Transcript
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Venture capital fund funds.
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We manage about $8,000,000,000 Firm's been
around for the years.
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How much risk is it that a couple of your funds
don't perform?
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Venture's more risky inherently.
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450 funds, 100 managers.
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When you're looking at a new manager, are you
just looking for pure alpha who could make the
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best decisions?
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The dirty little secret of Venture Capital is
that you want all the best talent to stay and
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help grow a growth stage company, but those
make some of the best founders.
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So people aggressively target that talent.
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Every venture pitch you get is pretty exciting
and interesting.
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No one boring really starts a venture fund.
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It's the top 5% of society.
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Ben, welcome to the 10X Capital podcast.
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Thanks for having me.
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Thanks for coming on.
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So what is top Tier Capital?
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We're a
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venture capital fund of funds.
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We manage about $8,000,000,000 Firm's been
around for years.
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Offices, San Francisco, Boston.
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I just moved down outside of New York, and then
we have an office in London as well.
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How critical are you guys to be on the ground
next to your managers?
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It's a relationship thing.
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So, I mean, back in, when the firm started,
everybody wanted access to Silicon Valley Tech.
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And for us to have a local presence, feet on
the street, and be seen in the market was super
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important to our global LP base.
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Just to to get the real truth of what's going
on, I think we have a firm wide belief that
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it's important to be local in the markets that
matter.
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And what's your products look like?
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I know you have the primary fund of funds, but
what other products do you have?
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The last investment cycle was about
1,500,000,000.
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So 2 thirds of that is primary capital.
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So investments end up venture funds.
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We only do venture across all of that.
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So, 5 to $10,000,000 checks into kind of new
relationships, new managers, emerging managers,
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whatever you want to call them, up to kind of
20 to 40 and and more brand name stuff.
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And then the other third of our 1,000,000,000 5
this last cycle was or is secondaries and
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direct investments.
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And so we'll do all different sorts of
secondaries, whether that be LP stakes, GP
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stakes, direct company, secondaries, all over
the map.
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And then for the equity checks and co
investments, what we call it, that's
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predominantly Series B, C ish tech companies, a
lot of enterprise tech, some consumer.
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Over the years, biotech has been tough for us
to kind of wrap our heads around and leave that
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to the experts most days.
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So the team is split, really.
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So you either predominantly focus on primaries
or predominantly focus on secondaries and
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directs.
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And so I spend my time on the primary side of
the business.
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But the reality is, is we're co investors and
we only invest in things from our hiring book
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on the secondary indirect side.
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And so when things come in through somebody's
relationship on the primary side, it gets
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passed over the secondary side for
underwriting, but you're still on the kind of
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deal team for relationship management, let's
say.
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As Q3 2024, what kind of secondary
opportunities are in the market?
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I mean, I think there's a lot of people trying
to figure out, what value is and what what
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people are willing to part with.
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I think everyone last year thought there was
going to be a huge rush to sell secondaries,
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and, oh, what a time to be buying, and you can
get things for 50 off.
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Like, reality is not that much volume traded in
the venture market, and it's because, I mean,
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2022, the venture market was down, like, 35%
from highs.
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And so if I'm the CIO sitting there looking at
cleaning up my book, like, I'm gonna be down
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35% and then take another 50% haircut and sell
it for some cash, like, I think we'll just
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wait.
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And and I think they're probably right to do
that.
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And so today, I mean, when you see, portfolios
being traded, they're kind of in the 25 ish
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discount.
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I mean, you still see the occasional 50% where
somebody just doesn't wanna be in a manager
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anymore or maybe a CIO regime change, and they
just don't buy venture.
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They don't care.
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They wanna rotate whatever cash they can.
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You see a bit of that, but for the most part,
the venture market on the secondary side.
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And now I'm talking LP stakes, with all these
discounts.
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The LP stakes, I mean, really, yeah, call it
20, 25 up to 35, 40.
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20, 25 up to 35 of the last valuation, last
quarter?
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Yeah.
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Yeah.
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So everything prices off at quarter end NAV,
basically.
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So we get our capital account balance for q2
here in a couple of weeks.
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And so then I could take that pricing and say,
like, it's 35% discount off of that.
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Some people you'll hear people say, like, Oh,
it traded at $0.85 on the dollar or something.
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Well, that's a 15% discount, like the lingo.
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Curious, why are discounts so high given that
there are quite a few secondary buyers
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coming down?
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For sure.
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But a lot of the AUM, for people who buy
secondaries, has gone into strategies focused
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on buyout and growth stage companies.
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I mean, these profitable businesses, it is not
uncommon to see those things trade at 5%
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discount, so 95¢ on the dollar.
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I mean, I was just talking to a broker Tuesday.
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The competition you see in the big broker
trades for the buyout stuff is 5 to 15%
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discount, where venture is still 25 to 35.
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And they're still I mean, venture is more risky
inherently and
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And the marks might not be as accurate,
correct?
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So
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we're a fund of funds.
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We're invested in 100 managers.
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We have 450 active underlying funds on our
platform.
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So, we actually track this stat.
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And it's one of the most asked for things from
our managers of like, Hey, can you blind my
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book and just say relative to all the other
managers who have an investment in our
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underlying companies, like, where do I sit?
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And there's a couple outliers for sure, every
time you look at those.
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And, like, you know, one manager maybe has more
confidence in the company than another,
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etcetera.
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But for the most part, people are pretty close
these days.
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Or we know that some firms just inherently
don't care and they won't mark their book up,
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no matter what the operating metrics are, from
last round price.
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And they just leave it there until, I mean, the
company goes public.
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You're in 450 funds, 100 managers.
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When you're looking at a new manager, are you
thinking about how is this, has a diverse set
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of assets or are you just looking for pure
alpha who could make the best decisions?
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We only add 2 to 3 new managers in our,
probably, core portfolio every 2 to 3 years.
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So, there's not a lot of, rotation in our book.
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And a lot of it's because people perform well
and they stay.
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And so, like, when I'm adding a new manager, I
mean, I have to think about how is that
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different from what I already have because I'm
kind of assuming, luckily, fortunately, for a
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young guy to to join a Fund A Fund platform,
that we have access to some of the best venture
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capitalists in the world already today.
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And so what's gonna be different and new, and
how does that fit into my book?
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Are you somehow looking at their assets versus
other assets, like whether they're doing SaaS
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and consumer and you have too much exposure to
SaaS or consumer?
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How do you
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Say we missed a big winner in our portfolio.
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Like, say we weren't in Uber indirectly, and we
had some.
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But, like, say we weren't, and there are a
bunch of spinouts coming from those companies,
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and some other VCs are just capitalized on that
talent because, let's face it, the dirty little
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secret about your capital is that, yeah, you
want all the best talent to stay and help grow
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a growth stage company, but those make some of
the best founders.
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And so, like, people aggressively target that
talent.
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We look periodically of like, hey, which
companies are we missing in recent kind of
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vintages and who are the VCs that are
capitalizing on that?
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And then we'll go try to get in front of them.
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Sometimes it's an early product person who got
into venture and is on their Fund 2 or Fund 3
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and has examples of this sort of thing, or it
is the VC who did that deal doubling down on
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the winners.
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Intuitively, it would appear you would think
that serial entrepreneurs have a leg up to
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these kind of former employee number 5 at Uber,
Tutan AI.
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But to your point, a lot of the big winners end
up being from these ecosystems.
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Why do you think that is?
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Solid is just building an early team.
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Like, if you can go start a company with 3 of
your buddies who you know are ex web operators
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and are in the trenches and frankly hungry,
like, they're not already wealthy, but they
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want to go change the world and be a part of
the next big thing.
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Like, that makes that initial 5 person team all
the more dangerous in our eyes.
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It derisks it and also sets the culture.
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Yeah.
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There's a corollary where David Sacks, the
first, like, 30 angel investments were just
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friends.
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He knew that people completely deristed.
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He has one of the best kind of angel track
records because
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he has one of the most angel track records in
the world.
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Yeah.
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You you sound like
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you know more about it.
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Well, he he he he he he's a Fund 1.
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So him and Bill coming together and launching
that.
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Like, I I hope, David and Bill are fine.
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That's good.
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My sword my sword is amazing.
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Yeah.
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And and a lot of fun to be a part of.
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You do invest in Fund 1s.
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So tell me about, well, when would you back a
Fund 1?
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So emerging manager, I kind of, like, said in
almost, like, air quotes earlier.
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So we don't internally think of us backing
emerging managers.
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Like, it's just too hard for for our platform
to really get excited about folks who don't
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really have a track record.
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I mean, you're being compared against Index and
Excel.
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And it's like, well, why, you know, why do you
deserve to win?
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And, like, what's your spot in the market?
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And so when we talk about backing of Fund 1,
it's usually someone like a David Sachs who has
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an amazing track record, wants to
institutionalize, either as family office,
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private activity, and, like, hey, he's all in
on being a venture capitalist now, or it's
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someone who has left one of the big brand firms
who, is going to, you know, generally, they
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talk about just not wanting to deal with, like,
the scope of a platform and want to really
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focus on either one sector or one stage, not
worry about the later stage follow on activity,
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etcetera.
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Like, we see that a lot, and we'll back those
sorts of managers.
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So, for example, we backed Tomas at Airheory.
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We were in FundOne there.
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We did West Chan at FPV, folks like that, when
they spin out.
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And they're just fantastic investors that we
know we want to be a part of.
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Just to play devil's advocate, there's
certainly persistence in venture capital
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returns, and you're in a lot of great funds.
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But can you really just go to these funds and
continuously upside?
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Aren't you basically capped in your top name?
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So, our Fund of Funds, like 70% of our
underlying dollars, if you look at it on a
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strategy basis, go into seed or Series A
focused strategies.
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And so, as platforms have raised AUM, and most
of that AUM growth has been on later stage and
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follow on activity like, if we scaled with a
bunch of those groups, like, our product mix
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would effectively change for our clients, our
LPs.
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And so we worry about that a lot.
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You know, at a certain point, our clients can
go and buy those platforms directly, and we're
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happy to make those introductions.
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And maybe they should, but then maybe it's not
a fit for us anymore.
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And so our, you know, our kind of core fund of
funds has actually stayed pretty consistent in
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size for the last 10 years sort of thing.
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And so you'd see $20,000,000 to $30,000,000
commitments in there across the platform.
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And then excess capacity goes to one of our
separately managed accounts that sits as an
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overflow vehicle on top of our stuff who would
like more of that type of investment.
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You mentioned your clients.
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Who are clients that invest into venture fund
of funds?
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What are some of those categories?
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Couple categories for us.
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I mean, we are almost exclusively large pension
retirement systems globally.
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Half our money comes from US and then the other
half internationally, so Germany, South Korea,
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Japan.
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So, folks like that who think of us as venture
experts who will help them manage their venture
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allocation.
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And so those are the large checks.
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And so then they're just like, Hey, here's our
venture allocation.
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We might hire 2 venture fund to funds, and you
guys go figure it out and get me into the best
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managers.
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And then there's a cohort of LP that wants us
to help with access.
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And since our founding of our firm, we always
have inherent churn in our LP base because it's
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part of our business model.
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So they'll give us a primary commitment, and
we'll help it for maybe, like, 2 funds in a
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row.
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And then we'll help them with introductions to
managers.
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And it's always up to the manager to let them
in, certainly.
222
00:11:55,269 --> 00:11:59,144
But, and we don't make a lot of promises there
because it just it is what it is.
223
00:11:59,204 --> 00:12:04,725
But, you know, the reality is, is it's worked
and people take their money, and it's a way to
224
00:12:04,725 --> 00:12:09,125
get smart on the space and then eventually
build out their their program directly.
225
00:12:09,125 --> 00:12:10,356
And we're totally happy to do that.
226
00:12:10,356 --> 00:12:10,725
Those family offices, endowment?
227
00:12:10,725 --> 00:12:13,259
And Those family offices, endowments?
228
00:12:13,259 --> 00:12:20,460
Smaller endowments or maybe, some international
funds that know they don't have access in the
229
00:12:20,460 --> 00:12:24,220
US and they want it, we're happy to help them
get up to speed.
230
00:12:24,220 --> 00:12:28,715
Maybe kind of to the way we start up, the feet
on the street and know the market.
231
00:12:29,095 --> 00:12:33,014
Like, they're willing to pay someone to help
them figure it out.
232
00:12:33,014 --> 00:12:36,795
You mentioned when we last shot you that you
don't chase sector funds.
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00:12:36,855 --> 00:12:43,029
For us, and this is a house view, it's that we
kind of view venture and innovation as people
234
00:12:43,089 --> 00:12:45,589
finding opportunities at the fringes.
235
00:12:45,889 --> 00:12:51,089
Maybe it's where 2 sectors collide, and then
bam, you have a new business model or a new
236
00:12:51,089 --> 00:12:52,450
method distribution, etcetera.
237
00:12:52,450 --> 00:12:53,829
And those are the big wins.
238
00:12:54,075 --> 00:12:59,514
And so, as we think about sectors, it's really
hard for us to not imagine that the generalist
239
00:12:59,514 --> 00:13:05,514
VCs wouldn't end up in some of the most
interesting collisions of sectors and finding
240
00:13:05,514 --> 00:13:09,709
the coolest opportunities because they're just
good FEC and they know a lot of people who've
241
00:13:09,709 --> 00:13:10,370
been successful.
242
00:13:10,669 --> 00:13:16,990
I will caveat that with saying we do have
really 2 sectors on our platform that we will
243
00:13:16,990 --> 00:13:18,909
invest in or are investing in today.
244
00:13:18,909 --> 00:13:19,889
1 is biotech.
245
00:13:20,644 --> 00:13:23,785
And that's like 10%, 15% of our book.
246
00:13:24,004 --> 00:13:26,264
And then the other is cybersecurity.
247
00:13:26,644 --> 00:13:31,365
The way we've kind of gotten there is that we
think you kind of need some of the gray hair in
248
00:13:31,365 --> 00:13:35,059
the room when you're talking to, like, the
customers of those 2 businesses.
249
00:13:35,059 --> 00:13:40,179
Like, big pharma is not gonna just, like, pick
up the phone to any VC who invests in biotech
250
00:13:40,179 --> 00:13:40,659
companies.
251
00:13:40,659 --> 00:13:44,820
Like, you need to have some gravitas to get in
front of the decision makers there.
252
00:13:44,820 --> 00:13:45,914
It's just the truth.
253
00:13:45,914 --> 00:13:50,654
And cybersecurity, we knew where for us that
it's a sector biotech goes back to, like, 99
254
00:13:50,715 --> 00:13:53,195
being, you know, about 15% of the book.
255
00:13:53,195 --> 00:13:57,274
But but recently, we kind of came to a
conclusion that cybersecurity, you need that
256
00:13:57,274 --> 00:14:03,029
same I'm using the term gravitas to get in
front of CSOs and and the importance of
257
00:14:03,029 --> 00:14:06,649
decision makers who can really move the needle
for early stage company.
258
00:14:06,789 --> 00:14:07,269
Hey.
259
00:14:07,269 --> 00:14:09,529
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260
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That's z.carta.comforward/10xpod.
270
00:14:48,284 --> 00:14:50,705
So we chatted last time about the pros and
cons.
271
00:14:51,240 --> 00:14:55,000
When you're in a situation where you have one
more vintage where you think that the fund
272
00:14:55,000 --> 00:14:58,679
could really deliver very well, would you
invest knowing that it's a one and done?
273
00:14:58,679 --> 00:15:00,039
And we're already existing LPs?
274
00:15:00,039 --> 00:15:00,759
You're not existing.
275
00:15:00,759 --> 00:15:01,799
They're probably unlikely.
276
00:15:01,799 --> 00:15:06,325
Reality is we have to monitor these funds for
15, 18 years anyways.
277
00:15:06,325 --> 00:15:12,325
And I mean, if I can't hand over my heart, say
that I think I can get 2 to 3 commitment cycles
278
00:15:12,325 --> 00:15:14,985
with a manager, like, we're just not adding a
new relationship.
279
00:15:15,125 --> 00:15:18,584
So how often do you not commit to the 2nd or
3rd vintage?
280
00:15:18,679 --> 00:15:22,679
I could count on one hand in, like, the 8 and a
half ish years that have been near.
281
00:15:22,679 --> 00:15:23,879
How many times it's happened?
282
00:15:23,879 --> 00:15:27,399
And that's been due to something that
specifically happened, or what are those cases?
283
00:15:27,399 --> 00:15:27,639
Yeah.
284
00:15:27,639 --> 00:15:30,919
I mean, a lot of it is just changing strategy
to something.
285
00:15:30,919 --> 00:15:34,725
If you started a seed fund and you raised
what's up to 150 and then, like, you come back
286
00:15:34,725 --> 00:15:40,565
and had great success and you're raising at 450
and you want to go be multistage, like, we
287
00:15:40,565 --> 00:15:42,745
might have a pause at that one.
288
00:15:43,365 --> 00:15:45,704
I would say the number 2 reason would be team.
289
00:15:45,924 --> 00:15:51,839
I mean, certainly, if there's a bunch of team
turnover and, it's just not the same story and
290
00:15:51,839 --> 00:15:55,779
pitch, like, that's hard to get behind because
it's such a personal business.
291
00:15:55,839 --> 00:15:59,120
What are some other reasons that venture
franchises decline over time?
292
00:15:59,120 --> 00:16:03,524
I mean, just senior partners who have made a
lot of money and are really doing the deals.
293
00:16:03,745 --> 00:16:08,865
And it's just a bunch of junior folks who don't
know how to make money in the business of
294
00:16:08,865 --> 00:16:11,024
venture capital, that give the keys to the car.
295
00:16:11,024 --> 00:16:15,440
Do you believe venture could function out of
office, or do you think that you have to be in
296
00:16:15,440 --> 00:16:17,200
office to be a good venture firm today?
297
00:16:17,200 --> 00:16:21,379
Now, I do think fundraising would be really
tough.
298
00:16:21,679 --> 00:16:23,519
And just there's a trust element to it.
299
00:16:23,519 --> 00:16:27,245
I mean, so, like, yeah, I do pitch your
strategy totally great.
300
00:16:27,625 --> 00:16:28,424
I understand it.
301
00:16:28,424 --> 00:16:29,865
It's in the meeting now, and I get it.
302
00:16:29,865 --> 00:16:34,184
But there's just something about breaking bread
with somebody and sitting down and and having
303
00:16:34,184 --> 00:16:41,304
an in person conversation that I just don't
think changes, that quickly in in this business
304
00:16:41,304 --> 00:16:46,529
because there's such an opportunity cost for
making the wrong decision here.
305
00:16:46,529 --> 00:16:52,290
Like, if you are one of the big platforms and
you invest in what you you know, you invest in,
306
00:16:52,290 --> 00:16:57,075
like, the number 5 winner versus the number 1
or 2 winner in the category, like, let's just
307
00:16:57,235 --> 00:17:00,754
and then you can't invest in the number 1 or 2
because you're conflicted, whatever.
308
00:17:00,754 --> 00:17:06,195
Like, I just don't think people are going to be
so willing to take it only on Zoom.
309
00:17:06,195 --> 00:17:10,674
Just to play devil's advocate, I do think in
person as well, I think venture more than
310
00:17:10,674 --> 00:17:14,789
anything, and like many asset management
fields, is an apprenticeship model.
311
00:17:14,849 --> 00:17:15,349
Sure.
312
00:17:15,490 --> 00:17:19,170
And you just imagine, you know, you have a
carpenter and they're doing it virtually.
313
00:17:19,170 --> 00:17:20,049
It's very difficult.
314
00:17:20,049 --> 00:17:21,569
Obviously, that's a very physical thing.
315
00:17:21,569 --> 00:17:26,445
But I think some of the greatest venture
managers, the next generation, tend to be from
316
00:17:26,445 --> 00:17:27,485
in office cultures.
317
00:17:27,485 --> 00:17:28,924
There's a lot of truth to what you're saying.
318
00:17:28,924 --> 00:17:30,365
And I mean, top tier.
319
00:17:30,365 --> 00:17:30,924
That's what I'm saying.
320
00:17:30,924 --> 00:17:31,725
You can do it remote.
321
00:17:31,725 --> 00:17:35,965
Like, we still work 2 days in the office, and
we actually we hire kids out of college every
322
00:17:35,965 --> 00:17:36,525
couple of years.
323
00:17:36,525 --> 00:17:38,125
That's how I lucked into it.
324
00:17:38,125 --> 00:17:38,525
Yeah.
325
00:17:38,525 --> 00:17:42,200
And for the first year, like, you don't get to
go to a lot of conferences.
326
00:17:42,420 --> 00:17:43,059
Like, you don't.
327
00:17:43,059 --> 00:17:47,640
Like, your job is to learn the book, which, I
mean, we have a lot of active portfolio
328
00:17:47,700 --> 00:17:48,200
companies
329
00:17:48,259 --> 00:17:48,380
and
330
00:17:48,380 --> 00:17:50,920
a lot of active managers, so that's a tall
task.
331
00:17:50,980 --> 00:17:54,660
I'd love to see if any of our analysts right
now could could talk to our entire book.
332
00:17:54,660 --> 00:18:00,424
But, until you're shooting an LP and until you
know enough to be dangerous and probably this
333
00:18:00,424 --> 00:18:05,224
is true for a lot of VCs like, you probably
really shouldn't be representing your firm.
334
00:18:05,224 --> 00:18:10,099
Like, you manage people's retirement money and,
like, that reputation has built over years.
335
00:18:10,099 --> 00:18:15,619
And so until, like, our junior people can kind
of talk the talk, and we know we're gonna have
336
00:18:15,619 --> 00:18:18,099
a good answer for like, Hey, what's an LP look
for?
337
00:18:18,099 --> 00:18:21,640
Like, what are the things with my venture funds
I should be thinking about?
338
00:18:21,724 --> 00:18:24,845
Like, until you can prove that, like, you know,
we're not sure.
339
00:18:24,845 --> 00:18:26,625
You're in 450 funds.
340
00:18:27,164 --> 00:18:29,025
I'm assuming you don't know all 10,000.
341
00:18:29,244 --> 00:18:31,964
I know you're very smart, but probably there's
limitations set to it.
342
00:18:31,964 --> 00:18:32,525
Oh, totally.
343
00:18:32,525 --> 00:18:34,285
So how do you talk about your book?
344
00:18:34,285 --> 00:18:38,670
And how do you talk about top tier when you
talk to LPs or at conferences?
345
00:18:39,130 --> 00:18:44,190
We have a standing thing that we get together
as an investment team and we review quarterly
346
00:18:44,250 --> 00:18:45,289
new deal activity.
347
00:18:45,289 --> 00:18:47,210
And so it'd be like, how many companies?
348
00:18:47,210 --> 00:18:48,109
At what stages?
349
00:18:48,170 --> 00:18:49,529
What was the average check size?
350
00:18:49,529 --> 00:18:53,585
Like, the managers who do provide ownership
percents, like, how does that tick up and down?
351
00:18:53,585 --> 00:18:54,884
And this is kind of a scoreboard.
352
00:18:54,944 --> 00:18:56,464
What are some of the things you're tracking
there?
353
00:18:56,464 --> 00:18:56,704
Yeah.
354
00:18:56,704 --> 00:19:00,944
Average entry price, ownership percent, size of
rounds.
355
00:19:00,944 --> 00:19:08,339
Maybe if you'd be curious, qq123 versus Q1
'twenty 4 is actually about the same invested
356
00:19:08,339 --> 00:19:11,000
capital on, like, a look through basis of our
managers.
357
00:19:11,539 --> 00:19:16,660
But if you look this year, there was more of a
shift to, seed and Series A stage.
358
00:19:16,900 --> 00:19:21,984
So the number of investments was higher, which,
like, for us is a good early indicator that the
359
00:19:21,984 --> 00:19:26,784
venture industry is, like, really kind of like,
at least with, like, you know, premier venture
360
00:19:26,784 --> 00:19:31,200
managers, which maybe I'm saying irregently,
but, you know, those top tier.
361
00:19:31,279 --> 00:19:33,359
Those are the top tier, whatever you wanna call
it.
362
00:19:34,079 --> 00:19:37,519
Those those managers are back to the works
writing early stage checks versus trying to
363
00:19:37,519 --> 00:19:43,359
follow on into some of their winners or, you
know, huge, huge sums of capital into, like, a
364
00:19:43,359 --> 00:19:45,039
couple big AI deals last year.
365
00:19:45,039 --> 00:19:48,355
Whereas this year, we saw a lot more kind of
back to basics.
366
00:19:48,575 --> 00:19:53,615
And, I think it bodes well for for the industry
here over the next 18 months that that there's
367
00:19:53,615 --> 00:19:55,214
such a there was such an increase.
368
00:19:55,214 --> 00:19:56,095
You mentioned AI.
369
00:19:56,095 --> 00:20:01,420
Do you have any early views on the ecosystem on
what you see, to your manager?
370
00:20:01,420 --> 00:20:06,539
Well, real revenue pulling through these
businesses, but it's still TBD if that's just
371
00:20:06,539 --> 00:20:09,840
fickle revenue of people just trying to figure
out which tools they want.
372
00:20:10,220 --> 00:20:13,039
It's totally unclear who's going to be category
winners.
373
00:20:13,304 --> 00:20:18,744
It's obvious that there's an enterprise budget
for these corporate tools solving real pain
374
00:20:18,744 --> 00:20:19,224
points.
375
00:20:19,224 --> 00:20:23,304
The problem is when you see 3 companies show up
that are solving the same thing, can our fund
376
00:20:23,304 --> 00:20:23,784
of funds go?
377
00:20:23,784 --> 00:20:25,944
Can I just like, Alright, who's going to win?
378
00:20:25,944 --> 00:20:27,144
All 3 are going to be winners.
379
00:20:27,144 --> 00:20:28,424
It's just the reality of the business.
380
00:20:28,424 --> 00:20:32,640
You said last time we chatted, our clients hire
us because we have people that will tell us the
381
00:20:32,640 --> 00:20:33,039
truth.
382
00:20:33,039 --> 00:20:34,240
Maybe feet on the street.
383
00:20:34,240 --> 00:20:35,119
We'll go back to that.
384
00:20:35,119 --> 00:20:39,140
But, references are such important.
385
00:20:39,200 --> 00:20:43,600
If you listen to any LP talk about investing in
venture, I mean, they talk about how important
386
00:20:43,600 --> 00:20:44,714
references are.
387
00:20:44,794 --> 00:20:50,634
Well, like, if I was starting a Fund of Funds
today and was just like cold start, like, I'm
388
00:20:50,634 --> 00:20:54,954
going to go get into the best venture managers,
like, every venture pitch you get is pretty
389
00:20:54,954 --> 00:20:56,255
exciting and interesting.
390
00:20:56,394 --> 00:20:58,794
Like, no one boring really starts a venture
fund.
391
00:20:58,794 --> 00:21:00,450
It's the top five percent of society.
392
00:21:00,450 --> 00:21:02,329
The risk manager is the top 5.
393
00:21:02,329 --> 00:21:04,490
They're just really smart, interesting people.
394
00:21:04,970 --> 00:21:08,809
And I think you could get caught up and just
like, Man, this is obvious.
395
00:21:08,809 --> 00:21:10,109
This is going to be a winner.
396
00:21:10,250 --> 00:21:12,569
And we talked to all our junior people about
this.
397
00:21:12,569 --> 00:21:14,509
Like, totally and I have the same experience.
398
00:21:14,704 --> 00:21:17,825
The funds that I thought day 1 were, like,
super interesting.
399
00:21:17,825 --> 00:21:18,625
Obviously great.
400
00:21:18,625 --> 00:21:19,664
We're like, Yeah, that's cool.
401
00:21:19,664 --> 00:21:23,345
But, like, wait until you meet all of our
managers who come through our office, and I
402
00:21:23,345 --> 00:21:26,865
think you'll understand why our book looks the
way it does.
403
00:21:26,865 --> 00:21:30,599
And, like, that then is the bar that you have
to compare new relationships to.
404
00:21:30,759 --> 00:21:35,079
And then those are the people that I get to
call to tell me the truth about the other
405
00:21:35,079 --> 00:21:36,380
managers and their ecosystem.
406
00:21:36,599 --> 00:21:40,839
And, like, Hey, is that seed manager really
getting into all these deals?
407
00:21:40,839 --> 00:21:43,720
They're getting into your shittiest 20% of
deals.
408
00:21:43,720 --> 00:21:43,880
Yeah.
409
00:21:43,880 --> 00:21:45,400
They're just scraping the bottom of your phone.
410
00:21:45,400 --> 00:21:46,575
Those people tell us the truth.
411
00:21:47,054 --> 00:21:49,855
And I mean, they're friends of the firm over
time.
412
00:21:49,855 --> 00:21:50,355
Absolutely.
413
00:21:50,494 --> 00:21:54,494
And we we look to, to help us continue to make
money.
414
00:21:54,494 --> 00:21:58,815
In terms of your relationship with these top
funds outside of being an LP, what care do you
415
00:21:58,815 --> 00:22:01,634
have to give them to kind of maintain and
strengthen their relationship?
416
00:22:01,774 --> 00:22:05,609
I hope people view us as knowing what we're
talking about.
417
00:22:05,609 --> 00:22:09,929
When you sit down with somebody on top tier,
like, with the access to the data that we have,
418
00:22:09,929 --> 00:22:14,089
like, what I hope and what the firm spends a
lot of time thinking about is, like, being a
419
00:22:14,089 --> 00:22:15,525
trusted partner for them.
420
00:22:15,765 --> 00:22:17,945
And the money's next, right?
421
00:22:18,005 --> 00:22:21,045
Everybody's nice to LPs, totally.
422
00:22:21,045 --> 00:22:21,285
Yeah.
423
00:22:21,285 --> 00:22:26,825
I mean, the ability to run LPACs for 2 thirds
of our managers and stuff like that.
424
00:22:27,125 --> 00:22:30,539
We just can sit down and be like, Hey, that's
market, or like, Yeah, you guys actually are
425
00:22:30,539 --> 00:22:32,619
doing a great job, or You're light on DPI.
426
00:22:32,619 --> 00:22:34,240
I'm like, We're just going to tell you the
truth.
427
00:22:34,539 --> 00:22:36,299
And I think people respect that.
428
00:22:36,299 --> 00:22:37,340
I hope people respect that.
429
00:22:37,340 --> 00:22:41,340
Do you find out the people that are most open
to feedback, your top managers somewhere in the
430
00:22:41,340 --> 00:22:43,494
middle, or talk to me about the correlation
between
431
00:22:43,575 --> 00:22:45,015
VC is super curious.
432
00:22:45,015 --> 00:22:50,295
People like, as soon as they know we have some
benchmark thing that, like, will come up in a
433
00:22:50,295 --> 00:22:52,934
meeting, they always want to see it.
434
00:22:52,934 --> 00:22:56,455
Like, they always want to to figure out where
they stack.
435
00:22:56,455 --> 00:22:59,430
So you lead with data, not not with ego,
essentially.
436
00:22:59,809 --> 00:23:03,750
Most of the firms we invest in are not like,
again, first time managers, whatever.
437
00:23:03,809 --> 00:23:06,870
We're happy to help on operational stuff, all
that.
438
00:23:07,250 --> 00:23:09,650
But, like, we've kind of got that figured out
at this point.
439
00:23:09,650 --> 00:23:13,634
It's like, how do you tweak things at the
fringes to to win?
440
00:23:13,634 --> 00:23:18,595
And so, like, the scout programs, I don't know,
what, 8 years ago when everybody was doing
441
00:23:18,595 --> 00:23:19,394
that, it was, like, okay.
442
00:23:19,394 --> 00:23:20,595
Like, what's best in class?
443
00:23:20,595 --> 00:23:21,954
Like, how do I go keep up?
444
00:23:21,954 --> 00:23:23,174
Was that a failed experiment?
445
00:23:23,315 --> 00:23:26,375
Honestly, some of those, like, buckets have
performed well.
446
00:23:26,809 --> 00:23:29,529
But I don't know, and I'd love to see the data
on this.
447
00:23:29,529 --> 00:23:32,890
We should probably I should talk to some other
fund of funds and, like, we should figure it
448
00:23:32,890 --> 00:23:33,049
out.
449
00:23:33,049 --> 00:23:40,109
But, like, I would love to see the success rate
of the VCs doubling down on the winners from
450
00:23:40,250 --> 00:23:41,390
their scalp portfolio.
451
00:23:41,845 --> 00:23:47,684
Because there's, I mean, many portfolios of 100
of companies sometimes, and really hard to
452
00:23:47,684 --> 00:23:50,005
figure out which ones are working so early on.
453
00:23:50,005 --> 00:23:56,549
And then how do you go from your 150 ks check
by your operator that you gave money to to MS's
454
00:23:56,610 --> 00:24:00,789
company, is really the one that I should go and
back up the truck and put $4,000,000
455
00:24:01,730 --> 00:24:03,730
superseding or whatever you want to call it.
456
00:24:03,730 --> 00:24:07,570
Are you not concerned that you guys are in
market beta given you're in 10,000 companies?
457
00:24:07,570 --> 00:24:08,984
And how do you assess that out?
458
00:24:09,065 --> 00:24:09,224
Yeah.
459
00:24:09,224 --> 00:24:12,105
I mean, that's worry, sure, with the fund of
funds.
460
00:24:12,105 --> 00:24:18,125
I mean, we try to benchmark ourselves against
the Cambridge USBC benchmark.
461
00:24:18,184 --> 00:24:21,325
Fund of funds and secondary benchmarks are a
little wacky because it's together.
462
00:24:21,849 --> 00:24:22,490
So, yeah.
463
00:24:22,490 --> 00:24:25,929
But most fund of funds, actually, I mean, I've
seen some of the numbers, and a lot of them are
464
00:24:25,929 --> 00:24:26,329
public.
465
00:24:26,329 --> 00:24:28,329
Like, they've done pretty well relative to the
market.
466
00:24:28,329 --> 00:24:29,130
Why do you think that is?
467
00:24:29,130 --> 00:24:34,649
I mean, access, the best name, persistence is
certainly, I mean, statistically, does exist in
468
00:24:34,649 --> 00:24:35,309
our industry.
469
00:24:35,450 --> 00:24:35,950
Sure.
470
00:24:37,654 --> 00:24:42,214
Willingness to probably take a little more
risk, than other folks in the asset class as
471
00:24:42,214 --> 00:24:42,535
well.
472
00:24:42,535 --> 00:24:46,054
I mean, it's you know, I have a $50,000,000
minimum check size.
473
00:24:46,054 --> 00:24:49,734
Like, I'm limited, on the new I can go for.
474
00:24:49,734 --> 00:24:54,390
And that's probably maybe a platform where I'm
a little more later stage focused, and it's,
475
00:24:54,390 --> 00:24:55,849
like, kind of an obvious buy.
476
00:24:56,789 --> 00:24:59,750
That that certainly I'm saying all those about
platforms.
477
00:24:59,750 --> 00:25:01,529
Some of the platforms are our best performers.
478
00:25:01,670 --> 00:25:04,970
So, like, I I don't want to get that loss in
the conversation.
479
00:25:05,029 --> 00:25:05,269
Yeah.
480
00:25:05,269 --> 00:25:06,710
David Clark said the same thing.
481
00:25:06,710 --> 00:25:11,404
He said that David Clark from Bendcap said that
his highest performing fund ever was a growth
482
00:25:11,404 --> 00:25:11,644
fund.
483
00:25:11,644 --> 00:25:12,045
Yeah.
484
00:25:12,045 --> 00:25:12,444
Why not?
485
00:25:12,444 --> 00:25:12,845
What do you
486
00:25:12,845 --> 00:25:18,704
look at the future of fund of funds in your
industry, any new products, any new approaches?
487
00:25:18,845 --> 00:25:19,505
For us,
488
00:25:20,099 --> 00:25:22,259
We went to Europe, which was new.
489
00:25:22,259 --> 00:25:30,179
We spun our European allocation out in 2019,
2020 to sort of like, we've been investing
490
00:25:30,179 --> 00:25:32,119
there since 2004, I think.
491
00:25:32,654 --> 00:25:36,755
And we just saw what was going on in Asia,
probably China specifically.
492
00:25:38,174 --> 00:25:44,575
We just saw the quality of company and even I
mean, our USBC being like, Yeah, we love
493
00:25:44,575 --> 00:25:45,934
investing in European companies.
494
00:25:45,934 --> 00:25:47,795
We can get it for a bit of a discount.
495
00:25:48,019 --> 00:25:51,700
And then they immediately come move to New York
or Silicon Valley.
496
00:25:51,700 --> 00:25:52,819
Like, yeah, why would we not?
497
00:25:52,819 --> 00:25:54,500
They're just really good technical teams.
498
00:25:54,500 --> 00:25:59,299
And then if you look at the underlying data on
the European continent, I mean, the seed and
499
00:25:59,299 --> 00:26:01,779
Series A round, I think it's something I'll
probably misquote it.
500
00:26:01,779 --> 00:26:08,644
Our European team will correct me after this,
but it's, like, 85% of the dollars, done is
501
00:26:08,644 --> 00:26:12,884
from a regional local manager at that, at that
round.
502
00:26:12,884 --> 00:26:16,984
And so if you're thinking of just, like, dollar
cost averaging into a strong tech ecosystem,
503
00:26:17,205 --> 00:26:21,679
like, that's where you wanna be, and the local
guys are just commanding the market.
504
00:26:22,139 --> 00:26:24,539
And the US folks are coming in at the Series B.
505
00:26:24,539 --> 00:26:26,539
So you don't have an existing exposure into it.
506
00:26:26,539 --> 00:26:26,779
Yeah.
507
00:26:26,779 --> 00:26:28,700
And so we're, like, we're getting in at the b.
508
00:26:28,700 --> 00:26:32,625
Like, well, that's cool, but, like, we might as
well go buy it at seed if we can as a fund to
509
00:26:32,625 --> 00:26:33,025
funds.
510
00:26:33,025 --> 00:26:34,985
And so we launched that strategy.
511
00:26:34,985 --> 00:26:40,144
And I mean, some of those firms absolutely
compete on a relative performance basis, like
512
00:26:40,144 --> 00:26:43,365
with a historical track record with our US
relationships.
513
00:26:43,559 --> 00:26:47,259
As a fund to fund, are you able to pursue pure
alpha?
514
00:26:47,400 --> 00:26:53,160
In other words, are you penalized if one of
your funds has a 0.5x if overall you're doing
515
00:26:53,160 --> 00:26:53,559
really well?
516
00:26:53,559 --> 00:26:55,080
And how much is it?
517
00:26:55,080 --> 00:26:55,400
Yeah.
518
00:26:55,400 --> 00:26:59,355
How much risk is it that one of your funds or a
couple of your funds don't perform?
519
00:26:59,434 --> 00:27:04,075
Just like looking at on maybe the other side,
like, it's really hard to pick which of our we
520
00:27:04,075 --> 00:27:09,674
kinda have, like, 25 managers per 5.50,
$600,000,000, on a fund size.
521
00:27:09,674 --> 00:27:10,554
Like, just if you go.
522
00:27:10,554 --> 00:27:15,680
So, like, it's hard to pick on any given fund
which of those 25 is gonna be the huge
523
00:27:15,680 --> 00:27:16,180
outperformer.
524
00:27:16,400 --> 00:27:20,480
And so, like, the opportunity cost is really
like, okay, which one is gonna be the screaming
525
00:27:20,480 --> 00:27:20,960
home run?
526
00:27:20,960 --> 00:27:23,140
And, like, what do you think about portfolio
construction?
527
00:27:23,200 --> 00:27:29,105
Like, I would be I have I would love to ask our
partners and myself, like, if you only have one
528
00:27:29,105 --> 00:27:33,744
fund, and like, it had to be over 3x net, like,
who we hand over your art this cycle would you
529
00:27:33,744 --> 00:27:34,545
put the money in?
530
00:27:34,545 --> 00:27:35,984
Like, that's tough to do.
531
00:27:35,984 --> 00:27:40,500
And so for us, I mean, taking that basket
approach with with the upside opportunity is
532
00:27:40,500 --> 00:27:43,400
probably more how we think about it than
worrying about the downside.
533
00:27:43,460 --> 00:27:45,779
Is there a power lot to investing in funds?
534
00:27:45,779 --> 00:27:47,880
Otherwise, is it right tail skewed?
535
00:27:48,500 --> 00:27:53,160
Or is it about, like, do you expect one of your
funds to return at 10.15x?
536
00:27:53,539 --> 00:27:54,339
Or does that not
537
00:27:54,500 --> 00:27:54,900
No.
538
00:27:54,900 --> 00:27:55,875
I think it happens.
539
00:27:55,954 --> 00:27:56,115
Sure.
540
00:27:56,115 --> 00:27:59,154
Some of the seed funds have like crazy, huge
multiples.
541
00:27:59,154 --> 00:28:00,994
But no, we don't think about it like that.
542
00:28:00,994 --> 00:28:06,355
I mean, if you're a 5x net plus venture fund,
you're crushing it, and you should be really
543
00:28:06,355 --> 00:28:07,335
happy about that.
544
00:28:08,115 --> 00:28:12,430
So the like, just the number of company and we
kind of got on this.
545
00:28:12,430 --> 00:28:18,029
So, like, I think since our 2,008 fund of
funds, we just did this over the summer, since
546
00:28:18,029 --> 00:28:23,150
our 2,008 fund of funds, like, oh, you could
say on average, like, a 1000 to 1200 companies
547
00:28:23,150 --> 00:28:30,664
and each of our fund of funds every couple of
years at scale or at maturity, like 18 to 25
548
00:28:30,804 --> 00:28:33,765
companies, they make up like 2 thirds of the
value.
549
00:28:33,765 --> 00:28:38,484
And then the next tail to get you up to like
90% of value is only like another 100
550
00:28:38,484 --> 00:28:38,984
companies.
551
00:28:39,409 --> 00:28:40,230
And so 10%.
552
00:28:40,369 --> 00:28:41,909
It's like kind of a 10 90%.
553
00:28:41,970 --> 00:28:44,309
The 18 to 25 account for 75%.
554
00:28:44,690 --> 00:28:49,649
And I think 18 to 23, I think was the stat,
account for like 2 thirds of the value.
555
00:28:49,649 --> 00:28:51,190
How does that inform your strategy?
556
00:28:51,329 --> 00:28:55,595
If folks don't have and this is talking about
maybe some of the venture math and, like, how
557
00:28:55,595 --> 00:28:56,875
do you make money in venture?
558
00:28:56,875 --> 00:29:02,255
If a VC can't sit down with me and have a
really clear, like, eyes wide open conversation
559
00:29:02,474 --> 00:29:09,019
of how much you need to own upfront, like, what
the sort of business can I'll just, like, pick
560
00:29:09,019 --> 00:29:10,299
a company and be like, Oh, hey.
561
00:29:10,299 --> 00:29:11,899
Like, you know, this company seems cool.
562
00:29:11,899 --> 00:29:16,000
Like, walk me through how that, like, return
your fund or, like, how that's a substantial
563
00:29:16,059 --> 00:29:16,460
driver.
564
00:29:16,460 --> 00:29:21,044
And so, as you're, like, talking about the
finance side of life, if a VC can't be really
565
00:29:21,044 --> 00:29:23,224
clear, like, Oh, we bought this much upfront.
566
00:29:23,605 --> 00:29:26,244
We think the market is huge, whatever.
567
00:29:26,244 --> 00:29:29,704
And we can scale it to this amount of revenue
and sell it for this return.
568
00:29:29,924 --> 00:29:35,549
And at that exit price with some dilution, I'll
return, you know, a huge portion of my fund.
569
00:29:35,549 --> 00:29:37,089
If not, it'd be a fund return.
570
00:29:37,230 --> 00:29:42,450
If they don't have a strategy and a clarity of
thought of, like, how to capture those winners
571
00:29:42,670 --> 00:29:48,269
and and be really diligent, about that, then I
just I'm not convinced, you know, how to make
572
00:29:48,269 --> 00:29:50,525
money at scale in this entry.
573
00:29:50,525 --> 00:29:55,805
I think it's also, you know, if I was to
advocate on behalf of those managers, I would
574
00:29:55,805 --> 00:29:58,045
say, A, is it's a learnable skill.
575
00:29:58,045 --> 00:29:58,545
Totally.
576
00:29:58,765 --> 00:30:01,484
And, 2, it's because they don't come from the
finance side.
577
00:30:01,484 --> 00:30:02,924
They come from the finance side.
578
00:30:02,924 --> 00:30:03,404
Yes.
579
00:30:03,404 --> 00:30:04,305
Different strengths.
580
00:30:04,849 --> 00:30:05,410
I agree.
581
00:30:05,410 --> 00:30:08,930
What would you like our audience to know about
you, about top tier, and anything else you'd
582
00:30:08,930 --> 00:30:09,890
like to shine a light on?
583
00:30:09,890 --> 00:30:11,970
I'm down here in in New York now.
584
00:30:11,970 --> 00:30:13,410
It's people thank you.
585
00:30:13,410 --> 00:30:13,809
Yeah.
586
00:30:13,809 --> 00:30:19,570
If if, any local managers around, that wanna
meet, happy to, to get to know you over the the
587
00:30:19,570 --> 00:30:20,289
coming months and
588
00:30:20,289 --> 00:30:20,744
all that.
589
00:30:20,825 --> 00:30:21,644
What's your criteria?
590
00:30:21,704 --> 00:30:22,184
Criteria?
591
00:30:22,184 --> 00:30:26,285
I mean, look, like we're probably going to
watch for a fund regardless.
592
00:30:26,424 --> 00:30:28,525
Like, we're just meeting you for the first
time.
593
00:30:28,585 --> 00:30:28,904
Sorry.
594
00:30:28,904 --> 00:30:32,505
It's the reality of it, and the business, the
way the business works.
595
00:30:32,505 --> 00:30:38,929
But interesting people that, like, on average,
are entry point for a group that isn't like a
596
00:30:38,929 --> 00:30:39,970
spinout like Tomas.
597
00:30:39,970 --> 00:30:41,829
And it's fund number 3.
598
00:30:42,849 --> 00:30:44,609
And so we don't have the smallest fund.
599
00:30:44,609 --> 00:30:47,029
We've ever done 50,000,000 in size, roughly.
600
00:30:47,595 --> 00:30:51,835
So, I mean, that's probably the ballpark of
when you become investable for us, but you
601
00:30:51,835 --> 00:30:53,914
should probably meet us when you're raising
your fund too.
602
00:30:53,914 --> 00:30:57,914
How could GPs benefit from meeting you early
and talk to me about building a relationship
603
00:30:57,914 --> 00:30:58,474
with LPs?
604
00:30:58,474 --> 00:31:03,539
Well, I hope people still think of us as groups
that knows what we're talking about, and we're
605
00:31:03,539 --> 00:31:07,220
going to shoot you straight, and we're not
going to just, like, ask a bunch of questions
606
00:31:07,220 --> 00:31:09,700
and just, like, take some notes and say, Hey,
thanks for your time.
607
00:31:09,700 --> 00:31:12,420
We'll probably on the call be like, Yeah, this
is interesting.
608
00:31:12,420 --> 00:31:16,144
Like, you know, this sort of network that
you're talking about, like, you know, a lot of
609
00:31:16,144 --> 00:31:17,184
people say it like that.
610
00:31:17,184 --> 00:31:21,744
What I think is unique and interesting about
you is and we'll try to give that feedback to
611
00:31:21,744 --> 00:31:22,244
people.
612
00:31:22,384 --> 00:31:25,345
Yeah, it's definitely not the way to up to
that.
613
00:31:25,345 --> 00:31:25,505
Yeah.
614
00:31:25,904 --> 00:31:30,849
You know, I think one of the underrated people
talk about pitching, but one of the underrated
615
00:31:30,849 --> 00:31:36,049
things about meeting with with great LPs is
actually evolving your strategy.
616
00:31:36,049 --> 00:31:37,650
You're we we just talked about it.
617
00:31:37,650 --> 00:31:38,130
Yeah.
618
00:31:38,369 --> 00:31:39,429
Portfolio construction.
619
00:31:39,784 --> 00:31:40,265
Right?
620
00:31:40,265 --> 00:31:43,065
You're not born out of the womb knowing
portfolio's construction.
621
00:31:43,065 --> 00:31:44,365
It's a learnable skill.
622
00:31:45,065 --> 00:31:48,845
So by meeting with smart LPs, you could
actually improve your strategy.
623
00:31:49,544 --> 00:31:51,971
It's not just a matter of pitching or
rephrasing and, you know, kind of putting a
624
00:31:51,971 --> 00:31:52,065
lipstick on a pig.
625
00:31:52,065 --> 00:31:52,345
So I think I think that's an underrated part of
of fundraising.
626
00:31:52,345 --> 00:31:52,845
Okay.
627
00:31:53,065 --> 00:31:54,359
I lipstick on a pig.
628
00:31:54,359 --> 00:31:56,940
So I think I think that's an underrated part of
of fundraising.
629
00:31:57,079 --> 00:31:57,579
Agree.
630
00:31:57,799 --> 00:32:01,000
I really appreciate you sitting down and and
chatting.
631
00:32:01,079 --> 00:32:01,480
Person.
632
00:32:01,480 --> 00:32:01,799
Yeah.
633
00:32:01,799 --> 00:32:01,960
Yeah.
634
00:32:01,960 --> 00:32:03,000
It's great to see you.
635
00:32:03,000 --> 00:32:03,240
Okay.
636
00:32:03,240 --> 00:32:03,799
Thanks, Ben.
637
00:32:03,799 --> 00:32:04,279
Thank you.
638
00:32:04,279 --> 00:32:05,339
Thank you for listening.
639
00:32:05,528 --> 00:32:10,328
The 10x Capital podcast now receives more than
a 170,000 downloads per month.
640
00:32:10,328 --> 00:32:13,468
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