133. The Importance of Storytelling, VC EQ, and the LP-GP Dating Game, Part 1 (James R. ‘Trey’ Hart III)

*Please excuse any errors in the below transcript

Nick: #Trey Hart joins us today from Chicago. #Trey is Vice President at #Northern Trust, where he leads their global venture capital investment platform. #Trey is responsible for sourcing and analyzing venture capital and buyout partnership investment opportunities in the U.S., Europe and Asia. Prior to joining #Northern Trust in 2013, #Trey was a Vice President at #Greenspring Associates, a $2.3 billion global venture capital fund to funds based in Baltimore. And he’s also seen things from the VC side as he worked at #NEA back when he was in law school. #Trey has always been very generous and candid in discussions with me. And I look forward to more of the same today. #Trey, welcome to the program.

Trey: Thanks for having me.

Nick: Absolutely

Trey: Happy to be here.

Nick: Can you start off with your background and your path to where you’re at?

Trey: Yes. Absolutely. So when I was in college, I went to Washington and Lee, that’s where my wife Leah and I met, everybody was, all of my, my classmates or fraternity brothers were going into this thing called investment banking, which I didn’t really understand. They just seemed extremely unhappy but were making a lot of money. And, you know, being in our formative collegiate years, everyone was particularly insecure about what everyone else was doing, including themselves. But I had no interest in doing that. And coming from a family of, of attorneys, that was the age old question, what are you going to do when you grow up? Well, I don’t know so I’ll go to law school. So when I went to law school, I knew I didn’t really want to be a lawyer, which begs the question why I’d go to law school. Well, I started working after my, at the end of my first semester of my first year in an internship capacity at, on the weekends and at nights. And according to the American Bar Association, you’re not allowed to do that during your first year at Law School. So I didn’t get paid or anything like that. And then the second year of law school, I did a year long internship at a SBIC or Small Business Investment Company, that was in College Park, Maryland called #New Markets Venture Partners. And that was kind of an experiential learning. It was an actual venture firm, but there was an educational component to it. And I knew, didn’t know what a venture capital firm did, but I knew I wanted to find out. And that it was, I was at law school class but had nothing to do with law really. So I spent a full year working at this venture firm in College Park and all kinds of different things. But I immediately knew that I liked this venture thing, because I got to see everything from some of the legal stuff to the IP stuff to the actual investment process. And it was there that I found out about who #NEA was, because this firm had done a couple of deals with #NEA. One of the partner’s fathers was one of the co-founders of #NEA. And being in Maryland, #NEA is well to every venture firm in the world, #NEA is the, you know, the, the 800 pound gorilla in the room, but specially in the state of Maryland where the firm was founded. And so my civil procedure professor’s husband was the general counselor at #NEA. And I had done extremely well in her class and had been telling her about how I really wanted to do this business law stuff. And she’s like well you should talk to my husband #Louis. And so I, just on a whim met with her husband #Louis Citron, who’s the, now the Chief Legal Officer at #NEA. And he said well, you know, we don’t really have a role and I’m not sure what you would do but why don’t you come work here for a year. And that was in the, the old St Paul Street office of #NEA, one, one of the original offices of the firm. And that was an amazing experience because I got to work on a, a myriad of different things but most importantly, got to work with, with #Louis and his number 2, #Shawn Conway, who’s now the Chief Operating Partner at a growth venture capital firm called #Questa Capital out in California. And prior to that, he was the General Counsel to #Andreessen Horowitz. So I’ve got to see a top firm working at, you know, one of it’s peak periods in time, and see the inner workings of, of a really well run venture capital firm, and probably one of the most high integrity firms in the world. And it was then I knew like this is what I want to do, this venture thing. But I was still going to law school. And at the time, #Gene Trainor, who’s, who was the Administrative General Partner and COO of the firm, said, you know, you, there’s no job for you when you graduate from law school and your internship here is over. So, I, he said well, you know, you’ve got this law degree, you should go use it. You should work for the best law firm you can. And one of that, that best law firm is one of the firms with whom we use, and that’s #Kirkland and Ellis, which is based here in Chicago. It has many offices but based here in Chicago. And I didn’t want to be an M&A attorney because I remember interviewing at #Skadden in New York and for a summer associate kind of, you know, paid vacation and everybody seemed miserable. And you had to share an office. So at #Kirkland, you didn’t have to share an office. People seemed miserable but they got to live in a great city. And so I, when I graduated from law school and got finished working at #NEA, I came to #Kirkland and did fund formation, and mostly did private equity fund formation for leverage buyout firms, but did a little bit of venture capital work. And the first opportunity that I had to, to leave, was to go join the investment team at #Greenspring Associates, which is a really wonderful venture platform. Which means that it has many different things all focused on venture, from fund to funds to direct investments to secondary investments and separately managed accounts and all things in between. And, you know, that was the first opportunity for me to go from being a lawyer to not being a lawyer. And the longer you’re a lawyer, the less likely you can ever be anything else. And so I felt even though it was early on in my career, not that I had learned enough, I definitely hadn’t, but I had to go do what I wanted to, you know, wanted to do, which was be on the venture side. Now I’m an LP, so I’m kind of on the venture side or at least that’s all that I invest in. But not a GP. Don’t ever have any interest in being a GP at a venture firm because I just, you know, since I started at #Greenspring and, and back to #NEA, just love the LP side of, of what it is that we get to do frankly. It’s easier than being a GP. So that makes it easy, easier to do. So that’s how I got to here today I guess.

Nick: And then #Northern Trust, can you talk about responsibilities here and how you sort of made that move from #Greenspring?

Trey: Sure. So I’ll be brief about what we do here, but we invest across 3 flagship platforms, which is venture where we do direct investments in companies, we do fund investments as an LP, and we also have our own separate private equity focused in the US and Europe. That’s, you know, focused on lower middle market buyout funds. And then a separate secondaries platform where we’re buying stakes and other limited partnerships, and in companies on a, on a direct basis as well. But, you know, we’ve been investing in private equity and venture capital for the last 17 years here at #Northern. And have, I think built a nice portfolio of firms globally speaking on the venture side, and predominantly in the US and Europe on the private equity side. And I came to #Northern 4 years ago from, from #Greenspring, as I mentioned. And focused almost all my time on the venture space both that’s in the US, China, India, Israel and Western Europe. And that’s mostly on the tech side, but historically quite of it on the health care side. We still have, a real active appetite for, for healthcare, but it’s less than, than tech is today.

Nick: Investing in funds across the US, you mentioned some other, Europe and Asia too, but do you have certain focus areas here? Is it the tech centers, New York and, and San Francisco or ?

Trey: It’s predominantly the Bay Area. We have two managers in Boulder. So I feel like we have the market well covered in Boulder. And, and then most of our managers that are in the US are all in the Bay Area frankly. We don’t have any pure play managers or that are geographically centered in New York or Boston yet. And we have invested a lot in, in the state of Illinois and in Chicago based venture funds and private equity firms. And we have, for the last 12 years I would say, managed a really important separate account that is focused on continuing to build the entrepreneurial ecosystem and venture capital and private equity landscape here in the state of Illinois. So we’ve been a very active investor and I would say champion for what’s happening in, in Illinois specifically.

Nick: Ever seriously considered a move to the, to the GP side? Or

Trey: No, definitely never. I don’t think I’d be very good at it. I think that the most important thing about what I do is not the numbers of being an LP, because they’re the same for everybody. There’s so many, so much data requests that you can ask of a GP. So at the end of the day all the numbers are the same. And, you know, the, the quantitative analysis, the benchmark analysis, the loss ratios and things like that, it’s not high powered math. So you can be an attorney and still be really good at the math of being an LP. But I think the, the most important thing and the thing that separates, you know, an LP from a good LP, and a good LP from a great LP, is everything but the numbers, which is the qualitative aspect of what we do. And it’s there where you are, you know, the, the most important thing I think about being a good LP is having big ears and a really small mouth, and being a center of trust and center of truth in the sense that our goal is to find out everything that we possibly can before we give somebody money. Because after we do, we can’t get, we can’t get it back. And the recourses for doing so are extremely limited. And it takes forever to get the money back from a distribution standpoint. But also it takes a really long time to understand if somebody’s, you know, good at what they do, despite past performance, if you will. And so I think that the thing I enjoy the most is being a receiver of stories, and, and a listener of stories. Being on the fund to fund side, you know, we are a, a narrator of other people’s stories in the sense that we’re never really telling our own story, we’re always telling other people’s stories, which we make our own. And we’re always living vicariously through other people. And if you aren’t insecure about that, that we aren’t the ones doing the doing, but, you know, proud of the people that you back, I think it’s a great opportunity to really thrive, and being an important, but, you know, less important part of the venture ecosystem, then certainly the focus on the entrepreneurs, and then the, the general partners who, who give those entrepreneurs money and support if you will. So would never have an interest in being a VC, you know, on being on the other side of the table frankly. Specially because if, if a fund doesn’t work out, we have somebody else to blame, right? We can always blame the GP. Well, you know, they picked the wrong companies, oh it was a bad vintage, you know.  A litany of excuses. And if you build a big enough portfolio, hopefully one fund doesn’t make or break things for you. But when you are a GP, you’re kind of, you know, you’re running out of, there’s fewer people for you to blame frankly. And I’m being a bit facetious, but as a VC I think I would be, some, lose some of that that I love the most which is the opportunity to really just spend time with people. Where if you’re, if you’re force functioning around, yes the numbers have to be, table stakes, table stakes they have to be good. And what good means depends on, you know, any moment in time but if you are most focused on building relationships with people, that’s totally different. Because, you know, if you’re a late stage, the, who the people are is less important if you’re a VC because the numbers really start to matter. Where early on in the company, in a startup the number, there, there’s not a whole lot of metrics to really be looking at. And so you’re more focused on the people. But I think I would lose that things that I cherish the most about what I get to do every day, which is just listen to people tell their stories, if I were to do anything else. Which is a telling example of the fact that I don’t want to do anything else, so.

Nick: Well, I mean, on that point, so, stories, what are some of the, the high level things that you’re looking for in, in the stories of a GP, I’m sure the array of funds that you’re investing in are, are wildly different. But there’s got to be some, some common characteristics across you, your GPs. What are, what are some of those?

Trey: Well, I would tell you things fall into two categories generally speaking. And the intersection of what an LP does is that struggle with how did those things come together. Because it is really easy to give money to managers that are really hard to get into, and it’s really hard to give money to managers that are really easy to get into. And that’s what separates, that, that’s where like I said the, an LP is separated from a good LP, and a good LP is separated from a great LP. You know, because I think people lose sight of the fact when you hear about oh somebody oh this LP is, and when I say LP I mean not the organization as an LP with a certain wonderful firm. And that, the people that are actually there managing that portfolio aren’t the people that actually got that organization, whether it’s a foundation or an endowment or even a fund to funds into that, that, that manager if you will. So I like to, to make sure that there’s some of us, where thinking about an LP is separation of the institution versus the individuals that

Nick: Got it.

Trey: manage the institution. But the, the most important thing there at that intersection between what’s really hard and what’s really easy is the people that are the best are the people that are have made money by doing the most difficult thing, which is give money to managers that are yet unproven. And that’s where I think, you know, #Lindel Eckman, who you’ve had on the show, has proven, you know, his, over a long period of time to have been extremely successful by not going out and backing those managers which are really hard to give money to but or sorry really hard to get into but really easy to give money to.

Nick: Sure

Trey: He’s done the hardest thing and developed a 3x net track record of doing so. Because I think of his unique insight and perspective into the qualitative parts of what makes partnerships successful and finding really talented people on, more on the, you know, on everything that isn’t yet proven. Right? And that’s where, you know, #Lindel and #Utimco and, and I think now #Foundry Group Next will be a continuation of backing the next generation of really outstanding managers. So the, those stories separate in two things, right, where we’re, where we’re trying to get into the managers that we aren’t in yet. And they’ve already proven to be successful. And you’re just hoping they continue to do the same thing. And there are you willing to take,  are you willing to look past some of the qualitative things but maybe they’re a little prickly or maybe they’re not quite as nice or they don’t value you as much and you’re not as important in the cog of their success, right. Because you’re new and so they didn’t build the firm off of you or your expertise or anything, you know, your capital.

Nick: Mmhmm

Trey: And there you’re just, you’re just allocating capital to something that’s already been successful and hoping that it continues to be so. And on the other hand, that’s where, you know, the, the, the managers you can get access to but it’s really hard to figure out which ones you’re going to give money to. I think the things that separate light from darkness or stand out, you know, the people that are the most, that understand the cadence of fund raising the best. Because the fund raising, that LP-GP relationship is an unusual one, where it’s a sales process at the end of the day where each party has something the other party needs, right. Capital or expertise or expertise with that capital. And knowing when a sale is going to happen or when it isn’t and having that I guess emotional maturity of how to push and when not to push and when to pull, for LPs like a lot of times you know, a lot of LPs I don’t think know what they’re looking for. And that’s a, that’s hard for a GP to navigate. It projects a lot of anxiety because they don’t know what to solve for because the LPs isn’t communicating to them here are the things that I, here’s what we’re looking for, and

Nick: Sure

Trey: here’s our existing portfolio, and we’re looking to add, you know, we need a block chain seed fund and we need a Scandinavian early stage fund and this that and the other. Or we’re just simply looking to add more at seed and here’s what we’ve already done. And, and so I think being a, you know, a lot gets lost in, in everything before you have a meeting with the GP if you’re an LP. And setting the stage for we’re not looking to allocate a lot of capital this year because x, y and z. Or we’re just not looking at a lot of new names. So we’re happy to have a conversation to build a relationship but just want to be upfront that we’re not looking to spend money right now. And so I don’t want to put the cart before the horse and, you know, start a process if there isn’t one. You know, I can’t talk until queue two because we’re not really, we’re, we have so much in front of us that it isn’t, there isn’t time to have a conversation. So setting a framework is the most important thing I think to having a successful dialogue between LP and GP and minimizing as much anxiety and frustration on both sides. And so the managers that are able to get, you know, build that conversation and have that relationship at the onset are I think most likely to be successful in building a longer term relationship with an LP, whether you transact in 6 months or 6 years. But there’s definitely a subtlety to fund raising where, you know, if an LP finds something that they love, you are going to know about it. You know, for most LPs I think that unfortunately there’s this I’ll call you don’t call me kind of mentality, where people take a meeting and they take, say down the deck from Dropbox or Box, and take a look at it and there’s nothing is ever going to come of it. And the GP will continue to drip it on them or feels like what’s dripping because you never, you as the LP never said to them well this wasn’t a fit or x, y and z, you know, before we even have a call we’re after the call. People are just looking for clear feedback to know where to spend their time most thoughtfully. So framing the conversation before you have it is so important. So that afterwards you don’t feel like you’re getting pestered. And the GP doesn’t feel like they’re having to pester. And I think that is, you know, like most VCs have written a blog post about how do they say no or what’s the best way is to say no. And it’s always the most upfront, the quickest, the most thoughtful, most polite. And that is definitely lost I think on the LP side and why there’s people that want to kind of whether it’s using hashtags or whatever, want to hold back a little bit of the unction on what do LPs actually do, what are they looking for. You know, you can’t go on some university endowments website and even find out what they’ve invested in. And a lot of people don’t like to talk about what they’ve invested in. So finding folks that are, well, at least buy into having an open and transparent conversation about what they’re looking for is super helpful. Because if you know you’re having a conversation with somebody and they’re just, you know, kind of looking to see what’s out there, that’s okay, don’t, you know, follow up if, if they ask you to basically. Sales automation, marketing automation, software would be so lost on the LP-GP relationship because like the leads are not worth much. There’s no data mining, how to build a better relationship with a GP or, or an LP or vice versa, other than I think trying to have as cordial and decent and humble a conversation as humanly possible. Because at the end of the day it’s just a sales process.

Nick: Sure

Trey: There’s no, you can’t like throw in a free anything. There’s nothing to do because people see past it if you’ve done it enough. You know, it’s actually a really simple pretty raw thing that should happen. If something amazing happens in an hour long conversation, an hour long meeting, you’re going to know about it.

Nick: Yeah

Trey: And that’s why over the phone is tough and face to face is always better.

Nick: I mean, I see tons of parallels with the GP-Entrepreneur relationship of course. I think in some cases the, the GPs string along the entrepreneurs because of indecision like you’re talking about. They don’t know what they want to invest in. They don’t really understand their own thesis or their own themes. And because of that they have a tough time getting to conviction.

Trey: Sure

Nick: Whereas in other cases, I’ve seen other managers that kind of want to sit back and watch for a while and see how that, that sales process works and how that relationship develops, and if it gets to the right stage.

Trey: Sure

Nick: Whereas kind of what you were saying there at the end is in the rare case, at the very first meeting, you kind of know.

Trey: Yeah

Nick: And unless, you know, something crazy happens to kill it, there’s, there’s probably going to be an opportunity to work together.

Trey: Yeah. I mean, and those, those opportunities do happen. I mean, I’ve had it happen oh probably at least four times in the last 4 years where I have an introductory meeting and you’re like oh my god, this is amazing, we have to give you money. And my initial reaction is okay when can we meet again? Can you meet on this date because I want to have somebody else meet with you, to get affirmation that I wasn’t just, you know, lost my mind. But in each of those circumstances, I’ve done exactly that, had somebody be like oh my god, this was a, where did you find this person, how did, like we need to invest as much as we possibly can. And I think that’s what, the, one of the struggles with being an LP and seeing other people do this like that’s what everybody is looking for, the thing they don’t yet know what it is.

Nick: Mmhmm

Trey: And so and I think that’s the honest answer for everybody but more people aren’t willing to admit that, or at least aren’t willing to admit that they, they only invest in 3% of the things that they’ve, they see. Or whatever that tiny percentage is. And they meet a ton of people but don’t give a ton of people money. But, you know, again if you just set the framework for we are going to invest in a block chain fund in the UK. Well, why are you taking the call? Well, we don’t, we’re never going to invest on one of these funds but I really I’m excited about block chain and I just wanted to see if you’d spend 30 minutes or 45 minutes educating me because I love to be proven wrong. And I, that was not actually, that was, that was just an example. But I always say that like I’m going to be wrong all the time. I love to be proven wrong. And I don’t say that like as a challenge. I mean that with the sense of  pride like we’re going to be wrong all the time because we just have to say no to so many things. And so there is a lot of learning that goes on. But as long as you’re honest with people about what you’re trying to accomplish here, you know, nobody feels like they’re wasting anything. Specially if down the road that conversation about well I didn’t know anything about block chain and now I know. And, you know, you end up wanting to make an investment in a block chain fund or you say oh well I just met this other LP who’s looking for a block chain fund, you guys ought to check because these guys are amazing. It’s not for us but it may be for you. And I think that’s one of the differences amongst LPs as it is amongst GPs is that this kind of fear of missing out. I just don’t think you should exist because I think there’s enough managers and enough good managers every  vintage that everyone should be really happy with what they have as opposed to this, this fear of everybody knows what they don’t yet have. Which is, you know, a few managers out there that are, like I said, incredibly hard to get into but super easy to give them money. Everybody knows they want these things. And if you’re in them it’s like oh you’re, you’re untouchable. You’ve, you know, you’ve found the holy grail. And everybody wants to be like the Harrison Ford of LPs, from that perspective. But, and that’s where everything else I feel like the, the most important thing is being happy with what you have, and not having this envy over the things that you don’t have. Because I do think that, that you can still generate with the right portfolio construction, venture returns. Where you don’t have to be in every single one of those, you know, top firms that everyone covets if you will. And while I don’t really care what other, you, you know, it’s hard to look at somebody else’s portfolio and be like well I would never invest in those things or why would you invest in this? Whereas, you know, in a GP it’s like oh well you should never have invested in secret like the thing was doomed to fail from the beginning. Well, you know, I’m sure at the time people gave secret money. There was wonderful reasons to have given that company money.

Nick: Yeah

Trey: And the, the emotional security of loving the things that you have as opposed to being envious of the things that you don’t have, I think is something that’s incredibly easily achievable in venture because there’s so much to go around. And it’s a big enough globe, you know, big enough market globally that if you can’t find in the US you can find, you can find other things to covet in certainly in Israel right now and certainly in China. I think India is a little tougher to find things to covet. But I think that that is not, that’s not always something that you, is readily present in, in the LP-GP relationship or even an LP to LP relationship right now I would say.

Nick: You talked a little bit about FOMO, and I kind of wanted to get your thoughts on, on herd mentality. So something I’ve been noticing lately is lots of investors asking who else is in the deal. And I had one of, one of my entrepreneurs, one of my portcos, who is raising a series A with tremendous progress. And he has I would say 15 investors that have been circling and interested in the deal. They all wanted to be in the syndicate. And for a while nobody wanted to lead. And then when he got a term sheet, all of a sudden he gets a whole slew more term sheets, right. And all these, these investors want to be in the deal but he only has so much room. So I’m curious to hear your thoughts. Do you see sort of this herd mentality when it comes to LPs as well? Or is this, is this something exclusive to the startup and GP relationship?

Trey: No, definitely not unique to, to just the GP-Entrepreneur relationship. It absolutely happens in the LP universe as well. And you can see that, I mean, so much of everything in venture is signal, right. It’s, there’s the signals and who leads and how much and what are the insiders doing. And, you know, who’s on your advisory board and all these things. And where, you know, the, the vanity of so many things is more important than the, the reality at times. And so there are definitely cases where you hear where, you know, a GP knows, plays to this advantage where they’re like well, you know, so and so has already committed $30 Million and, and am happy to share their diligence works, you know, with specific fund to funds, writes $30M cheques for emerging managers and doesn’t share their diligence or negotiate the LP in a kind of LP friendly way, where those signals are used all the time to get other people to fall in line. Oh well this LP is in, they’re smart, they do a lot of research, like I can feel better about this. I mean, I remember I had a colleague who’s, who was looking at a, I think it was like a turn around private equity firm. And his placement agent was saying that LPs are making, and I’m using finger quotes “thesis” based commitments to it that they, they liked the story but didn’t have time to do diligence but there are really good LPs that did the first closing. So they were going to make a thesis commitment to the fund.

Nick: What?

Trey: Which is just insane. But that definitely happens. Where there are a few, there are a few names in venture where, you know, people, you know, GPs want to have the signal that they are, that smart capital is giving smart capital money.

Nick: Yeah

Trey: And I think if your if your goal as an LP is to help your GP as much as possible, and at the same time if they do well you profit, then I don’t know why you wouldn’t want to share that with other people frankly if, if what you were describing of that nobody wanted to lead, you know, it reminds me of the, the, I don’t know if it’s a fable or a nursery tale, of the little red hen, right. Where the little red hen was making a loaf of bread and she was asking all the, the children to help, you know, crack the eggs and roll the dough and pat the dough and this and that, and put it in the oven, and nobody wanted to help make the bread. And when the bread came out of the oven it smelled amazing and all the little kids rushed to the picnic table and wanted the bread but nobody wanted to help make the bread. You know, it makes me think a lot of times of what happens in venture where everybody, nobody like to do first closings, everyone wants to wait till the final closing. For that very reason to find out who’s in, right, and

Nick: Yeah

Trey: how smart is their capital, right

Nick: Yeah

Trey: And, well they’re not really an institutional LP or family offices don’t count, they’re not smart, you know, they’re not like smart capital like a foundation even though they’re really brilliant people. Like that kind of, you know, negative language definitely happens and where it’s all a sales gimmick, right. You know, it’s not a gimmick like we’re buying used cars or something like that, but it’s definitely used as a signal or a motivating factor at times. And also it’s going be a negative signal where if you don’t have institutional LPs or this and that, people will use that as well look at all these smart people that passed. And that’s why I don’t do LP, other LP reference because, because I, like I said before the thing I have to be the most comfortable with is my own comfort with the manager.

Nick: Yeah

Trey: I don’t care if nobody else has backed it. We’ve backed at least since 2014 I can, I just know when this fund closed, but one manager that nobody else in the world backed. And so many people passed on. And, and right, I, I think probably rightfully so at the time. We kind of made a smaller commitment on a flyer. And it’s done extraordinarily well. And that manager is so grateful that we made a commitment even though we’re the only institutional LP in the fund. And I didn’t call anybody else wondering like why did you guys pass. All I had to do is convince myself and the rest of the folks at our firm who, you know, have, hold the fiduciary duties for our firm and why we’re making commitments for other, for other clients here at #Northern, why we should invest. And other people like cause of reference can’t have any effect on my fiduciary duties, right?

Nick: Yeah

Trey: Or my, I guess emotional guttural sense for right and wrong, when you’re making tough decisions about things. Because you should like there’s a lot that if, if, if the numbers are what they are and you’re trying to figure out, you know, somebody either they have an integrity issue or emotional intelligence issue. And when you’re trying to make those judgements where you’re like I don’t want to give people money if I think there’s an integrity issue, or maybe there’s just whatever, you got to trust your gut because it’s almost always right.

Nick: Mmhmm

Trey: And those are, those are things that are very personal, where it’s difficult to say like how did they ever invest in that fund? Well, it’s very personal. That’s why there’s so many of these funds everybody can have their favorite flavor. Which makes it really difficult again, to pick those managers which are really easily to give money to. Because it’s really hard right now to figure out who’s really good. Because there’s just too many people. There’s too many people to spend time with right now to even start to do that like next step of the filtering layer if you will.

Nick: You talked before about how a lot of LPs need to see significant track record before they get that comfort level. Have you guys made investments in first time fund managers? Or

Trey: Mmhmm, yeah we have

Nick: are you waiting for?

Trey: No we have. And, and we have made commitments to managers or at least I should say a manager in the last 4 years, where part of the memo that we wrote wasn’t, you know, where there wasn’t a directly attributable track record because of the way in which the previous partnership dynamics worked. Where if you weren’t a certain title you couldn’t take the track record with you. And so that’s, that’s where we get paid to do what we do. You know, that’s the hardest thing that we do, and the thing that takes the most time, right, is when you have spin outs and you’re trying to verify, you know, track records and make sure cost basis and fair values are accurate and that people are, there wasn’t another portfolio that we didn’t know about, that we see and don’t see kind of a, a hand selected portfolio of assets. That’s the thing I think that is one of the most rewarding things that we do because it’s also the most difficult. But yeah we absolutely have backed first time managers, first time funds, first time managers frankly. But it’s more often than not that we’ll back spin outs which are first time funds but not first time managers.

Nick: Got it.

Trey: Because you’re taking on a lot of the emerging manager risks when you do first time managers, first time funds, of, you know, is everybody going to get along, do they know how to recycle, do they know how to reserve capital. And when you’re thinking about how do I spend my time, not how do I spend my capital, those managers take up a lot more time.

Nick: Mmhmm

Trey: A lot more time.

Nick: Interesting. So I’ve done I think over 40 calls now with GPs that have raised a first venture fund. These are not podcast interviews that were published. But I’ve been picking the brain of a lot of folks on, on how all this looks and, and advice and tips and tricks and things to look out for. And this recurrent theme that I’m getting from many of them is that they keep hearing from LPs that GPs need to have an edge. They need to have an edge that they’re bringing to the table beyond just, you know, their network and, and their background. Is this the case? Are you all looking for some sort of edge? And if so, what does that look like?

Trey: Well, I think it’s hard to reduce it down to an, an edge. And I think it’s easier to say, and I, I know what you’re, what you mean. And, but I think where that, that language, you and I both know that other people are saying that or thinking that because they’re looking for signal amongst all the noise, that the edge is something that’s so unique.

Nick: Mmhmm

Trey: Something that makes you stand out from the crowd. Where actually the thing that I think makes you stand out from the crowd the most is the thing that, that isn’t the edge, it’s, that is defined as the edge. It’s where did you come from? What is your network? And what is uniquely, what is something that you have that, that is a unique strength that you have that others don’t? Or if others have it, why do you have more of it, right? And, and that comes back from what, you know, you worked at this venture firm or you were an operator and you angel investing and now you want to become a fiduciary manager of other people’s money or whatever. And so I think people get lost in this what’s the edge, and they create these, all these micro VC seed fund decks all look the same. They look like, you know, like YC decks where everything has to go up into the right and there’s nobody else that’s in the space. And everybody does these like McKinsey four by four and we’re always up into the right. And it’s a cluster in the middle. But, you know, people keep looking for like more, more but different is not always better, right? There’s, you know, we have so many of these different funds and everybody has these pitches, everybody has a deck in their slide, in their deck that is like oh our advisors, our venture partners, our ninjas, our blah blah blah blah. Make up some title. And it’s always 12 people, men and women, who are the VP of something at some company and they’re just faces. They’re just faces. They might as well just be like mugshots because we have, we as LPs have no idea who any of these people are. And more is not more. And you’re giving away, and everybody is giving away carry to these people.

Nick: Yeah

Trey: Oh we’re giving them carry and they,

Nick: Yeah

Trey: you know, we invest back in our entrepreneurs like all these things like so many people are trying to reiterate this how do we have an edge, what is new, what is new. Like when the thing that should, the only thing that matters at the end of the day is like what’s your background and what is the unique network that you have amongst other VCs or entrepreneurs or universities or whatever that unique part is. Just who are you? That’s all that matters. Specially when you’re trying to raise a new fund. The only thing that matters is who are you?

Nick: Yeah

Trey: Or who are you as a partnership? As opposed to all the other stuff. I just feel like if people could go back in time and they were told differently, I don’t know, you know, people work so hard, their entire career. And sometimes for some times that’s super early because you can raise a venture fund, you know, in your 20s right now or 30s or however long their career is. But if you think about it and like go back 10 years, if you work your entire career to get carry, right, why would you give it away so quickly?

Nick: Mmhmm

Trey: Why are you giving away 20 point, 30 points to these venture partners, advisors and all these folks right out of the gate? If these people are people that care about you and love you and want to mentor you and help you and give you things, they should have, they probably were already doing that. You weren’t giving them anything in return other than affection or reciprocity or, you know, friendship or whatever those things were. And then start to monetize it and give away

Nick: Sure

Trey: something you’ve worked your entire life for. Like if, now, as you now know I’m never going to be a GP, but again if I were a GP like the last thing I would do is give away the carry.

Nick: Mmhmm

Trey: I’d give away the management fee first. I’d give away the management company. Who cares about the management company of a venture fund, right? They’re never going to go public. But the carry, I just, that’s one of these, these things that people are playing with,

Nick: Yeah

Trey: you know, trying to make it the, that as you, you said the edge. And it should be like the, the thing you give away the least or the thing you try and change the least of. I don’t think people are getting bad advice. It’s just that, you know, it’s, it’s like you run the risk of doing something new and different is, can be a negative thing. Whereas if you just do the same thing LPs don’t it as differentiated but they don’t see that as a risk. Well, it’s the same, you know, here we get the same 20 page deck and it’s all the same, and we end with the terms and a bunch of disclaimers and blah blah blah. But, you know, being the radical, the new kid on the block or the radical and doing something totally different is also not safe either. But people say well, why are you only charging 15% of the carry, it’s not, you know, the, you aren’t as good as these other folks, right? They’re charging me more. I want, I want to go with the folks that are charging me 25% because that means, you know, they, they really know what they’re doing. They, you know, they can charge me more. This is a more expensive car than the, than the car that’s only going to charge me 15 point of carry. So I’m not looking for folks that have an edge. I think it’s just unique, authenticity, genuineness and surely something that is different. And again it’s just, it’s all how you tell the story. It, you don’t have to have a lot of adjectives and cool slides. One of the best pitches I ever got was from somebody who had all the pre-conceived notions of not being one of the most humble, kind, you know, folks. And it was just an awe impressive thing for, for, to sit down with this manager. And I remember asking the question, well, how much do you want to raise? Well, the answer, the answer that this GP gave, where normally everybody says well with the hard cap 70 we’re going to, we’re going to raise, you know, we’re going to hit the hard cap, I don’t think, you know, we’re, we’re over subscribed already. The, the answer from this GP was well, you know, we’d like to raise 50, I don’t know if we’ll get there, we’ll, you know, I think that’s the goal and if we hit it that’d be awesome, and if we don’t we’re going to try and work as hard as we can to get to as close to that number as possible. And that to me, more than anything, was something that meant a lot to me in that the manager I think understood that we are very privileged to get to do what we do. When you wake up in the morning and somebody, my wife asks or my two daughters one day asked me like daddy what do you do for a living? And I’m like well, I sat in this conference room doing this podcast on what is it like to be an LP, and that was part of my work day today, right. And I flew to Boston and have coffee with somebody in between. I’m very grateful to get to do what I do. And that’s why being able to listen to other people’s storytelling, the thing that, you know, we’re always looking for better versions of ourself in every human relationship we try and see. Whether it’s with a spouse or partner or a boyfriend, a girlfriend. Definitely in, in paternal and maternal relationships we’re always looking for a better mother or better father or better caregiver or something like that. And whether that’s us projecting onto our own  children or whatever. But I think it’s that seeking of the, of something that’s better than ourselves is why being an LP is such a gift. Because we, we should, keyword is ‘should’, always get to see people at their best. And when they’re not at their best, it’s an immediate turnoff. Because we’re dating. This is a dating game before we get “married” and sign a limited partnership with the firm goes on for an eternity.

Nick: Mmhmm

Trey: That, the human decency in this act of making a sale process between an LP and GP, the more human nature it has, the more enjoyable it is and the more likely somebody is going to buy it. That’s why if you think about why girl scouts or boy scouts, girl scout cookies and boy scout popcorn are so successful. It’s generally because the, the young men and women who are selling those things, if, all of the cookies and popcorn are all the same, right, the people that sell the most are generally the nicest kids. Because people want to buy not the cookies but they want to buy their kindness. Right?

Nick: Sure

Trey: And it’s the same thing here. That a lot gets done between the numbers. And that’s lost on people. Totally lost on people at times. And those are people that definitely are in the minority of not realizing that are probably the folks that are most affected by it frankly.

Nick: Well, while we’re on this point here, let’s talk a little bit about mistakes that, that GPs make. You’ve written a little bit about this in the past and you’ve met with, with many GPs at this stage. What are some of the, the common red flags or mistakes that, that jump out at you that you see GPs making?