Jan 21

VC Craft – Analysis of Venture Unlocked #4

Week two of listening to Samir Kaji’s podcast, this one with Jodi Sherman Jahic of Alignment Partners. Again, there are good notes on the podcast in that link, so what’s below is simply what I thought was interesting along with my comments and analysis.

They discuss how LPs are really attuned to partnership dynamics and how it’s a long term commitment. Frankly we’ve struggled to put into our deck the magic that exists in our partnership and the way we interact as a team. I’ve worked with plenty of teams, some are great, some less so. But every once in a while you manage to get that great blend that is special. Trying to put that into a deck has been tough.

Jodi states that fund sizes, large funds, are driving the power law dynamic in venture. If you don’t know about the power law argument here is a great article by Clint Korver, yet another Kauffman Fellow, discussing it. The statistics she uses are that the average venture funded company exits around $70-80M and so it’s possible to create a rational portfolio where you don’t need billion dollar exits to get a 3x or better return.

While that portfolio math is true, I don’t think it means that power law outcomes are driven by the fact that large funds need them to win. She mentions that one of her companies is on track for a billion dollar exit with only $3M of investment. If large funds were really the driver then this shouldn’t’ be happening. To me it seems that the power law is a function of winning a large market and becoming dominant and has little to do with the fund size investing in the company. Having said that, I still agree that it’s possible to create a firm that doesn’t need to rely on power law companies to make great returns for its investors.

Jodi makes an interesting point about why funds tend to grow in size. Her two reasons are management fees and social pressure. This second reason is intriguing; funds grow because money is available rather than to fulfill a specific strategy. I love the quote “The world doesn’t ever need another venture fund.” In fact, that’s what I said to my partner Craig when he first suggested we form a fund. The only reason that becomes untrue is when you can find a real reason that a new fund fills a hole that others aren’t filling. Obviously I think we’ve done that, but I may be biased. 😉

Jodi ends with a single piece of advice for new firm: There is something magical about LPs being there solely because they believe in you rather than from a legacy of a fund you joined. I couldn’t agree more so I’d like to say thank you to all of our LPs.

Jan 21

Venture Unlocked #3

I’ve decided to spend some time each week in Q1 trying to work on the craft of venture capital. While I’ve been doing this for close to a decade, I’ think there is always room to learn more. To that end, I’m going to be listening to Venture Unlocked by Samir Kaji, a fellow Kauffman Fellow who is looking at venture from a unique angle given his seat at First Republic.

Since I’ve already listened to the first couple episodes I decide to start with episode 3, Roger Ehrenberg.

Given the notes provided in the link above, I won’t bother telling you what’s in the episode, instead I’d like to give my analysis.

  • To find his partner Roger took 1000 applications, did first calls with 100 people, interviewed 20 and whittled it down to 5 finalists before choosing one person. I’m a fan of such a rigorous process.
  • They actually found fund size growth painful. The fund sizes went 50M, 105M, 160M, 160M. That’s a pretty quick progression up to a steady state.
  • They are pretty aggressive about recycling but that has gotten easier since they invest cross fund. A series B in a later fund get’s liquidity earlier than a seed and makes recycling in that fund easier. I really like that observation a lot since cross fund investing is a controversial idea.
  • When it comes to flexing to get into a deal, they keep capital at risk steady and instead take a lower ownership with an eye towards buying more later. I’m a fan of being disciplined about check size, especially for smaller funds.
  • Their biggest learning was essentially the power law rule: Great companies can get much larger than you could have ever imagined out the outset. Even though everyone believes this, it feels like you have to experience it for yourself to really grok it.
  • Once they had the returns to be picky they were very deliberate about their LP makeup. It’s not often you hear about funds breaking up with LPs, so this is some good insight into what they looked for. Not surprising mind you, funds that are in it for the long haul.

Overall, this is a really good conversation about the growing pains of taking a fund from proof of concept to steady state. My big takeaways were that they learned a lot on the fly and try to do small experiments to keep improving over time. Seems like a team with a real growth mindset.