162. LP Value Creation, Why DPI is King, and Secondaries as a Means of Exit (Sarah Anderson)

The Full Ratchet Sarah Anderson

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Sarah Anderson of Cintrifuse joins Nick to discuss LP Value Creation, Why DPI is King, and Secondaries as a Means of Exit. In this episode, we cover:

  • What is the investment focus/philosophy at Cintrifuse? Can you tell us a bit more about the Cintrifuse model?
  • What impact has the Cintrifuse Syndicate Fund had?
  • Can you explain how this benefits large corporates?
  • What about startups– what’s in it for them?
  • Are the corporate LPs hesitant to invest directly in funds– Is that why they come to you?
  • Does your diversified portfolio preclude certain vertically-focused corporates from investing in a fund of funds model?
  • Does Cintrifuse work w/ other types of financial institutions, aside from insurance? If so, how have you seen them react to the explosion in crypto and disruptive fintech?
  • Tell us about your role as matchmaker– how do you get involved and facilitate between VCs, startups and corporations?
  • What’s the strategic value-add to a VC fund manager?
  • What industry disruptions have you observed and what are the impacts on large corporate companies?
  • Advice for entrepreneurs– whether underserved spaces or where they should be focused that they’re not? What message do you want to send to founders?
  • In Rob Go’s recent study on fund metrics, he said “In the early days of a fund, VCs tend to optimize for TVPI. But in the long run, DPI is king. You can’t feed your family with TVPI, and you can’t spend IRR.” Is he right and what do you suggest to Fund I and Fund II managers that have attractive paper gains but no distributions to paid-in (ie. a DPI of zero)?
  • Let’s discuss reinvesting in startups, I want to talk about doubling down on firms and investing more in their new funds. When Chris Duovos was on we discussed the concerning stats related to persistence. And Antoinette Schoar, of MIT did a notable study on fund returns, which showed persistence of returns from private-equity funds has gone down in the last decade. She said: “If LPs are not vigilant, we’ll start seeing persistence at the bottom. So many LPs want so much to get into PE that they are not sensitive enough to poor perf and keep reinvesting in partnerships that are not deserving” Sarah, what’s your take on the study and her position here?”


Guest Links:

Quick Takeaways:

  1. Cintrifuse started in Cincinnati as a Fund of Funds with an LP base of corporations.  These LPs were looking for three things 1) better access to innovation, 2) a tech based economy and 3) a strong return
  2. In the past five years they’ve made over 1000 introductions between LPs and startups.  97 have resulted in contracts.
  3. Corporates have a desire for innovation but without a dedicated function and metrics, the desire is often not realized.
  4. The value for Cintrifuse is in the network.
  5. They only work with corporates that actively pursue innovation.  They assess each potential LPs level of activity w/ startups before engaging in a partnership.
  6. The Health and Wellness vertical has benefited significantly from startup innovaiton.
  7. We are going to see more secondaries as a means of exiting.
  8. Many entrepreneurs don’t know how to sell into the enterprise.
  9. Entrepreneurs should understand corporate limitations– their systems may not be flexible, processes may not be streamlined and sales cycles can be quite long.
  10. Different LPs have different duration expectations for DPI.  Early-stage LPs have more patience for real cash returns.

Transcribed with AI:

welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran and this is the full ratchet

Welcome back to TFR. The great Sarah Anderson joins us today on the program. Sarah is the managing director at the centrifuge syndicate fund in Cincinnati, Ohio. centrifuge is a limited partner in many great venture funds and focuses on bringing value to the table where many LPS provide capital alone centrifuge has a capital base that includes many of the largest corporations in the country. These relationships allow Sara and her team to play the role of matchmaker connecting startups with the companies they wish to sell to or partner with. Sara is here to talk about that approach. And we also get her take on Rob go in Antoinette shores articles on the spotty performance of venture funds and how managers are measured. Here’s the interview with Sarah Anderson.

Sarah Anderson joins us today from Cincinnati. Sara manages the centrifuge syndicate fund, an early stage venture fund of funds in Cincinnati, Ohio. She joined centrifuges in March of 2013, to help set up their first fund. Prior to that Sara was in banking in San Francisco with JP Morgan and RBC working with technology companies such as Netflix, Zynga, and EA. Such a fuse is unique in that they actively work with their corporate and fortune 500 LPs to expose them to the right innovation at the right time. Sarah is here today to talk about that and centrifuges approach. Sarah, welcome to the program. Thanks. Great to be here. Thanks for having me. Awesome. Can you tell us a little bit about your background? And how you’ve gotten to the position you’re at today? Sure. Yeah, definitely. I mean, you did a good job at the intro. But um, so my background is primarily in banking, finance related. And in 2012, actually, my husband who grew up in Cincinnati, made the trek back, we were both out in California and San Francisco,

made the trek back to do some work with his family. And, you know, I obviously came with him as the loving wife. But making that trek from San Francisco to Cincinnati was huge. I mean, you guys made it going to Chicago to write like, it’s just it’s a, it’s a big difference both culturally, environmentally, professionally. And so when I got to Cincinnati, a lot of what I did was just kind of landscaping, looking at what’s here, what might be interesting and fun. You know, it’s, it’s a, it’s a Midwest, city. And so, you know, the industries were very different. There was no easy shift from what I was doing in banking. But there was this really cool concept being set up called centrifuge. And the people were very young, energetic, doing something cool with big companies around innovation, and around tech. And so I got involved with them. And this was early days, I mean, centrifuges was really just started in 2013. And they were setting up their fund, like you mentioned, and it was the first fund and the concept was really around building a tech based economy in Cincinnati, or in the southwest Ohio region, right. Which meant a lot of different things. And I think early days, you know, the fund, all of our backers, all of our investors are large corporations, many Fortune 500 corporations based in the Cincinnati region. And they were looking for three things primarily, right, they were looking for

access to innovation, right, which is something that we focus on. They were also looking for more of a tech based economy in Cincinnati. And I think a lot of Midwestern regions fall into this category where Tech has really taken off in our neighboring cities. But Cincinnati was kind of behind the curve. And so they wanted to figure out a way to really generate some more momentum around startups and new technologies. And part of that, you know, the corporations here recognized that they were a huge part of that, right? Because they are the customers of a lot of these startups. And then the third thing that they were looking for from the fund was really a return. So there’s a lot of ways to do what they were trying to do. But there’s very few that actually kind of return capital to them. And so the fund was structured as a fund of funds to kind of accomplish

So all three of those goals, and it was just a really exciting place to be. And so, you know, here five years into it, we, you know, we’re really moving into that corporate innovation cycle. And it’s been a pretty exciting adventure. Awesome. Was this your brainchild? Or were the seedlings of this syndicate fund approach there when you joined the team? It’s interviews.

I wish I could say it was my brainchild, but no, I’m not quite that smart.

It was. We have an organization in Cincinnati called the Cincinnati Business Council, the CBC. It’s made up of some of the largest companies in Cincinnati. So you know, p&g Kroger, great American Financial, Cincinnati Bell, western and southern, which is a large insurance company. And they were the ones that really drove the formation of Sintra fuse. And the fund itself and the structure of the fund as a fund of funds versus, you know, a direct Fund, which was brilliant in so many ways. I mean, the leverage that we’re able to bring from a fund of funds model versus a direct fund model is has been a multiplier effect. That’s great. Can you talk about some of those impacts the syndicate fund has had in Cincinnati and beyond?

Sure, so there’s two primary impacts. So first, we work really closely with our investors, right. Like I mentioned, all of our investors are large corporations. And they’re large corporations who are by and large, interested in innovation across categories, right. So, you know, we work with large insurers, right? They’re not just interested in insurance technology, right? They’re also interested in security, they’re interested in logistics, they’re interested in direct to consumer plays. So center fuse really focuses on making sure those investors in those LPS have access to innovation. And the impact we’ve seen you I think, in the past five years, we’ve made over 1000 introductions between our LPs and startups, right?

Which is significant, but the hit rate, right, and I’m sure that you’ve seen this from your own portfolio, the hit rate is small,

you know, startups working with corporations to have an actual contract in place. I think we’ve had 97 contracts put in place. And some of those are pilots. Some of those are, you know, larger contracts, customer contracts, but it’s a pretty small hit rate. So you know, the impact has really been with our LPs to bring them back up to speed on the innovation trends, like what’s happening in their industries, how are they being impacted? Who should they know? Right? A big a big part of what we do is making sure that they’re well connected into the venture community. And if, for instance, if they’re trying to learn and get smart on blockchain, right, which investors should they know it’d be talking to, even beyond startups that they should be, you know, talking to and working with. So that’s one piece of the impact that we’ve had, I think the other major impact that we’ve had is with startups in the region, right? Because if you remember, the genesis of central fuse, was to really kind of create that tech based economy, right. And so that deals both with the corporation’s becoming more tech focused, but also the startups that were in Cincinnati being able to grow and be successful. And one of the things that has happened over the past five years is just the the amount of risk capital that has come back into Cincinnati. And you know, centrifuges had a lot to do with that. Now. It takes a village. Right. So we aren’t the only people that have been working for towards that. But I think in the past, let’s see 2012 was when centrifuges was, you know, started to get formed. 2011 I think the Southwest Ohio region was able to bring in somewhere between like 15 and 20 million a year, right. And venture capital funding. If you look at 2016, that number goes up to 140 million. Whoa. Right. That’s a huge jump. But you know, I think a lot of it has to do with just VCs too often get exposed to the Midwest, right? Especially California, New York, Boston. Of course, Chicago is a little bit of a different story. But

there are great startups all over the country, right? But they just don’t have the access to them. The startups don’t have access to the VCs and the VCs don’t have access to the startups, right. And so for us to be able to make those connections has

and really helpful and just a step change, I think for the Cincinnati community, right? It’s great. It’s great. One plus one plus one equals three, clearly, if you have sort of the right talent, you know, the right corporations, and the capital, if you can combine all three, you know, a lot more innovation and a lot more value can be created. I think right here in the Midwest, I think we have all the ingredients. I think you’re totally right. And guess where all the corporations are headquartered? Right? Yeah.

Yeah. So you know, and one of the things that we found because we often go to other communities and centrifuge as a model has been something we’ve been exploring expanding to other communities. And really, the secret sauce of why centrifuge has been so successful, I think, has a lot to do with our corporations. They know that they are, you know, the key to success here in so many ways. And a lot of communities don’t have that buy in from the corporation’s really coming together as a group to say, this is the momentum we want to create. So we’re really lucky, I think we’re, you know, in Cincinnati, we’re very unique, and that we have those relationships with our corporates, it seems like, at least from my perspective, it seems like the appetite to get involved earlier with tech companies is there with a lot of large corporations now. Whereas, you know, I felt like, even as soon as five years ago, the integration piece was just totally lacking. I’ve seen it in Chicago, I saw when I was in, in Colorado, but it just seems like that level of interaction is much more significant. And even a lot of these big corporates are kind of behind the activity in the incubators, and supporting the accelerator programs as well. And so yeah, I don’t know if clearly, you’re seeing that in Cincinnati as well. But it’s a good thing for for everyone involved. I think so I mean, you know, innovation is such a sexy word, right? A lot of corporations want to innovate, they want to be thought of as innovative. But it’s hard to do. You know, I think one of the things we’ve found there’s really no common denominator.

Among you know, how corporations innovate and how they become successful at it, I think there’s a lot of different ways to do that. But I agree with you, we hear about it a lot, you know, plug and play, their growth has just been off the charts. And a lot of the corporations here in the Midwest are involved in plug and play and other you know, TechStars, other accelerators that help them have that access to innovation. But I one of the things that we see is, you know, truly being innovative. Having innovation be a core competency is very different than just being involved in, you know, an accelerator or having a CVC or,

you know, having some type of co working space or, you know, different things that corporations are trying around innovation, I think it all helps. But there are some necessary ingredients, right, you have to have budget against desired innovation rate for pilots for potential

contracts for acquisitions, you know, things like that, you also have to have a dedicated team. And I think human capital in a lot of corporations is even more rare than money. A lot of these corporations have plenty of money to throw at innovation, but they don’t have internal teams that have time or are measured on the innovation metrics, right. So it creates, you know, a desire without an actual realization, right. And that’s one of the things that we see a lot with corporations. And it’s taken a while to work with even some of our LPS around their internal process, you know, how they’re measuring performance of their teams, you know, what type of money they’re putting towards it and expectations. I think internal expectations is key, because you’re going to fail a lot. A lot of these startups aren’t going to work out like you thought they were going to for a host of different reasons. And if you don’t have that patience, or that expectation at the outset, then your innovation strategy is going to be deemed a failure. Right. And so you’re going to have to start over from square one. Whereas if you know that’s going to be the case, then you can keep marching forward and keep optimizing. Sure. Sure. Yeah. I mean, clearly, there’s a big difference between really getting involved in the tech community for a large corporate and just sponsoring an event or slapping your logo on something which we see that too. So you know, just

just doing a co working space and just being around interesting people is, is not really a

imperative to, to further innovation within a large corporation. But you know, I’m curious, why do one of the corporate LPS come to you guys? Are they? Are they hesitant to invest directly in funds? You know why it is? Why is it that they want to work with centrifuges?

Well, I wouldn’t say centrifuge for most of our LP centrifuges is not their only investment, right? Typically, what we see it’s, it’s an ecosystem approach. So they may have some money invested over here over here in centrifuge is kind of one outpost of maybe five or six different initiatives that they have around innovation. One of the unique aspects of centrifuge, and the fund of funds is the breadth and depth that we offer around innovation. So for instance, you know, we work with a lot of insurance companies in different verticals of insurance. And they’re really good at that the core kind of insurer tech innovation, right, and getting access to what’s coming out of, you know, specific insurer tech accelerators, or, you know, working with specific, maybe later stage growth companies around insurance tech, but things that they’re not seeing right around the edges of that is really where centrifuge comes in and adds value. So things around machine learning and AI, things around drones, right, those are areas where we can add significant value that they may not otherwise have had exposure to. And that’s just one example of one industry. I mean, our LPs are, are multifaceted between, you know, consumer CPG, retail, insurance, healthcare, you know, across all industries. And so those adjacencies a lot of times are very important to innovation. And and a lot of times can hit especially with the speed of innovation now can hit corporations very quickly, when they didn’t see it coming. And so that’s one thing that sends your views has been pretty valuable in helping them with

Is there ever a concern about the diversification side? Not from a return standpoint, but if you’re speaking with a corporate that CPG, large CPG. And you look across your portfolio, and you know, the the total percentage of investments that are in, you know, CPG startup in Tech is a small percentage? I mean, is that, is that a concern? And is that a reason why they may not invest in a fund of funds?

It’s a really good question. I think with that specific example, not a concern, but you could go down the path of other industries where it would be, you know, they would want a lot more exposure, for instance, and like health tech, right, right.

One of the things that, interestingly enough, we’re talking about the structure as a fund of funds, right. And I think this is fairly typical to with venture portfolios. Really, what we invest in is the tip, tip, tip of the iceberg, right? So our portfolio has seven fun one has 17 managers in it, it has about 400, I think 477 startups, right, across the world. And those are in, you know, direct to consumer enterprise, life sciences, consumer products, so it kind of across the board, but where we really add value is not just in that portfolio, right? That’s 1%, maybe of those funds, we talk to you and those companies that, that we have a relationship with, really, the value is in the network, you know, just like a VC, you guys invested maybe 1% of the companies that you see, similarly here, but we have access to a huge network of innovation, in which case, we can open doors, you know, for startups that are not necessarily in our portfolio, but outside of our portfolio through great investors that we just didn’t have the opportunity to invest in. So

while I think, you know, some investors may look at our portfolio and say is way too diversified, right. Others see it as a huge benefit to have access to 10,000 or more startups, you know, across the country and across the world that they otherwise wouldn’t be able to access and our process in working with our network is fairly refined, right? We have kind of a push pull is how we look at innovation with our corporates. And the poll is largely then giving us innovation briefs are telling us hey, this is what we’re really interested in right now. We need to find

Some solutions here. And with our investor community, we’re able to reach out to those that have a specific investment thesis right in that category and say, Hey, have you seen anything that might be a good solution here, right? Whether you’ve invested in it or not, if you’re gonna invest in it, that’s, that’s awesome. That’s icing on the cake. But, you know, their eyes and ears are so well tuned and well focused, that that network really creates the value in the system. Awesome. Do you find that the interaction between the corporations and the VCs is more active than that of the corporations and the startups? Or, you know, how’s that? How’s that balance? That is a great question. It’s very interesting, because, you know, we talk all the time about corporate innovation and corporations, you know, working with startups and startups working in corporations, but the VCs have a huge role to play, right? In fact, a lot of times, when corporations, they’re trying to get smart on a subject, right, we will connect them directly with VC, it doesn’t make sense at that point in time for them to talk to a startup because the startup might be one point solution, when they want to know about, you know, if they want to make some bets, where should they make some bets? And what should they try? VCs that are experts in those categories are really their best source of knowledge. Right?

So the VCs have a lot of activity and interaction with our corporations, while especially at the early stages.

You know, you mentioned insurance before this interviews work with other types of financial institutions. And if so, you know, how have you seen them react to the explosion in crypto and in other disruptive fintech?

Yeah, well, you know, insurance is a big vertical for us. We don’t have unfortunately, because we’re a fund to funds, right? We don’t have any banks. Yet, although the Volcker rule may have some changes soon. So we’ll see what what comes out of that. But I would say by and large, no, not just crypto, you know, Blockchain, AI, ml, they’re all really trying to get smart on these areas. And I think some are more progressive than others, and the way that they’re trying to get smart, right, some are testing different systems, maybe having developing a portfolio of assets that they can incorporate into their own platforms, and some are kind of, you know, dabbling a little bit lighter, and trying to get educated, but they all realize that this is going to change their industries, and trying to get smart on it quickly. So there’s a lot of opportunity there. And our corporations admit that there’s a lot of opportunity that they need to be a part of. But there’s a big spectrum. I think when you think about how they are working with these new technologies, there’s a big spectrum of appetite. Interesting. Yeah. It sounds like to some degree, you guys are playing matchmaker, whether it’s, you know, between the VCs and the corporations or the startups. You know, how does, can you explain kind of how your interaction works on a regular basis and how you get involved in, you know, the process between your constituents, and also just the the overall innovation process? Yeah. So when we have an investor, right, and clearly, you know, at the outset, we don’t take investors that are not interested in innovation, right?

Our value add is minimized if they’re not interested in innovation. So an investor comes in, and we immediately try to assess where they are on kind of the innovation spectrum of sophistication. Right. So do they already have a team in place? What have they already tried? what’s worked, what hasn’t? Right? How good are they at working with startups, because a corporation that has never worked with a startup before or has not done, it frequently, needs to start in a different place than a corporation, who was doing new pilots every month. So we quickly assess that, and we have an internal team at Central fuse that adds to the human capital of the innovation teams that are corporations, right? So they’re working with these corporations one on one to say, Okay, where are you? And then once we’re able to assess that we kind of iron out some goals. Right? Where do you want your innovation strategy to go? What is your current focus today, although that changes often, more often than you would think, and how are we going to get there and then, you know, we work with them to make sure they are accessing our portfolio, access accessing our network, right. The push poll I mentioned before, the poll I talked about the push is us actively mining, you know,

We get a lot of feedback that one of the more active LPS with the managers that we invest in, because we’re actively mining their portfolios to make these connections in these introductions to our corporations, because oftentimes, where innovation happens is not where a corporation says I need x, or I need y, right? It’s, it’s, Hey, this is an exciting new technology that’s on the market, and you need to know about it, and the corporation pulls it in, and that’s what we call the push. So,

you know, it’s, it’s a pretty customized process, depending on on the LP, but we have a good system down that makes sure, you know, everything is accomplished within a dedicated timeframe.

You know, I can imagine there’s, there’s fund managers out there running around trying to, you know, raise capital, I can relate with that a little bit. And in some cases, you know, they’ll take capital, whatever way they can get it, but it sounds like in this case, I mean, there’s some clear strategic advantage, you know, you invest in fund y, in fund y, you know, can get access to a lot of large corporations for potential m&a and for for channel and a variety of other things. Are you finding that, you know, the the fund managers are seeking you guys out because of that in telling their friends? Or, you know, is that a significant value add for the VCs themselves? Or?

Yeah, yeah, for sure. I think a lot of our managers look at us as a strategic investor more than a financial investor, even though we are a fund of funds because of our LP base, right? And because of the approach we have towards innovation, and it’s a virtuous cycle, right? And if if we invest in a manager, and their underlying companies become an active client of one of our fortune 500, LPs, right, that boosts the value of their portfolio, and thereby comes all the way back up the chain. So, you know, it’s something that for so many reasons, we’re actively trying to make sure those connections happen, but it is a huge selling point for a lot of managers to have access to some of our corporations. That’s great. You know, we’ve talked about finance, we’ve talked a little bit about healthcare, I touched on CPGs. You know, I’m curious to hear about sort of the industry, industry disruptions that you’re seeing, you know, across different sectors. I know that, you know, I used to be an m&a for Danaher, and I was scouting out early stage tech companies. And quite candidly, more often it was because they pose threats to the portfolio

as opportunities. There were both but you know, I’m curious kind of, you know, what you’ve seen out there and how various corporates are reacting to potential threats and opportunities.

Yeah, I mean, I think that there’s, you know, more opportunities than threats, although I guess it’s an opportunity can become a threat, if you don’t seize the day, you know, when it’s readily available? Maybe it depends on the size of your p&l. Yeah, well, yeah. And your risk appetite?

You I think a lot of our corporations are, obviously in disrupted industries, I don’t know an industry that hasn’t been disrupted. And,

you know, I think most of them tend to be one of the things I look at is the reactive innovation versus the proactive innovation, right. And obviously, the more successful innovation is the proactive kind, versus a reactive time, but there’s so the speed of disruption is, is so fast. I think a lot of our corporations see what their competitors are doing and suddenly want to either emulate it or try to do something as

as disruptive as they did. And one thing that would be, I think, really interesting to see is more proactive innovation, where

corporations are taking more risk, and then they’re, they’re kind of more of a trendsetter. We don’t see that often. And and I think it’s the more successful the two, but, you know, specific industries that are getting disrupted quite a bit. I think.

If you look at health and wellness, I know we talked about that, but technology as applied to health and wellness is a huge, you know, you look at telehealth and telemedicine you look at you know, even pharma and technology that’s being implanted into drugs now, you know, genetic coding and recoating that’s happening, which is really interesting and

And happening much faster than I think a lot of people would have predicted. We see a lot too, I think, especially in the Midwest, around, you’ve probably heard of this new sector called Cloud bio, probably not even that new anymore. But it’s basically just the application of technology to our food supply, right into agriculture and ag tech,

there’s a lot happening to make our food supply more sustainable and more efficient. I think that’s critical. Looking into the future. You know, we have a lot of industrial LPs. So makers of things, right, whether it’s chemicals, or textiles, or auto. And we’ve seen a lot more around supply chain and direct to consumer models, right, in in the heavy industrials, more than I would have thought, and have a huge interest in having exposure and being a part of direct to consumer, right, because this thing is a big trend, especially for young people. And even if you look at

textiles, for instance, right direct to consumer for textiles, and having access and convenience, groceries is another really great example of disruption, we saw what happened with Amazon and Whole Foods, now, you can get your groceries in two hours, right? So that’s creating a whole new market where consumers are purchasing groceries much more often, instead of going to the grocery store once a week, you can do your daily grocery purchase, right, and they’re waiting for you when you get home. So, you know, I think disruption is happening across all industries that are LPS touch, at least in all industries, and I can think of the key is staying in the forefront of that disruption. And I think that’s the hard part, right? Being a proactive innovator versus a reactive innovator, because reacting is easy. You see your competitor doing something, then, you know, trying to react to that is something I think corporations are very used to. Whereas

taking a risk, being on the forefront, and knowing something may not work out is much harder.

It’s really hard, really hard for a lot of people, whether it’s an LP investing in a fund one or a corporation investing in a startup or a fund, those are those are difficult decisions. Yeah, you know, I’m also curious about maybe some of the underserved areas or, you know, if you’re talking to entrepreneurs, and you’re curious, or you’re you’re trying to give advice on maybe areas that they can move into some whitespace, or areas where maybe entrepreneurs aren’t so focused on but but they should be, you know, what message would you send to the, to the founders out there?

Well, some of the feedback that we’ve gotten from our, you know, corporations, which is where I get a lot of my visibility on this particular subject is just around readiness. You know, it’s, it’s great to have a fortune 500 customer, and to be able to go around and talk to your investors about having great, great customer portfolio. But it is hard for large corporations to onboard these startups in large part because you know, they may not have the backend infrastructure yet that they need, they may not have the security certificate that they need, you know, the technology stack may be very unique and not flexible enough to work on their systems. So, you a lot of times, that’s the pushback that we get from our corporations when we’re making these introductions, and it would be great for entrepreneurs, before they go talk to a lot of these large corporations to understand the limitations that the corporations have.

Because oftentimes corporations have existing and inflexible systems in place, right, the more that they can incorporate, and a lot of it’s just learning how to sell into the enterprise. Right, one of the things that we found in in the startups because we work with early stage VC. So I think that’s why this becomes an extra acute pain point.

We’ve found a lot of the startups are just not well prepared, or skilled in selling into the enterprise and selling into corporations. So I think that’s one area that I would love to be able to provide more color to entrepreneurs on in an area where entrepreneurs can get a lot better.

That’s great. And then, you know, I want I also want to jump into your thoughts and sort of advice for VCs as well. You know, I was reading in Rob goes recent study on fund metrics. He said that, quote in the early days of a fund, VCs tend to optimize

for TV Pei, but in the long run, DPI is king. You can’t feed your family with TV Pei and you can’t spend IRR in quote


easy, right? And what do you suggest to the fun one and fun to managers out there that, you know, they’ve got attractive paper gains, but no distributions to pay it in? You know, the the DPI is zero. Right, right. Yeah, we see that a lot. And, you know, we look at emerging managers a lot. And I have a love affair with emerging managers, I think they are hungry, ambitious, there, a lot of them are so smart and talented. And they’re also looking for, you know, differentiation in a pretty saturated market. But I do tend to agree with Rob, one of the areas, you know, the long run and the duration of an LPS, when they start looking at DPI versus TVP. AI is different, right? So since we’re an early stage venture, we’re going to have a little bit more patience than would a standard fund of funds. It’s doing a lot of PE, maybe a lot of growth stage venture.

But really an early stage venture fund one fun two, okay, no distributions, once we get into fund three, you know, you’re looking at kind of nine years, six, I guess six years, you would start raising fun three,

you would start you would want to start seeing some thing, right? Because at that point, theoretically and fund one you should, most of the bad apples should be out of the portfolio, right? And you’re kind of cultivating those that you think are going to be most successful.

So around fund three, I would say we do want to see some returns. But we know, especially with emerging managers that don’t have a huge track record. It’s just gonna take some time. But DPI me Rob is definitely right. DPI is at least on the LPS that we work with like other fund of funds and other institutional investors, DPI is king. And for the fun one, and fun to fun twos of the world, to the extent that they can show even moderate distributions is huge, is it? It’s huge, it shows that managers know how to exit. You know, they’ve been through a full cycle. Yeah, it’s, it’s a big a big deal. So I talked a little bit with Eric Paley about this, but let’s say hypothetically, I’ve had a couple opportunities to be taken out of an early investment, right by a Series A or Series B, investor that’s coming in. And let’s say hypothetically, that multiple was five to 10x. So they offered me a five to 10x in 18 months. Well, you know, conventional wisdom, says, you’re supposed to double down on your winners, and you’re supposed to put more money into them. You’re not supposed to take your money out, but to show some DPI to get a win on the board, especially if it’s, you know, north of 5x in some cases, far north of that, ya know, it’s a tough one. And I’m, you know, I want my entrepreneurs, and I’m just saying this is hypothetical, I don’t want to say, this has happened, wink wink, but,

you know, you want to support your entrepreneurs. And that’s what we chose to to do. And it’s a tough one, though, because getting that dpi, as, as you’ve said, and as Rob has articulated, is, is critical.

Yeah, I mean, I, and I think I hate to say it’s, it depends, right. But I think in large part, it does depend, I mean, you as the investor know, more than anybody else, you know, other than the entrepreneur would know about, what what the prospects of that company are, I will say, we have seen some of our managers who made that decision, right to to stay in and keep refunding. keep reinvesting. Then, you know, they get a few more years down the road, and suddenly the market drops out, or, you know, things happen that they weren’t expecting, and the valuation goes down, and I should have sold, right.

So there’s definitely two sides of the coin. I mean, you know, if you hold on to it, and it just goes, you know, skyrockets, then you obviously you’ve made the right decision, but it’s an educated decision on your part. I think, to the extent you know, and one of the things that I think we’re going to start seeing more and more of is the acceptance of secondary sales among early stage managers, because when you look at the market, and the mega the megaphones that are being formed, right, it’s completely changing the private investment market. It’s completely changing the the opportunities for exit, right within a reasonable timeframe, Dropbox just IPO, right. They were founded in 2007.

So, you know, I think we are gonna start seeing more and more secondaries as a means of exiting.

In the past, you know, secondaries have always been kind of frowned upon, you know, it means you’re not sticking with your entrepreneurs. But, you know, I do you think they’re going to become more mainstream? And and in that case, you know, if you’re, if you’re raising funds to and you have a chance to have a five to 10, multiple on a fund one company, why not take in? I don’t know the situation, but you could take some off the board leaves on it, right, kind of hedging your bets, but you’re also showing some cash distribution to your existing LPs and to prospective LPs, that you know, how to exit companies. But again, I mean, you know, as the investor, you know, so much more than we know about the companies that you’re investing in.

I’m confident that in that hypothetical situation, you made the right decision.

Thank you for that. Yeah, we had some meal, Shawn. And he mentioned that his rule of thumb is, if it’s 20x or more, he takes half of the half off the board. I think that was it, which, you know, it’s it’s a rough guestimation, assuming everything else is equal. But, you know, we’ve talked about reinvesting and doubling down on the startup side, I wanted to get your take about doing the same on on the firm side, and investing in new funds that that a firm is launching. And Chris Duboce was on we were talking about persistence, you know, funds ability to continue performing after doing well. And I was reading this article by Antoinette shore of MIT. She did this notable study on fund returns, which showed persistence of returns from private equity funds has gone down in the last decade. And she said that if LPs are vigilant, we’ll start seeing persistence at the bottom. So many LPS want so much to get into PE, that they’re not sensitive enough to poor performance and keep reinvesting in partnerships that are not deserving. Yeah, sir. What’s your take on the study and her position?

I love Dubose. He’s like a brother from another. He’s amazing. He’s awesome. He’s the best just tweeting at each other today. It was good. Yeah, he’s and I think he was, you know, he has a lot of really great thoughts and opinions. And he doesn’t hold back either that guy, I think, you by and large, there’s definitely increasing competition. And the persistence argument, I can see in certain categories, right. One of the things I’ve always believed in, especially within the emerging manager market, you know, and even establish funds is that success begets success in venture, right, and I’m not quite as experienced in private equity or later stage, to know how that may be different in competition and deal flow and deal sourcing. But I do tend to think that, you know, in venture, you do see a gravitation of very successful entrepreneurs seeking capital, from investors that have had success in specific categories, right.

At the early stages, I think there’s a lot of noise in the seed category. And I love seed, I love early stage, I love emerging managers, there are a lot of those funds, right? And so, you know, persistence is is very difficult to, to argue that, that in that category, you’re not going to have some separation, right, those that that are going to become successful, and those that are probably not going to be successful and continuing to raise fund after fund. So I do think part of it is separating the signal from the noise. Right. But I think there are certain patterns that you can see where you can start to do that. And persistence and venture. I’m not sure I agree with this. And, you know, maybe maybe private equity is different, but I do think you’re going to still have those funds that have significant success in certain verticals. Right. And you’re going to see some persistence among those funds in those verticals.

There, if we could cover any topic here on the program, What topic do you think should be addressed? And who would you like to hear speak about it?

Well, the one topic that I’ve really been looking for a lot of other LP thoughts around, is this megaphone phenomenon, how that’s going to affect exits and liquidity, right, because venture already has a liquidity gap and, you know, many funds, most firms are well over their funds timeline and the extensions, right. So how to think about

these mega funds further delaying exits, and how other LPs are hedging against that I think it’d be really interesting to know about and like you just mentioned, I think you know how ICOs are going to affect private capital? Right and venture capital will be interesting to learn about two couldn’t agree more. Sarah, what investor has influenced you most and why?

Well, there’s been a lot of influential ones, I think, probably not an investor, but

someone who has influenced me quite a bit, one of my bosses in investment banking, when I was at RBC, he taught me that you know, work doesn’t happen behind a desk or behind a computer work happens when you are meeting with people developing relationships, and really, you have your eyes and ears to the industry that you’re working in. And I believe that wholeheartedly. And it’s really influenced the way that, you know, I carry my career and hope that my team carries their career is not just sitting behind a desk, but going out and developing relationships and getting to know what’s happening and what’s affecting different industries. And you know, what’s going on in venture and where we really need to have some involvement. So that’s been pretty influential.

You I think, really highly of several LPS that we work with that I think have affected the way that I think about investing in managers. You had Lendl on he’s, he’s fantastic. And I think he’s very thoughtful in the way that he thinks about emerging managers. And we have a lot of the same ideologies as relates to smaller funds. You know, and new managers coming to market, Chris DeVos, has been a big sounding board for me, and has helped me think through a lot of challenges that we’ve had as an LP. He’s also very honest, which I appreciate because, you know, it’s hard to get that in this industry.

So yeah, I think, you know, there’s not been one single person, but there’s definitely been people that have shaped my thinking. Right? And then just wrap up here, what’s the best way for listeners to connect with you?

Probably email or so they can email me, Sarah with an h@centrifuge.com

or Twitter, Twitter, at Adams underscore Anderson is also a great way to get in touch with me. Yeah, those are probably the two best ways. Awesome. Well, Sarah, this has been great fun. I hope we get a chance to catch up next time. You’re in Chicago. And thanks so much for doing it. Yeah. Thanks for having me. This was fantastic. I appreciate it.

All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that. Some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening