, I wanted to share a bit of LP perspective.
We all know the venture market was on š„ in 2021, but how is that actually manifesting and what does that mean for how the proverbial table is being set for 2022?
Hereās what us LPs are seeing and some of the questions LPs are asking themselves going into 2022.
#OpenLP
#OpenLP
1 - The average capital called in the 1st year of a fund is accelerating rapidly.
In 2021, our portfolio averaged 33% in terms of capital called in a fundās first year, which implies an initial investment period well below two years.
In 2021, our portfolio averaged 33% in terms of capital called in a fundās first year, which implies an initial investment period well below two years.
Hey GPs - In the last few weeks Iāve had multiple asks about emerging manager benchmarks/what we are seeing for 2019 (and other recent) vintages.
So hereās a quick š§µ breaking down what we see in the case of 2019 venture funds and the greater LP contextā¦
#OpenLP
So hereās a quick š§µ breaking down what we see in the case of 2019 venture funds and the greater LP contextā¦
#OpenLP
Key point: 2019 funds, emerging or otherwise, are *really* new.
Stating the obvious here, but itās worth reiterating.
In the olden days of venture, asking about benchmarks on funds <2 years old wasnāt a thing.
Stating the obvious here, but itās worth reiterating.
In the olden days of venture, asking about benchmarks on funds <2 years old wasnāt a thing.
Cambridge specifically caveats that āresearch shows that most funds take at least six years to settle into their final quartile ranking.ā
But what the heck...welcome to 2021! š
But what the heck...welcome to 2021! š
Itās September - time for the annual run to raise/close out #VC funds before the end of the year. For many #GPs - this means reaching out to an LP who passed on a previous fund.
This thread deep dives into what to keep in mind as you circle back and reach out to #LPs that passed in the past (which I *do* recommend doing btw)š
#OpenLP
#OpenLP
(Note: Drawing inspiration from this wonderful thread by @dunkhippo33 on a similar dynamic when entrepreneurs are turned down by #VCs:)
1/ Recently
@oper8rio @SapphireVC and @accoladeprtnrs had a conversation regarding the due diligence process for emerging managers (EMs), mainly around whatās important in the due diligence (DD) process, as well as how LPs make investment decisions #openLP
@oper8rio @SapphireVC and @accoladeprtnrs had a conversation regarding the due diligence process for emerging managers (EMs), mainly around whatās important in the due diligence (DD) process, as well as how LPs make investment decisions #openLP
2/ Similar to venture capitalists (VCs), most LPs ascribe to pattern recognition and evaluate managers based on several consistent criteria, including team, strategy, and track record #openLP
3/ Other concepts & processes that are exceptionally important to LPs are portfolio construction, references, and understanding WHY a particular VC is the right fit for the investment strategy #openLP
1/ I recently exchanged tweets w/ @elizabethYin, @macconwell, & others on the notorious topic of OWNERSHIP.
It came up again today on a Zoom chat w/ emerging GPs.
After many conversations (over many years) w/ Institutional LPs -- ownership does matter.
Here's why:
#OpenLP
It came up again today on a Zoom chat w/ emerging GPs.
After many conversations (over many years) w/ Institutional LPs -- ownership does matter.
Here's why:
#OpenLP
2/
Start w/ the customer -- let's assume it's an institutional LP (not HNW or family office). If you ask (and listen carefully) what they care about... it's three things:
Start w/ the customer -- let's assume it's an institutional LP (not HNW or family office). If you ask (and listen carefully) what they care about... it's three things:
3/
a) Distrbution of Returns. Inst. LPs invest in funds. Those funds invest in startups. LPs have an index -- a large basket of startup investments via their existing managers. They don't want another index. Related to this, the more investments one does (high
a) Distrbution of Returns. Inst. LPs invest in funds. Those funds invest in startups. LPs have an index -- a large basket of startup investments via their existing managers. They don't want another index. Related to this, the more investments one does (high
Lots of ink is spilled parsing differences b/w pre-seed vs seed vs early stage (etcā¦) investing. But some truths hold across all stages of venture investing! @alexiskold digs in here: startuphacks.vc/blog/7-truths-ā¦ #OpenLP
Truth 1. Venture outcomes are driven by a power law.
Power law is an immutable law of the universe, and that extends to #VC too. Most startups fail, but the biggest winners, when they happen, tend to be huge.
VCās NEED š¦ās (and decacorns!) to succeed.
Power law is an immutable law of the universe, and that extends to #VC too. Most startups fail, but the biggest winners, when they happen, tend to be huge.
VCās NEED š¦ās (and decacorns!) to succeed.
Truth 2. Your Fund Size is Your Strategy
A fund's portfolio construction will depend on how much capital is under management.
This is why funds often specialize at a specific stage of investing (ie. <$50M fund = pre-seed/seed, $150-$300M fund = seed/series A, etc...).
A fund's portfolio construction will depend on how much capital is under management.
This is why funds often specialize at a specific stage of investing (ie. <$50M fund = pre-seed/seed, $150-$300M fund = seed/series A, etc...).
The great debate in #VC āfollow-on/pro-rata investingā vs āmultiples on dollar investedā continues... #OpenLP -->
.@fintechjunkie wrote a fantastic thread detailing the power of concentrating #vcās capital into its best companies.
.@dunkhippo33 gave great insights into the power of multiples not ownership for smaller funds.
The @PrefaceVentures website is live: prefaceventures.com. Special thanks to @BrettBerson @atouchofair as well as an anonymous designer akin to Banksy for the output. We're doing a few things a bit differently, specifically around founder #communication. A thread:
1 / Founders deserve more #transparency into how VC's operate and what we will do for them as partners. At Preface we call this "The Code", which is essentially our #SLA for #frontierenterprise founders
2 / We are clear how and what we invest in you. How much initially ($250-$750k), how much is reserved for follow-ons (1-3x) and how often (5-7x pa, ~20 investments per fund). This simple info is impossible to find online on 99% of VCās
1/ Some specific insights for Venture Fund Managers (GPs) from a world class LP (our friends at @TTCP_SF) on managing through the crisis. #openLP
Inside Baseball alert!
Inside Baseball alert!
2/ Easing-in with a macro observation:
Best vintages in history were built in last crisis, even if we assume exits delayed 2-3 years
Right now seeing 0-15% decrease in TVPI with 2010-2013 funds most exposed
Best vintages in history were built in last crisis, even if we assume exits delayed 2-3 years
Right now seeing 0-15% decrease in TVPI with 2010-2013 funds most exposed
3/ LP are working HARD to assess portfolios. Avoid surprises, be transparent ... LPs will understand!
LPs need to:
- understand risks to performance
- get detailed guidance on downside
- precisely budget capital calls
- get predictions on liquidity
LPs need to:
- understand risks to performance
- get detailed guidance on downside
- precisely budget capital calls
- get predictions on liquidity
1/ I've been having a few conversations with people in #VC about the denominator problem and I wanted to share this bit of math to put things in perspective:
If you run a $1B endowment, you may have a 15% #PrivateEquity target . . .
#Investing
#OpenLP
If you run a $1B endowment, you may have a 15% #PrivateEquity target . . .
#Investing
#OpenLP
2/ So that means you're looking to have $150M in NAV of private holdings . . . and on top of that, you've got undrawn commitments of another 50 cents to $1.50 for every dollar of NAV depending on your positioning ands assumptions
3/ An old rule of thumb says that you should have $1 of undrawn for every $1 of NAV, but Dean Takahashi and Seth Alexander wrote a great paper a while back that refined that thinking, although the rule of thumb still seems to work for most people
Sometimes we hesitate to ask some real questions or give feedback because we want to be proper in public and not risk judgment.
So- weāre hosting a new event series at @ffvc called Real Talk- bringing together two groups of people that might benefit from some realness #openlp 1/
So- weāre hosting a new event series at @ffvc called Real Talk- bringing together two groups of people that might benefit from some realness #openlp 1/
Weāre starting with an easier one- LPās and VCās. Hosting a closed door dinner 11/13 for these folks to get real with each other for the sake of learning. If you have been an LP in a fund, and would like to join to share and learn, shoot me a DM. Know one? Share with them.
Do VCs share (some) misalignment w/ LPs similar to how founders have (some) misalignment w/ VCs?
~90% of funds don't return $$?
FoF is a hits driven business too
You could imagine something like "Indie LP" (@bryce) - focused on funds targeting repeatable 3x
"Lifestyle funds"
~90% of funds don't return $$?
FoF is a hits driven business too
You could imagine something like "Indie LP" (@bryce) - focused on funds targeting repeatable 3x
"Lifestyle funds"
@bryce Perhaps the the operator fund equivalent will exist but for LPs.
Today, already, people are closing entire micro funds just from other VC firms/HNI.
Maybe bigger funds will close that way too.
Today, already, people are closing entire micro funds just from other VC firms/HNI.
Maybe bigger funds will close that way too.
"We should change the cadence of general meetings to 18 months or more and GPs should visit LPs more frequently." - I put that advice in an email yesterday and I'm curious what other LPs think about it? Annual meetings are a lot of work and cost. Do they accomplish their goals?
The stated goal is to report on fund investments to LPs. The meetings are also a way to build and maintain important relationships for future fundraising. They also serve as institutional rigor that is healthy for the GPs to evaluate a portfolio and strategy in total.
LPs use general meetings to network & reference, forming community amongst themselves too. Small meetings are so much better on all dynamics whereas some of the large funds have a giant ballroom and no personal connections. Those feel empty.
