103. The Limited Partner, Part 2 (Lindel Eakman)

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Today we cover Part 2 of The Limited Partner with Lindel Eakman of . In this segment we address:

  • Lindel Eakman Venture Capital Limited PartnersDo you think that LP investment strategy is driving the strategy of individual fund managers? Why or why not?
  • What are the biggest challenges for limited partners?
  • How do LP’s differentiate and attempt to get an allocation w/ the best GPs?
  • What advice would you have for investors and first-time GPs listening to the show?
  • Any other things we didn’t discuss that you’d like to touch on regarding LPs?

Guest Links:

Key Takeaways:


1- Types of LPs

1) Retail: High-net-worth individuals investing their own capital

-Family Offices

2) Institutions: Large pools of capital w/ professional staff, long time horizons, and commitments at the asset class level.

-University Endowments
-Pensions, both public and private
-Insurance companies
-Sovereign Wealth Funds
-Collective Vehicles- OCIOs… Outsourced CIO institution… acts like an outsourced endowment staff, which manage groups of smaller endowments delivering some benefits of scale
-Fund of Funds… much like Foundry Group Next where LPs invest in the FG Next fund and then Lindel uses that capital to invest in up-and-coming VC funds


2- The Six Items Required for Investing in a VC Fund Manager

1) Sourcing Advantage: How will the VC fund manager be able to source better deals than other funds?
2) Internal Team Dynamics: How are the interactions and inter-relationships of the general partners?
3) Strategy of Portfolio Construction: Does the fund size reflect the strategy? Does the manager understand how to build a portfolio, hold themselves accountable to it?
4) Performance: Is there a track record and how have previous investments performed?
5) External relationships: How is their external relationship w/other LPs and GPs? What kind of partner are they? Is there overlap w/ Foundry? Do they know how they act on a board of directors? Can the LP do direct investments together and do they want direct involvement?
6) Legal Terms: Does their Limited Partner Agreement include some non-starters?

And, Lindel concluded by saying that, at a high-level, he’s just looking for a cogent plan of how the fund manager is going to build their business. And even if it’s not an immediate fit, he likes to maintain and build the relationship over time to see if that fit develops for the next fund that the manager raises.


3- Issues & Challenges w/ Limited Partners

Gatekeepers: Especially with the large LPs, there can be a number of consultants and service providers that function as gatekeepers
Process & Timing: Slow decisions w/ a longer process at multiple levels of the LP organization
Deworsifcation: Many LPs have over-diversified, which limits their ability to outperform as returns regress to the mean
Compensation: These are professionals, in some cases managing a $15B portfolio. Lindel talked about his team of five at UTIMCO, managing $5B, which is a billion dollars per person. So while their efforts have substantial impact on the economy w/ significant levels of assets managed, these professionals are often grossly underpaid.
Denominator effect of Market Fluctuations: As the AUM move up or down, the allocation to different asset classes must be force corrected to keep the percentage the same. In the case of venture, it is very difficult to get money out, so in these cases where the allocation needs to be adjusted down, the LP must stop making new fund investments.
Mis-aligned incentives: Lindel said “LPs aren’t rewarded for risk… they’re rewarded for IBM stocks.” This has created a environment of mis-aligned incentives where LPs can’t take the kind of risk required to meet their return expectations.


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*Please excuse any errors in the below transcript

Nick: Do you think that LP investment strategy is driving the strategy of individual fund managers, and why or why not?

Lindel: You know, I, I would, it would be a quick no. Except that there are edge cases where a GP might have separate accounts or, you know, undue capital concentration for a specific LP source. I mean, look it’s customer concentration. They have a risk there. And, and I think, you know, GPs might have a tendency not to evolve as quickly because LPs once they’re locked in are generally risk averse and kind of don’t like change. There are a couple of specific examples of, of GPs that have changed their strategy, I don’t want to name them but, you know, one, you know, I have raised two or three successful funds, saw the market changing underneath them becoming more competitive, and wanted to try a, a slightly different framework. And wow the response from LPs was challenging for them. And I had a conversation with them yesterday about it. And I thought it was, it was interesting that in some ways it, it kept people from evolving there. And then look, GPs and LPs, we’re all guilty of this. There you will always see a flood of new fund formation around the hot new term, be it big data or AI or machine learning or VR. I mean, social networks, I mean, the, my favorite example is going all the way back to nanotech. Can you imagine nanotech funds?

Nick: Yep

Lindel: You know, back in 2000. So like there’s always appetite for that. And if somebody can figure out how to get a business in the back of a, a, you know, of a fad, I suppose good for them.

Nick: Yeah, I mean, part of the reason I asked, recently I met with an institutional LP and was talking with them about their strategy. They manage about a hundred million bucks, or sorry, they have a hundred million bucks that they can allocate to venture. And they mentioned to me some very specific themes and some very specific ways that they want to invest that capital into specific fund managers. And were having trouble identifying fund managers that had that strategy. And I was just sitting there and thinking wow, that’s got to be, it’s got to be tough for some of these individual fund managers, not to, not to adapt and, and move to some of these hot sectors or move to some of these hot themes to satisfy the interests of the LP community.

Lindel: Well, I think that’s, you know, the tail wagging the dog.

Nick: Yep

Lindel: You know, in

Nick: Yep

Lindel: in reality, in reality entrepreneurs and the, and I think the changing capital needs the startups that, that do drive strategy and should drive strategy.

Nick: Yep. We were just talking with #Dave McClure about that very point on how the  tail could be wagging the dog. Okay, so moving on here, #Lindel what do you think are some of the biggest challenges for Limited Partners?

Lindel: You know, it’s going to sound like I’m picking on limited partners. But, but I’m not. I, I think that, that it’s a mistake that limited partners aren’t held in, in sort of higher regard. You know, staffing is huge. That nobody, no LP that I know has too many people. It just, that is just not the case. They’re and generally they’re way under staffed, specially the public entities. You know, I think just as a high level metric, a billion per investment professional, that’s a lot of money. I don’t care how you, how you invest it or how smart you are, how good you are, how hard you work, that, that’s a lot of capital to deploy in a smart way without being the dumb money or the flying capital. So staffing is huge. I think the incentives and the pay scales are all wrong, given, you know, really the importance of these pools of capital to our economy, where at large but, but certainly it, you know, in the case of pensions to the retirement accounts of those people. I mean, we’re all capitalists and we’re all greedy and we’re all trying to make money and all that. But much of this capital comes from these pensions. And people are relying on those returns, so they have a fully funded pension. And if they don’t, if that, if those returns aren’t delivered, we the people have a much larger problem because we have to, you know, figure out how to handle that underfunded amount. And there aren’t many fully funded retirement pensions out there in our, in our world today. So staffing, if you look at the Canadians, they’ve done a really good job of, you know, getting pay scales and incentives right. And they’re, they’re attracting some of the best people out of public pensions in the US to come work for them in Canada. It’s, I, I know a guy, a friend of mine that moved from California, and he had a beautiful setup there, and he’s surviving those Toronto winters, but yet they made it worth his while. And they gave him

Nick: Wow

Lindel: more flexibility and they gave him more risk. You know, and so, I mean, that’s just one example in particular. I’d say that in, in an attempt to avoid risk, LPs are always, they’re, they’re over diversifying. So I call it deworsification. So in, you know, in you, you try, I mean, they really they, they limit their ability to perform. And I think that’s just crazy. I think many LPs are realizing this, and that’s an input to smaller allocations and cutting back the number of managers. And it’s, and it’s seen in the fund raising market with trying to put more money with the haves rather than the have nots.

Nick: Mmhmm

Lindel: Now that’s not purely for me but, you know, I think that’s, I think they’re figuring that piece of it out. And, you know, a lot of LPs follow the endowment model right or wrong. Whether they have or not they have the staff resources brand profile ability or nimbleness or risk profile, they follow that endowment, you know, model and maybe they shouldn’t. Maybe some LPs should pick where they invest a little more carefully. And, and, you know, that gets to kind of the institutional risk profile. So when you got to, I don’t know, call in a 35 billion dollar pool of capital, and you get put in the paper for a 3 million dollar loss, you just don’t, that, that doesn’t make sense. First of all, the 3 million dollar loss is, is a lot of money but it’s not in, you know, in respect to the 35 billion dollar portfolio. And you also see if this indicates the public entities. I was subject to this at #UTIMCO, you know, the same thing with bonus compensation structures. So anytime somebody does try and pay somebody, and attract and retain talent, it’s put in the media. And it does seem like a lot of capital but they’re such important pools of capital, I think you want to, you know, keep the, the best talent there, and they’re important. I mentioned the denominator effect, that procyclical piece that, that’s just bad behavior across the spectrum. And then I’d finally just say, you know, process. I mean, if, GPs won’t buy this at all, so GPs should just cover their ears at this point. But it’s sort of amazing that, you know, after maybe four hours of FaceTime with a GP, that can lead to a, it may be not even four hours, sometimes it’s an hour meeting and some phone calls, then that can lead to a 10 million or a 20 million or a 50 million dollar cheque. I mean, this is in a, in a blind pool vehicle. You know, where, where you’ve defined loosely what they’re going to invest in but not specifically. I mean, no wonder emerging managers struggle to raise capital. Just getting the process. I mean, it’s relatively short for such a blind commitment. I mean, LPs are rewarded for risks, no not really. They’re rewarded for #IBM stocks. So, you know, I think, I think the risk, it puts in superversive incentives, it creates the haves and have nots. And, you know, maybe the process should be different. And, and this would be a chance for me to say, you know, reminder to those GPs you can uncover, uncover your ears now, you know, always be fund raising. You know, I mean, literally always you find the best time to meet someone will, first of all the best time to fund raise is always, but specially after you close your fund, continue following up with those people that gave you the soft no. I, you know, I know of a VC who visits an LP every town, in every town he goes to every trip. It is just when, you know, when he schedules a trip anywhere, he goes and sees at least one LP. It’s

Nick: Sure

Lindel: It’s check the box. A lot of people don’t do that. And, you know, I think if you want to build those relationships and get people on sides, give them more time.  You know, have them, have them already be on team because they have this, this challenging process they have to run internally, you know, help the, the LP in that regard.

Nick: You know, I think there’s a, there’s a parallel with the entrepreneurs too. I mean, the entrepreneurs that I see very early that are just getting their structure and just getting their strategy together and building product, you know, I may give them a no. But if they hang around, they’ve sent me updates, I do a call every quarter with them and, and get that comfort level and watch their progress, we’ve had that situation a couple times and we’ve invested.

Lindel: I thousand percent agree. What limited partners do is just one level up from what GPs do. And, and in fact my best learning as a limited partner was watching what good GPs did, and, and then implementing some of that. And frankly what I’m doing, you know, here at #Foundry is trying to go one level deeper. So not quite to me being a direct investor and a direct GP, but we’re bridging that gap and consolidating the two. I, I actually when we introduced #Foundry Group Next, I put that analogy up on a blog post.

Nick: Awesome. So, you know, often we, we hear about the chase from the standpoint of GPs chasing after LPs. But sometimes this, this dynamic is reversed and, you know, LPs are trying to win over GPs that have a limited allocation in their fund. Can you talk a little bit about how an LP might differentiate and attempt to get an allocation and what may be considered a, a hot or well established fund?

Lindel: For better or worse, I got a lot of experience with that. And having been a large, a large investor, a public investor trying to get, you know, a meaningful allocation. And, and our, our strategy and frankly the one that then formed our success was we chose not to chase, you know, the #Sequoias, the #BenchMarks, the #Accels of the world, great firms. #UTIMCO wasn’t the best investor for them. And we, you know, we went to their marketing manager where we could help to support them, take a little more risk and evaluate them. You know, but look, generically my money’s definitely greener than yours, right. I mean, that, money is money. So what, what can you do? Yeah you can be easier on like, you know, on process or on terms or, you know, on reporting and how frequently you interact and  are, are you seen as “less of a bother”? You know, really it’s, I mean, it’s relationship building. And that’s, that’s any sales, right? It’s relationship building. So you and another you’re partnering with, and he by the way you’re partnering with him for much longer than the average American marriage. So probably pretty important to get to know who it is. You know, you have to take a proactive approach, well on front of a fund raise. Like I said I like to meet GPs right after they raise the fund. It’s okay with me. I’ll get to have longer to get to know them and I can sell myself and my money, and I can get comfortable with them and they can get comfortable with us. You know, like I said, we chose to go earlier and doing that again here. You know, it’s again it’s us freeing our LP and GP experience to bear for them. So you know, I, I think if we can be helpful with them and even mentoring to some degree as a senior partner would a new partner at a firm, I mean, we’re here. We’re not going to, you know, we’re not going to force ourselves on anybody, but we think that that’s the way that we’re going to sell, you know, against other capital and, and differentiate ourselves. We hope that our fund portfolio kind of binds itself into a supportive network. You know, I mean, much like GPs do with their portfolio companies. So if our GPs can think of themselves in a, in a supportive network that’s important. I don’t want to use the word platform here because that implies direct services. You know, the, the kind of thing that #Andreessen and, and others have, have, have brought to bear at the direct level.

Nick: Sure

Lindel: But, you know, we hope to find other ways to support our, our GPs, and so in a structured way. So, you know, open question here for listeners and much work for us to do. But we’d love to hear, specially from GPs, if they have ideas for how LPs could support them better. And I think, you know, we want to do that. We’ve got I think the experience to do it but we’ve got to figure out the right structure and the right, you know, the right way to interact with them to help their business rather than be a challenge.

Nick: #Lindel, do you have any advice for investors or first time GPs listening to this show?

Lindel: Well you heard the one, always be fund raising.

Nick: You sound like, you sound like #Alec Baldwin

Lindel: Exactly. You know, partnerships are about relationships. They’re, they’re shared ideals and experiences. I think if you find the right LPs, or vice versa, you know, the right GPs, and make it something more than transactional or just capital, I think you might be surprised how beneficial it can be. You know, I would point to, to where I sit today. We’ve built a really great personal relationship, the guys became friends. And I was seeking advice from them. But then we decided to be partners. And, you know, that’s a, that’s a, that’s an example of what ended up being a very special relationship, and, and certainly beneficial early on to the guys, and clearly beneficial to me, you know, later on.

Nick: Any other things we didn’t touch on with regards to the LP discussion that you’d like to, to finish up with?

Lindel: Oh, you know, I, I, I would be remised if I didn’t mention on Twitter the #OpenLP Group. If listeners don’t know about that, you should pay attention to that. That’s where LPs are trying to, trying to be more transparent doing podcasts like this one, you know, blog posts. I’m supporting that. I would also encourage LPs, I would support better organization among specially venture LPs. There’s a, there’s a big organization I was part of called the #ILPA, I think they do great work. I think venture is a little bit different enough that there should be a sub group  of either #ILPA or perhaps the #NVCA, which I’m, I’m still a little hot at for not including venture fund to funds in their lobbying efforts to avoid SEC registration. Despite being a large portion of the capital, we got left out in the cold at, at that point in time. So that, thus the, the intro line that you had to hear from me.

Nick: Gotcha. #Lindel, if we could address any topic related to venture, what do you think should be addressed and who would you like to hear speak about it?

Lindel: You know, that’s a tough one for me. I don’t think that venture tells it’s story very well. I don’t think that, you know, the, the mention of unicorns and, and, and fund raising prowess, you know, and tech crunch and all the other tech websites or even in podcasts, you know, helps the image of the industry. I think if you took a larger perspective on venture capital, frankly the way it’s historically been defined as rather not just tech, but, but at large. You know, there’s a heck of a story to tell. Part of the do gooder in me, I did used to work for a, you know, endowment non profit for 13 years is that I believe that venture capital and tech venture capital can be the benefit to our economy and it’s really so and help, help pull some of that, that, that back for us. And the challenge on, on, on tech in venture is lack of transparency data. So if we could, if we could pull together better data, you know, whether it’s #CB Insights or #Mattermark, one of our portfolio companies, I wish that we had more transparency of returns and outcomes and that we celebrated those really grinded out, you know, venture startups that work, that work. They work and they hustle maybe it takes 5 or 7 years. And then they sell an M&A deal and it has a very good outcome. I think we should celebrate those as much as we celebrate the, the consumer unicorns. So I guess rather than directly answer your question, I would say let’s put a spotlight on the broader benefit of venture capital in the economy. And I think we need to do that through data.

Nick: And finally #Lindel, what’s the best way for listeners to connect with you?

Lindel: You know, I think, to steal a line from my partners, I don’t know have you seen their ridiculous VC parity, I’m a VC

Nick: Oh yeah. I expect to see you in those too

Lindel: There, there is some concern on my part about those coming your way soon. But if, but if you need to find me, check out Facebook, LinkedIn or Tweet me, was one of the lines in their song. I’d say like the reality is that a, a warm introduction matters. And my email is easily found.

Nick: Awesome. So we should expect an appearance in one of these upcoming videos?

Lindel: No promises, but I don’t think there’s any way out of it for me.

Nick: Well, I can’t wait. Well thanks again for the time, #Lindel. It’s been great to connect with you and I’ve heard a lot about you before, and it’s very generous of you to spend your time here and, and help me out and help out the audience.

Lindel: Well, I hope it’s useful and I appreciate talking about it.