224. Crisis Coverage w/ Beezer Clarkson – Platform LP; Allocations in a Down-Market; COVID Strategy Drift; and Emerging Manager Selection

224. Crisis Coverage w/ Beezer Clarkson - Platform LP; Allocations in a Down-Market; COVID Strategy Drift; and Emerging Manager Selection
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Beezer Clarkson of Sapphire Ventures joins Nick on a special Crisis Coverage installment to discuss Platform LP; Allocations in a Down-Market; COVID Strategy Drift; and Emerging Manager Selection. In this episode, we cover:

  • Background and path to Sapphire?
  • Overview of the thesis at Sapphire?
  • You have relationships with many different funds and fund managers, how have you been managing the current situation from the LP side?
  • Down years tend to be very good times to invest, what portion of institutional LPs do you think will view the current situation as an opportunity to deploy versus those that tighten up?
  • Strategy drift of a venture firm can be concerning. COVID has impacted some strategies more adversely than others — what have you seen as far as shifts in theses and deployment strategies among firms and what’s your opinion on GPs changing course due to COVID/SIP?
  • Changing gears a little bit, but I want to talk about OpenLP. What is OpenLP and why’d you launch it?
  • There was a good article recently published by Kauffman Fellows talking about the relationship between LPs and micro-vcs and emerging fund managers. It mentions that most institutional LPs won’t invest in emerging managers until they see them produce cash-on-cash returns, but at that point, they’re no longer an emerging manager. What do you need to see from emerging fund managers to consider investing in their subsequent funds?
  • As far as skills are concerned, which skills do you often see emerging fund managers have aside from having access to great deals, making good investment decisions and providing value to founders?
  • Have there been any novel ways that you’ve seen smaller firms differentiate themselves that you can mention? Any other areas where you’d like to see more focus?
  • Let’s say you’re looking at an emerging fund manager’s existing LP-base — what, if any, are the red flags or things that might give you pause?
  • I know you place significant emphasis on the human aspect of working with people, how do you assess whether or not a fund manager has the people skills that you require when deciding whether or not to invest into their venture fund?
  • How can a fund manager determine whether an LP has real interest vs. just being a tire kicker? -You are approached to invest in a Emerging VC Firm. Their last fund is currently at 35% IRR 1.3 TVPI and is 2018 vintage.
    • Catch is you can only ask 3 questions (for 3 additional data points) to make your decision.
    • What 3 question do you ask? Granted this is not how investing works! ; )
  • Any advice for fund managers that are early in the career, planning a fundraise within the next 12 months?

Guest Links:

Transcribed with AI:

Intro 0:03
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

Nick Moran 0:23
Beezer Clarkson joins us today from San Mateo Beezer is managing director at Sapphire ventures Silicon Valley based venture firm that invests in growth stage companies and early stage venture funds. Prior to joining sapphire in 2012, these are managed the day to day operations of Draper Fisher Jurvetson global network, which then had 7 billion in assets under management across 16 venture funds. These are so glad to finally have you join us.

Speaker 1 0:48
So glad to be here. Thank you for the invitation. Well, Beezer

Nick Moran 0:52
we’ve known each other for some time, and I’m glad we finally found a chance to have you on the show. Can you start out with your background and your your path to venture and Safar?

Speaker 1 1:03
Well, I’m gonna try to condense it because I, let’s see, I graduated from college in 94. So I’ve been working for a while. But as I like to say, if you’re a liberal arts undergrad in the era of you must be an AI banker and a consultant for going to be school like what else would you become later on in life, but an LP, which is sort of a joke, but the part that I love about being an LP, if I can just start with that is that it is such a wonderful mix of different things that I’ve done and cared about that allows me to bring all these parts together, which I always harken back to as the backbone of the liberal arts education that it’s the interdiscipline and being an LPS interdiscipline. And to kind of get a little bit closer in I graduated from business school in 2000. And wanted to get involved, honestly, I want to work in business development for a startup. And I got like the hairy eyeball, every single person I interviewed with because they’re like you were an AI banker and a consultant, what could you possibly bring to the table for a startup, which was awesome. I did exactly what you do when you can’t do the doing, you go to the investing side. And I was joined one of the first early stage VC slash incubators in New York City. And this was in 2000. So I was joining it as the world was crashing. Well, and yeah, so that was fun, not. And back in those days, when we can talk about the differences between the two thousand.com, crash and 2008. Now if you want people kind of close fun, sometimes they gave back the money. And this was a smaller vehicle that was raised from high net worth and friends and families and the right thing to do. And it became clear that the world was gonna be a tough place for tech. And New York City was so much less developed right than it is now it was a really different place. The GPS gave back the money and we all left one to do something else. So I then spent five years at Hewlett Packard doing software business development, just probably one of the only times my mom could say she knew exactly what I was doing, which is always sort of amusing to me.

Nick Moran 3:01
Usually see my mom’s face when I told her I was starting a podcast seven years ago, she flipped out. Right? Didn’t even know what it was.

Speaker 1 3:09
This was back in the day when you my first the first deal I wrote was when you dropped the AOL CD ROM in the box to dial up the internet. And that was it, go find the internet was sort of how it was and you got paid to put these CDs in a box and got paid again, when someone subscribes. That was the first deal that I did. It shows you how old I am. But I left there. And as I got back into my investing, and I worked at Emidio network, which is really interesting place it was all all the money of Pierre Omidyar was a bit of a family office slash venture funds slash philanthropy. It’s gone through a couple of iterations. It’s a different version now. But when I was there on the investing team, you had to make three kinds of investments every year, you had to do direct venture investing, you had to do what I now understand to be LP investing, but we just call it fund investing. And you had to do nonprofit, working grants into nonprofits. Hands down, making a successful nonprofit grant is the hardest kind of investment to make, which I know is not the focus of the show, but just want to throw it out there. And I discovered by doing these three different types of investing, that I really love the LP side, it just, it just got me it was crazy multiplier effect where I could talk to one or two GPS and through them see the world through their eyes and the trends that we’re looking at and that had both macro and micro implications us reached a lot more people and saw a lot more ideas, versus me doing one or two deals per year. And I just, I just got bitten by the bug. And from there, I went to DFJ and did the DFJ network, which was this. It’s not a franchise model. But back in the day, it was a bit about finding different GPS and merging them. So if DFJ joined Safar literally, literally write DFJ into the management docks of sapphire and there was fee and carry trade and I got to run around the world to Latin America and Japan and throughout Europe and Israel and look at venture and it was An amazing way of figuring out ventured what works and doesn’t work. And it did that for a number of years. And then I had the great fortune to be invited to join sapphire and to help launch what we call sapphire partners, which is the LP program on the Sapphire platform. And that was 2012. And that is the long short story of how I became a sapphire. Okay,

Nick Moran 5:19
yeah. And tell us more about Sapphire. So I know you guys are doing some some growth stage directs, but you’re also investing in early stage funds. You know, what, what is the approach? And what’s the thesis?

Speaker 1 5:29
Yes, so sapphire has different kinds of investments. Teams and strategies must be the right word, but mean to define as we have separate pools of capitals, separate teams, and they’re dedicated. So there’s no commingling. I don’t write any of the lovely direct growth deals that you see Safar ventures doing that is not me, that is not my team, we have a Chinese walls, like we don’t, we don’t are friends. But we don’t commingle that kind of activities, right. Like they’re very separate. So the software partners portion of the business is the LP portion. And that is, it’s actually built really differently. From the direct side, the direct side looks and feels like a regular fund, we have an evergreen structure that we use. Because when we launched the LP program, we sat down and we were like, Hey, we get to create what we think an awesome LP looks and feels and moves in the world like, and what do we what do we think is true and needs to be true. And one of those core principles is durable, permanent capital. And when you want to have permanent capital, there’s a couple of ways of doing it. You see endowments out there, right, they’re always talked about as having 1000 year horizon. And that’s great. But like launching a school, or a foundation or a hospital to have an endowment associated with it is a little bit more than we had available to us at the time, shall we say. But what we could do was create a structured evergreen vehicle where you can recycle the proceeds to make your future capital commitments and sort of get a self supporting lift off that way. So that’s what we’ve been building. Our goal is we only do we focus on venture we do early stage venture on the LP side. So we don’t do cross assets. We don’t do hedge funds, we don’t do Publix, we don’t do large buyouts, we don’t do any of that stuff. We’re just all in on venture. We thought that was really important because that keeps us dedicated to an area so. So in times of turbulence, say like today, when people are wondering what’s happening to LPs, and where they might be going, you know, we’re doing the doing. And our model is predicated on committing, give or take the same amount of money every single year, so called 100 100 and 20 million every year. And we just do our thing. And I, we’ve set up those guardrails on purpose, because we believed it was important. So that’s what we do, and we invest predominantly in the US. And then within that predominately Bay area, but we have exposure to the coasts. And we also then do some in Europe about 20% call it and then about 10% in Israel, and we’ve had that geographic focus since Day One. And we thought those were areas of great technology innovation, and we’ve been staying the course. So that’s that’s what we do. And that’s, that’s what we believe.

Nick Moran 8:06
Good. So with regards to the Evergreen nature of it, you know, how do you manage the capital cycles such that, you know, you don’t fall short of a capital commitment when when one is called. So

Speaker 1 8:18
we have a single source of capital, and they are incredibly patient in long term vision. So we have enough capital at our disposal that when we model out, say what if it takes to your point, 10 years, 15 years, we have the capital to deploy into the system to meet those needs. And we have times like, for example, we’ve had some early distributions this year that were really great. Hats off to our managers. And we can use the capital we’ve received back from them to meet all of our capital use, the rest of our capital needs this year plus, so you don’t know always when it’s going to occur, you do modeling, and sometimes it’s better than expected. Sometimes it’s worse, but you do all that do exactly what you think you do do a ton of sensitivities. And you have a fair bit of data to assist to inform the model right ventures along as a business there’s a lot of history to it. So we pulled all that in the very beginning and did lots of math.

Nick Moran 9:11
Above my paygrade there, which

Speaker 1 9:12
is which I was very I was laughing myself. I was a poli sci liberal arts major. I did econ, but I took an accounting class my sophomore year and hated it. I dropped it I thought it was stupid. I didn’t know why I’d ever needed an investment banker and I was I’m not gonna swear on your show, but I walked in and I was like, oh, fill in the dots like I really shouldn’t know what a credit and debit is now. So I’m living proof that when you understand the story behind the business, the numbers follow you do not have to be a math major to make this work.

Nick Moran 9:45
I love it. It seems like all you LPs are liberal liberal arts people, you know, like Chris DuBose and the largest LPMI fund and you you know, it’s it’s it’s interesting.

Speaker 1 9:57
It’s interesting I you know, Hitting a nose of what every LP is is always hard because there’s so many and so varied. But I do think if you’re interested in macro trends and how different you’re not, don’t overuse word interdiscipline. But if you’d like how different kinds of worlds come together and the impacts being NLP is a really fun place to be.

Nick Moran 10:16
Yeah. Yes, I can imagine. So just right off the bat, I mean, do you think that Safar strategy is going to tighten up or slow down? Or, you know, how do you how do you guys react to the pandemic?

Speaker 1 10:31
Well, nobody likes sheltering in place, particularly, we’re all doing it to keep the world healthy. No, we specifically set up our business so that so that it’s, there’s a very human level response to fear and uncertainty, which for most people, is to pull back and retreat, because that’s keeps you safe and alive, right? When we’re all running around the plains of the world. But as an investor, you especially in venture where you can’t time the exit. And when you’re doing early stage venture, you know, how long does it take for an average company to exit now, 10 years, 11 years, you can’t call it. So being disciplined on just making sure you’re consistently investing in good times. And bad times is, is a key best practice. So we built our business for that. So we’re just we’re doing are doing, we’re continuing to move on, we have a number of our existing managers back in market this year, it’s actually been a really busy year for us. Really busy now. And maybe there’ll be some quiet during the summer. But, you know, every year we’re like, Oh, it’ll be quiet during the summer, maybe we’ll get a summer vacation every year funds want to close in September, which means we’re hoping it. And I don’t really think this year is going to be that different. To be honest, I think next year might be slower for other reasons we can talk about but we’re we our goal is to continue to do exactly what we’re doing. Why why if past is any precedent for what happens is usually you can see there is when things hit and there’s a hard time, there’s an immediate response. But for an LP a lot of what we do, I’m saying we collectively for the industry, so I’m grossly stereotyping, but bear with me. You think forward, right? So you have you sort when you look at your individual companies, and you sort of fast forward and you say okay, in 18 months, we’ll need to raise again. And then if they do well another 18 months and LP does a similar thing and says okay, I have funds may tend to be on called a two and a half, three year fundraising cycle. So you can plan ahead and say, I know the next couple of years, who’s coming, who’s coming back to market within a six to nine month window. And you see the institutional world, you essentially budget for it in a way of speaking. So this year, it doesn’t surprise me if things are still going relatively smoothly, despite the fact that big parts of our world just fell apart people had budgeted for their funds are coming back, it might be harder for funds, you’re just meeting. But there’s budget for what I don’t know. But again, history would predict this could be hard as if we’re going into a recession and there is going to be continued liquidity challenges. And continued uncertainty, that’s where you know, a year from now, it could be more pullback, because LPS might not have as much capital because things aren’t coming back in or if they use the stock market. I know Chris talks a lot on his podcast with you about this. So just a shout out to listeners to go back and listen to him explain it versus me rehash it. But if you’re an LP that has to sell stock, or some sort of public asset to meet your capital calls, and that’s not going well, these things all put pressure on you. They might triage their portfolio a bit, because over the course of a year, you might see who’s not doing as well. Oh, that usually means the fundraising gets harder later. I would love to be wrong. But I have no idea what’s going to happen in this market. It doesn’t feel like it’s going to get a lot easier considering the whole how do we come out of sheltering in place seems like it’s gonna be a bumpy ride. And I don’t know how to deal with the employment numbers and the impacts of that all that just gives me signals that it might not be awesome next year.

Nick Moran 14:03
Yeah. My goodness. It’s, yeah, it’s pretty sobering to look at those numbers. So you mentioned triage, and I talked to a lot of other VCs, a lot of other fund managers that are, you know, it seems like eight out of 10 are like, Oh my god, I’m so slammed with triaging the portfolio and, you know, sky is very much falling for many fund managers right now. As you think about your relationship with fund managers, you know, how are you triaging? How are you working with fund managers and, and how are they communicating and working with you, you know, what are you seeing from them?

Speaker 1 14:42
Yes, a great question. We are seeing a lot of awesome communication. I’ve been really blown away from the beginning of it. We have had folks reaching out and before we could reach out, we tried to be pretty fast. Just to say, hey, we’re here. You know, we’re all good. Just how are you doing let’s talk, we had numerous of our GPS reaching out to us saying, Here’s what we’ve done right. And generally speaking, at this point, I think everyone’s sort of followed a similar blueprint, which I’m sure you’ve already heard about know, what’s going on at portfolio, what’s the cash runway who’s been impacted? How are they thinking about where their reserves are gonna go, because of that, we’ve had folks set up to what the right word is, I keep going to say pop up. But it sounds so not as sophisticated as the thinking that’s going on behind us from the managers, but we’ve had an previously unscheduled, but now happening mid year, annual meetings for folks have fallen annual meetings, they’ve done annual meetings are pulled together with, you know, one week, two weeks notice for their LPs or L packs, or webinars. So folks that we were not scheduled to be in touch with we’ve been in touch with. And then we’ve had, for whatever reason, they was always scheduled to be a heavy Annual Meeting season for us. So there’s, I think we have nine or 10, this month, which is every year, it’s either April, or may it sort of some sort of weird system between spring breaks and Easter and Passover, and then people pop out the other side when they want to do their annual meetings. No idea. But every year this dynamic happens. So we’ve got a bunch of checkpoints. Now, people are really communicating. And on our part, we’ve tried to reach back out and do the same, what we have on the software platform that we’re really proud of and been trying to leverage very heavily during this time, as we have a group of 10 folks that we call portfolio growth and their value added service providers, right. There are people that do marketing, business development, talent, those kinds of activities on behalf of our direct and indirect portfolios. And they’ve been working overtime over the last few months to pull together resources for our GPS and portfolio companies. Some of it’s tough stuff like how do you do a riff? How do you think about it? Other side of it is which if you’ve got all these folks who have now been referred, how do you think about redeploying them into other companies? What are some best practices, our business development team is in touch with a whole bunch of CIOs and CISOs and CHR OHS and you go through the acronyms of executives, and paying them to hear what they’re thinking and seeing and then wrapping that up, they’ve been blogging about it. So we’ve just been trying to synthesize all that information, and sharing it with our GPS so that they can use it to their best guidance. So that we’ve all been invested in communication, which has meant for I think everyone’s had a lot of zoom. There’s a lot of time on.

Nick Moran 17:25
Too much. I mean, in a way, it’s too much. But then, you know, also, we had our quarterly VC breakfast in Chicago this morning, we kind of have this informal, VC breakfast, get together once a quarter clearly couldn’t do that in person. So we did it virtually today. And it was surprising to me how much you know, there’s like 30, founding partners of VC funds in Chicago. 100 million. And last, and it was surprising to me how much people appreciated that, and just really enjoy kind of connecting with each other, you know, kind of a group of friends at this point. But something that was interesting coming out of that conversation is the folks that we’re raising, right, actively raising from LPs, I would say for the most part, the targets are still kind of retail, lots of family office targets. But there were some, you know, small institution targets. And largely speaking, the the people that are out raising right now we’re saying that it’s, it’s on pause, it’s pretty much dried up. And I don’t know if that’s just, you know, this is probably four out of the groups and this but I don’t know if it’s just their own personal situation, or, or if that’s, you know, what all LPs are doing right now. So I’d be curious to hear your take on sort of this, you know, institutional LP class and other you have a lot of friends and colleagues. And you guys all talk, you know, are people tightening up right now? Or what do you think will be the deployment plan over the next couple quarters?

Speaker 1 18:54
Oh, I hate being a Debbie Downer. But I’m not surprised to hear you say that. I do think and the numbers support this. And you look at the funds that have announced that they’ve raised that there’s there are funds that are raising and typically what I’m reading in the papers are funds that have established institutional LPs, but you know, more than the first fund cycle, right? Like they’re, they’re on vintage, whatever it is four or five, six. Because then to my to the point I was making earlier, you can see how there’s LPS have budgeted for it. They probably heard about the fundraise last year, you know, it’s and there’s DPI as well as TVPA to look at. So I’m not surprised those are getting done. What is a lot harder is the the newer relationships and converting them, especially if the LPS themselves need to pause and take stock about what’s going on in their personal wealth situation right for the high net worth the family offices. And, and just they might be recalibrating. I mean, honestly, I don’t think it’s insignificant that everyone’s also still sheltering in place. And there’s a lot of work from home in school from home and I think the mental ability to process is awesome. You’re just being impacted. And there’s days when people might just not be able to do it all. And then this doesn’t sound like the LP base, your managers were talking about that maybe it is. But you also have LPS who’s not only is there liquidity and things like that going on in the stock market’s way up, and then it’s down and who knows what’s going on. But if your business as an LP is under pressure, because it is a school, or it’s a hospital, taking, taking a moment to pause and take stock is me, that’s just business, in some respects, not good business for the GPS that want to raise but good business for the hospital that wants to take care of patients. Right. So right now, right, I just think there’s it doesn’t surprise me, I think, pausing to reflect and see where people are at, given people don’t know, if they’re allowed outside doesn’t feel irrational, although it is painful.

Nick Moran 20:48
Yeah, you know, and a lot of GPS traditionally have caught flack for, you know, strategy drift, or investing off thesis. And now we’re in the situation where the fundamentals have changed. And a lot of startups for sure, are needing to change strategy. And with that, I’ve seen some GPS, you know, shift their thesis. What are your thoughts on strategy drift? Now, amidst you know, the pandemic?

Speaker 1 21:17
I think you’ve seen things that we haven’t seen yet, we’ve seen GPS, certainly saying they think there’ll be new consumer buying trends on the other side or new. Everyone says, No one’s going to travel, I am personally on the unconventional pieces of No, of course, there will be travel, it might look different. Right? I won’t be in a hazmat suit, or whatever it is, but it’s

Nick Moran 21:40
all my group of friends can talk about, we can’t do it. And I think that’s part of the reason, but everyone just keeps talking about Hawaii or Florida or whatever. Yes.

Speaker 1 21:48
So I feel point about, I guess, I haven’t experienced drift in our portfolio, I do see people trying to make sure they have dry powder to invest on this other size, they can counterbalance what’s going on at portfolio. But are you seeing radical change?

Nick Moran 22:02
I I can’t say because I’m not an LP, of course, but I do know GPS that have a thesis based on mobility, or based on, you know, a variety of different categories that, you know, they’re not going to be able to be sure, they’re not going to be able to operate on that thesis for some time, unless it’s, you know, a heavy tech investment. And it’s a really long cycle. So, I, you know, I haven’t heard them, you know, they’re not calling me up saying, Hey, we’re changing the thesis, but I’m already hearing the messaging change on some of these webinars, like the way that they message their thesis is has shifted.

Speaker 1 22:45
That’s interesting. It’s such a, it’s a very provocative question, because on one hand, technology changes. And as an investor, it is logical to me that one would also change, right? Like, I’m old, right? So in the beginning, it was wireless. It was like, you know, infrastructure and routers and wireless networking and semiconductors. And those same, some of the same investors, if they can, they stayed in business long enough, will naturally then became mobility investors or cloud so. So there’s something about allowing investors to move with the times that’s it’s never nothing is necessary. I think it’s critical. Otherwise, you end up investing in old technologies that don’t go anywhere. But it’s also At what point does somebody invest in an area? Because they might, they might realize it’s a productive area, but for whatever reason, they’re not going to be the best at choosing within it. And that’s, that’s tough, right?

Nick Moran 23:36
It’s hard to agree. So changing gears a bit. One wanted to talk about open LP. So you know, I’m very familiar with it at this point. But for the listeners, can you can you tell us what open LP is and why we launched it?

Speaker 1 23:51
Sure. So So remember, when we launched software partners in 2012, we are, we’re super geeks on venture, we love venture, we love reading people’s blogs and podcasts. But back then podcasts weren’t as many, to be fair, but there was still you know, there’s all that good stuff that’s on the internet. And it again, this isn’t rocket science, sort of like my credit, debit world. We just look back and realize that VCs used to not be that prevalent online either way back in the day, you didn’t even know who they were, where they were very ivory tower. And with the advent of people tweeting, and blogging and all that good stuff, the entrepreneurs really benefited from hearing the voice of the VC and and there was learning and there was engagement and as you said, you can feel like you know, somebody just by reading their writing or listening to them. And that really changed the face of venture but we noticed that there just really weren’t many LPS out there. There were some like Mr. Chris do those super LP was one of the first hats off to a Michael Kim was out there, Judith LCF and whether Gage was tweeting Lindell, and there’s some Lindell acmin Like there was there was, so I said, I mentioned Michael Kim at Cendana. He was out there but but it was really very few and you think about the number of LPs in business, right? And there are some structural challenges. So that’s where we want to, we want to create a platform or a way of enabling folks to be able to share because we thought the LP voice and granted this is self interested or biased, whoever the right word is because we are LPs. But we feel like there’s value in having the LP voice out there GPS. And some entrepreneurs ask us what the LPs are thinking, and you find yourself directing them to the same five links over and over again, and you’re like, This is not rocket science, we should create some form of aggregating the information that’s out there, and also doing it in such a way that welcomes and supports and encourages others to join, because a bunch of LPs have a lot of rules and regulations, they have to think about before they speak publicly. I’m a Ria, which means the SEC comes and says you can and can’t say certain things, because you’re considered an investment advisor, you can’t go make market in the stock. So no other VCs say this company is awesome, you should totally buy their stock, whatever, there. They are not an RIA, so they can say that and not get in trouble. If I said that I would get in trouble. A lot of LPs are in that boat. Right? Other folks are in institutions where the focus is if you’re a foundation, I’m just generalizing here, the focus is on the people that get the grants, the focus might not be on the on the LP in the background. And so some institutions don’t necessarily want to do that. And so the whole idea behind open LP, which is simply put a website and a hashtag, that we can use to aggregate the content that is out there that LPS or GPS or folks like Samir Kaji, at first republic that does so much great work, I’m looking at the venture ecosystem, we can aggregate it so people can find one place to go, was also to encourage folks to participate and just sort of say, hey, if we can, so our sites compliant with all the RA stuff and all those things, you say, Hey, if you do it, it’s going to be safe. And to bring more folks in so we we can’t take credit for the fact there’s a lot more LP voices out there in the world. But we are certainly super excited. I, I had a science class way back in college where the thesis they had a great scientific term for it, which I forget, but it basically was there’s times in the world when I when an idea has come. And you’ll see it be invented in multiple places at multiple times. And I just think the LP boys an ecosystem, the time had come. And so open LP was there with it. And it’s we’re all just going to move along together. And long story short, but it’s all about fostering greater transparency and dialogue, and not just LP GP also welcoming the entrepreneurs. And honestly, when I was looking at joining startups way back in the late 90s, I didn’t know where that money came from. Sure. It didn’t even it didn’t even dawn on me to ask an upgraded I was not a CEO, I was just a little little minion that was going to get hired, but it was going to pay my paycheck how the company raised their money. And so I just think there’s a whole bunch of financial literacy that’s helpful. And it’s hard to get it’s just not part of most curriculum.

Nick Moran 27:46
For sure. I mean, there’s a parallel here with with venture, right, like Yeah, a couple decades ago, there, it was pretty opaque. And then, you know, Fred Wilson and Brad Feld. And, of course, six ish years ago now, like, you know, on the podcast front, myself, and Harry. And now finally, the allocator side of thing, things is getting less opaque, which I think is really refreshing.

Speaker 1 28:08
I find it fascinating. I listen to other LPs talk about their programs all the time, because they’re really different. I suppose people don’t people have now accepted and expect VCs mean, obviously the business is the same, but who they are, what they are, to your point about strategies, why they’re doing things, super varied. LPs are just like that. How would you know? You don’t know. And I listen to podcasts that people have, you’re like, Oh, I didn’t know you did that. That’s so interesting. So I think it’s great. So thank you for doing this podcast and for putting it out there because it’s just an integral component for how people learn.

Nick Moran 28:44
Of course, well, likewise, you know, it depends on people like you joining us. Well,

Speaker 1 28:49
I have to admit, I’m also gonna own up to this, it also selfishly helps us because we at Safar really liked to be helpful. It’s just, it’s not. I don’t know how it became embedded in our culture, and our thesis and our ethos, but it’s just there. And one of the challenges you only get 24 hours in a day, and frankly, I like to sleep and see my family and sometimes not be on my computer. I think that’s true for everybody. So things like your podcast, things like open up pay, enable us to just have a much to help a lot more people and just sort of aggregate and send out. So it’s not relying on someone saying, Hey, can I get some advice? And being a one on one like the one on ones there as well, but you can a lot of times I just send people an article, I’m like, you don’t need to hear my words. Here’s somebody spoke about that. Here’s, you know, to your point, Fred Wilson does all that great stuff and how much equity people should give folks in their companies or here’s Chris DuBose on the denominator effect. Yep. Go self serve.

Nick Moran 29:43
Ya know, I mean, it’s, it’s great and it’s not one size fits all, either. You know, there’s a broad audience and sometimes they’re really interested in the allocator side and others are really interested in, you know, what it takes to raise that first round of capital and others want to get super deep on And, you know, what does machine learning investing look like? It’s series A so yeah, it’s nice. It’s nice that actually we, you know, we get the opportunity to do something like this. But, you know, I wanted to get your take a bit on emerging managers, right and kind of what you’re looking for. And before we dive dive into that, there was an article published by Kauffman fellows, was talking about the relationship between LPs and micro VCs, you know, emerging fund managers, and it mentioned that most institutional LPS won’t invest in emerging managers until they see them produce cash on cash returns. But of course, you know, the DPI is not coming in the early years. And by the time it really comes, you know, that manager is no longer an emerging manager, they’re either out of business or pretty successful. So what do you need to see from an emerging manager or an emerging fund to consider investing in you know, a fund to fund three?

Speaker 1 30:54
Well, we use a similar rubric for both established and emerging since we do both and I don’t, I don’t know if it really changes. So I use simple things I was a friend of mine taught me the term Snoopy math. So I use mental Snoopy math rubrics to keep myself clear. And the one that we use is just why you and it you can apply that to an emerging manager. So why are you why are you like, right? Why are you doing this? Why are you these are doing this? And then what is the opportunity you are going after? And what does the entrepreneur have to believe and want like, why are they going to pick you versus somebody else. And in that, you usually get a lot of, you can dive really deep, because we like to see. And I say this, we believe in the power of authenticity, when investing, because that reaches through to the end, if you think any of this is totally ridiculously wrong. As a direct investor, please educate me. But if you’re going to try to convince if you need to figure out which of the entrepreneurs you want to invest in, and then they have to, you have to convince them to take your money over somebody else’s, if you’re doing something that a you actually enjoy doing. And B is true to who you are and you built not just your fun, but your firm around it. We just think there’s a real power of form following function and the authenticity of that that runs through and just the way you question just allows us to dive into it. And just to understand the world that you’re swimming in, and what your powerline is and how that’s going to play. And the other part of it is there’s no right or wrong answer. It just, it just is what it is. And so we just dove in that way. And we’ve, we consider emerging managers, anyone who’s fun one through four, we absolutely invest in emerging managers. We also do establish what we have not done is somebody who’s never managed institutional capital before, which is different, right?

Nick Moran 32:41
Oh, interesting. That’s one of your filters. Um,

Speaker 1 32:43
well, we also our core focus has also been Series A, we do see it as well. You don’t tend to stand up a series EQ fund, if you’ve never invested before, I’m sure Institute manage institutional money like way back in the day, we were not alive as an SF our partners was not around. So I can’t claim to be an anti portfolio. But it’s an interesting question of who did do it for this reason, like when Mark and Ben set up Andreessen Horowitz, presume they were both active angel investors but then never managed institutional capital. Clearly, they were not dummies, and they knew what they were doing as far as a lot of things in life. But it is the bar is super high to start a series a fund with no institutional experience. A lot of folks start their first seed funds and go from Angel investing to C, but those funds tend to be smaller than what we do. So it’s our strategy also takes us out of that usually being a question those partially a design purpose, because it’s not that we don’t think people should make that jump, we think people should make that jump all the time. It just I think to be a good LP for that. GP, could take some slightly different value, add services or time and things like that. And that’s why you see entities like sand, Ghana, things like that geared up around that business model just to focus on getting people over that first time. Because, you know, there’s K ones, there’s all sorts of things that doing of the fund management, that’s just not obvious from the outside.

Nick Moran 34:08
What about the, you know, established, let’s say, partner at a really large institutional VC fund that splits off to do their own thing? back those before you have, okay. Yeah,

Speaker 1 34:22
again, it’s the same filter what we do and I’m happy to share what we track for so we when we underwrite a series, a focus fund. We’re trying we look at it to say, Do we believe this fund has a 3x net return potential and so a lot of that not went along with the why you Why are you doing it? Who are the competitors also comes into what’s your portfolio construction strategy, which is, you know, I’m not sure anyone ever hits it exactly the way they’re doing it. It’s much more roadmap than truth speaking, but it just gives you a sense of, you know, like, how are you thinking about deploying your capital? Are you going to be a highly concentrated fund or are you going to be you know, let us know was in flowers bloom, no reserve capital, the two extremes and and what does that mean for what kind of investing you’re doing and then we do seed we try to under it to a 5x. Net because of the earlier risk of seed. And I gotta tell you, between those couple of filters, it keeps the world pretty, pretty focused.

Nick Moran 35:15
Well, and so how many different fund managers do you have? And what’s the split between emerging versus established?

Speaker 1 35:23
did not do the math on that last question. I can get back to you and email it to you. i If I went out on the limb, I would bet our average is. Well, you know, it’s tricky, because what you really want to know is when we first invested in them, not what vintage? They’re on now, right?

Nick Moran 35:39
I gotta throw you some curveballs. Beaser directionally though, is like, 5050 7030.

Speaker 1 35:46
Yeah, there’s probably I would say, I want to say at least 5050. Okay, because because there’s not also what you see is if you’re a series, a fund, and it’s continuing to go, Well, you might end up being, you know, a billion dollar, some of them have grown a lot in the past. And so that that tends to be slightly larger than our appetite goes to, again, because of our underwriting focus, and can you be, can you raise $2 billion and be a 3x. Net fund? I hope so. But it’s a little easier to see that at 350 or 450. Right? Yeah, I don’t have a but I would, I would say probably at least 5050. And then the best way for me to answer your question on how many managers we have is to say we probably have 15 ish Corp managers. And we define that as folks that we have deployed significant capital into, which means we’ve done repeat rehabs with them, because it’s a little bit more of a lump sum longitudal, when you look at it over a long period of time, otherwise, it’s harder to be caught. I mean, we wouldn’t write a $50 million check into somebody the first day for 100 million over a course of a year. Got it. And

Nick Moran 36:54
can you give us a sense for? I don’t know, are there any novel ways that you’ve seen some of these emerging funds differentiate themselves? I mean, you mentioned the why you question which I think is really interesting. And it’s different for everybody. But is there any, I don’t know novel differentiation that that you could highlight? Or any areas that where you’d like to see more focus and more differentiation?

Speaker 1 37:19
Well, one of the things that came to mind when you asked me this, I’m not sure it’s 100% what you meant, but it’s where my mind went first was one of the things that I’ve noticed, in emerging managers recently, not all of them. But once were folks that are founding them have come out of an operating role that was deep in some sort of a software cloud enabled company, they tend to lead with software, they’re not seen as very articulate. Software just becomes a really important component to their fund. And they’re investing in a way that is just intrinsically different than if you take someone who is more of a traditional venture capitalist. And it’s not that they don’t use spreadsheets and things like that. But there’s just a really different feel to how the firm talks to each other they might use. I’m just gonna pick on various technologies. And I don’t mean it this way. But like, they might come out of the gate being a distributed team always on Slack using six different kinds of software to not just track the on entrepreneurs, but their investments. And you know, it’s not uncommon for us to hear folks saying, oh, you know, what, I just got up to date and I hacked, I hacked our CRM system, I started with x, I don’t why and now we’re using this as our system. So no venture capitalist ever, like 15 years ago.

Nick Moran 38:29
Right. Right. And again,

Speaker 1 38:32
it’s not every emerging manager, and I don’t know, I don’t have an answer. And we’ll have to wait for the returns to come in a decade from now, I don’t know if that is an inherent advantage or not. But it’s something that’s really clearly different about how some of these new managers are going to market. And you see some of the people like myself that would never have thought to do that. Because I’m not necessarily sitting here writing code ever tried to implement those. Those abilities. I’m not sure quite what the right word is into their firms. And I’m sure you can get there. But it’s, it’s interesting, because it feels the same way. When you walk into a company and someone, someone who is a product CEO versus a sales oriented CEO, there’s just a very different when there’s a product GP who says I did the software, and we all now use it, we live in it. And again, I don’t know enough to know which I’m not making a prediction of one’s better than the other. But yeah, it does. I’d note, we’ve been noticing that recently over the last, I don’t know, 18 months, just real difference. It’s amazing

Nick Moran 39:30
how many different shapes and sizes and styles and cultures there. There are, I mean, I know that a number of GPS that we’ll get, we’ll roll up their sleeves, and they’ll hack for their startup portfolio companies and help them build out, you know, an MVP, and, I mean, it’s, that’s definitely not what we do. But I mean, you know, kudos to them. And there’s just a lot of different approaches now that I don’t think, you know, we’ve seen in previous decades No, I

Speaker 1 39:59
think the closest thing was, I guess always some version of the operator turned investor, right? Oh, I was at a wireless networking company and I understand the business model challenges, or I can understand, you can kind of see around the corner, but more on the next iteration of the technology. And we have some folks just to make sure, you know, I don’t think it’s age related. And we just put it out there, I think we have some investors that we’ve backed who might not look like before we’re techy, if you just did a quick resume scan, but because it’s been in the stack for so long, they actually can see around the corner much better, potentially, than someone who is just rolled out of like, pick your latest hot company, right? Because it’s so it’s, so I don’t think it’s actually always age or tenure related. But it’s so those things we just think are really fascinating. And I think, as an LP, it’s always hard to know what exactly resonates with an entrepreneur, I think the is one of the hardest things is understanding, getting enough time with entrepreneurs, because you’re so removed. But I presume it speaks to different entrepreneurs, these different levels of good and how people go to market and what the background of the VC is. Because you you certainly hear that and I believe it’s true, there was

Nick Moran 41:07
enough. So either in the LP space as an emerging manager, trying to raise capital, it’s, it’s really hard to figure out how to connect with LPs, you know, how much time to spend with them? Who’s serious, who’s not serious. I was just talking to a big GP, the other day. And he was saying, Nick, you know, be really careful with tire kickers, because there’s tons of them out there, and they will suck your time. And I’m just curious, you know, how, what’s your take on how a fund manager can determine whether an LP has real interest or they’re just a tire kicker?

Speaker 1 41:47
Ya know, it’s a great question, because I agree, I think it’s always lovely to hear what somebody’s doing. But it’s not always a good use of your time to educate someone else. These so these are Roberta says trickier to do over email, but maybe in the shelter in place worldwide and be more forgiving. But if you’re in a meeting, we always offer it Safar to first explain our platform and how we work and what we do, because I don’t think least in my experience, a lot of GPS didn’t ask. And I don’t know if that’s because there is some level of oh, it’s inappropriate to ask, or just some sort of reticence that I could never quite figure out why. Hubris appeaser? Oh, okay. Well, silly me. In case we just put it out there and say, why don’t we start? And then, and that way, it allows us to share so people don’t have that it opens the door to these questions. But if they haven’t opened the door, and the GP hasn’t, so I guess my takeaway is GP should ask, it’s completely okay. And most LPS feel like GPS, don’t ask anything about the next step. Can I have money? Yep. So you can ask things that are bit about their money. But some of these questions overlap on each other, but things like are you? First of all, are you still actively making new investments in venture? Because the LP in question might be a bunch of assets? And who knows what they’re thinking for the next year, right? But you want it, you want to solve for someone who’s actively making new investments in venture and you can push a bit? Because people might say like, Oh, yes, we’re committing 100 million this year. And then you can say, Great of that money, how much do you anticipate going to your existing things versus new managers? And you will be shocked at the answers because I hear a lot of LPs talking about their deployment. And they’re talking about their existence. And I fear that GPS hear that and think, oh, that’s all new money for me. And the answer is probably not. Right? Yeah. You can ask them well, positions, right? And when was the last time and there’s some folks right debit business of doing this? And they’re like, all of it, whatever it is, those are great. But you can ask, When was the last time you made an investment in a new manager to you? Yeah, net new to you and what motivated that and if it’s, you know, sequoias, you know, $8 billion fund may or may not translate. So I would say me sometimes LPS aren’t going to share and they say I can’t share details. But you can say like, what does it look and feel like what needs to be true? And you can basically just kind of get it very politely. Are they really actively making new investments? Yes. Yes,

Nick Moran 44:16
I found LPs are super receptive to questions. And I refer to them as my pre qualifying question list. But I think that they just, you know, are enjoy the fact that they’re getting asked questions.

Speaker 1 44:28
I’m 100% in your camp, I’ve yet to meet an LP, who was like, I am shocked to GP asked me a question.

Nick Moran 44:36
And it’s like, you know, I didn’t mean to be facetious earlier with the hubris comment but I talked to probably two ish GPS a day and half of them 50% of the calls I have, you know, 75 to 80% of the call is just, you know, on and on and it’s it’s the the gap show for whoever I’m talking to, you know, it’s it’s not as much of a conversation Yeah,

Speaker 1 45:01
I know, I really underscore that. Because what’s awkward is sometimes folks want to come and pitch you. And I appreciate there’s a lot of concern about sending information in advance. But we always ask because we’ve, we’re pretty focused, relatively speaking as an LP. And what’s terrible is when someone comes in, and they’re like, I’m a growth later stage, you know, geography, we’re not even investing in like in Latin America Fund, and they’ve, you know, well, now you’re in the old days, right? When we actually had meetings in person, you’d be like, yikes, like, you’re here in my room, and there’s like, you’re outside of my scope. So what do we do? And if we please, please check in in advance, because you want to point out the tire kickers, you want to pre filter as much as you possibly can and not not waste your time as a GP, either. Unless what you want is really just to get advice, or ask them to open their Rolodex, but for sure, yeah, I’m with you. I think LPS love to talk about their work.

Nick Moran 45:54
Well, maybe maybe it’s my lack of eloquence that I just prefer to listen, that tends to go better.

Unknown Speaker 46:00
You run a podcast?

Nick Moran 46:05
I think, yeah, I’m like the anti host here. But so you know, I want to give you a hypothetical. And this is not how investing works. But I want to put you on the spot here. Let’s say you’re approached by an emergent, an emerging VC firm. Their last fund was at 35% 40% IRR. Let’s say it’s 1.3 TVP. Ai, it’s a 2018 venture vintage. The catch is, you can only ask that fund manager three questions for three data points, in order to make your decision. Now, I know that this is a relationship business, but we’re going to put that aside for the hypothetical. You know, what three questions do you ask?

Speaker 1 46:47
Well, I certainly have to start with my why you question otherwise, I would be a hypocrite.

Nick Moran 46:52
We’re gonna love it.

Speaker 1 46:56
Do we know what size and strategy or is that? Does? That also have to be the second question? I don’t know. I, I do think and I want to give Mike Maples credit for this comment. Others may have made it too. But the size of your font dictates a lot of your strategy. He said it cooler than that when I heard him say it. But understanding folks his size and strategy is pretty core to us understand it. And if I’m up to your point about GPS, not always asking questions in their environment, we always like asked me folks, who do they compete with?

Unknown Speaker 47:27
Ah, that’s good.

Speaker 1 47:30
Not because Because frankly, unless you’re the only VC and a whole geography, the odds, and you’re not having anyone competing with you, is probably close to zero. So it’s not a I got you Sequoia is going to compete you for a deal. It’s just understanding their their sense of the ecosystem. We never tried to stump the wizard, we just want to have a conversation. Because if you’re investing in a GP, you’re with them for a long ride. So to your point about people to try to get questions that that help bring you together and understand.

Nick Moran 47:59
It’s great. It’s great. Love it. And then you know, any advice for fund managers? Let’s say they’re early in the career and they’re planning a fundraise within the next 12 months. Any advice that you would share?

Speaker 1 48:11
Well, I, I want to be positive because I think starting a fund is a wonderful thing. I do you think it’s going to be being realistic that this is going to be a bit of a harder run? is important. I think you like brand new fund, like you don’t have a fund ambassador, you want to start fresh? Or is it say we know our fund is ending? And we because they’re slightly different? Where I was gonna go with his communication, which is your resisting LP, you should know where you’re at, and check in with them. And it might be a matter of saying, Hey, is it we get asked this question? It’s a great question. Do you have a preference if we close a fund in December or January, which is sort of a way of getting at is this year bad for you? But I’m asking that question. And that implies both liquidity thing and budget thing, a whole bunch of LPs have calendar, your rent cycles, some have June, know their academic. And so getting a sense of when they’re when they’re sort of mental math on redoing morphs kicks in is a great question. So if you have existing LPS checking in with them, and saying I in sharing with them, I will be out of capital in my current fund on XYZ date. And I would obviously want to have a fund in place before then. So talking through the math with them, so they understand it and giving yourself some buffer if it takes longer to fundraise, so it helps them understand. So I would say a lot of that communication is going to be huge and to some extent, and the season, which I know is hypocritical because I just live each side of it every day. On one hand, since we’re all semi locked in place. It’s a great time to reach out and say hey, I just want to get you up to date on my plans. Can I send you something to read? Can we get on a call? Because people are here which is great. People are also tired and dealing with school from home and endless zooms. So be patient if they’re slow to respond

Nick Moran 49:59
because you’re Ah,

Speaker 1 50:01
well, I know I’ve emails in my inbox that I meant to get to two weeks ago. And it’s just, you know, some days you’re like, how have I been busy all day long. And I haven’t been able to get to this. And it’s not a lack of caring, it’s a none of us anticipated doing what we’re doing. Yeah. And I thought I was going to be in a plane actually had a bunch of European annual meetings this month, I spent a whole bunch of playing time. So in some respects, I’m time to do wonderful things like this and other hand stuff. So long story short, I would say to you that and I’ve said this before, and I got a good response. So I think it’s worth repeating is that really think about your Minimal Viable font size. And if you can get to that to get going. And this is, for both established and newer managers, I think there is a ridiculous amount of ego around one and done that is not how funds used to raise, they absolutely used to have multiple closings. And it is totally fine. And if you can get the money that you need to get going to put yourself in business, and there will be great companies done. Here’s the positive spin, like tough times make for some great companies. Not all of them, of course, but there will be some new business models that come out of this, there will be some new ways the world and being in business to take advantage of it is awesome. But not getting too hung up on some of the right word is sort of like the like bragging rights and venture and LP land. And I just get over and keep going. Right? Like that’s

Nick Moran 51:27
just not the point. Totally. Well, I mean, I appreciate a lot you’re clarifying question at the beginning, you know, brand new fund versus existing fund, because I heard something similar about VCs deploying into startups this morning. A lot of the communication from the bay Bay Area VCs is that they’re, they’re investing in people they know, and known entities, and serial entrepreneurs now more than ever, and the first time founders are going to struggle more. It doesn’t mean they won’t get funded. But you know, it could take longer, and it could be harder, because they’re not a known entity. Yes.

Speaker 1 52:04
And, and here’s my current soapbox, I’m gonna get on is that I also think I worry a lot. And I hope the numbers prove me wrong. I worry a lot that this will again, be that much harder for minorities are underrepresented folks, both on the GP and the entrepreneur side. Because, you know, the whole like getting to know new people thing seems to be hard for folks, if you don’t have a diverse network going into this. It’s going to be tough, right?

Nick Moran 52:28
I hope you’re wrong.

Speaker 1 52:29
I really hope I’m wrong. But I’ve heard multiple times you will say the same thing, right? Like we’re going back, we’re looking at companies, we didn’t get allocation, or GPS, we didn’t get allocation, and whatever it is, like we’re going back to our portfolio trying to put more on our winners, we’re looking at who we missed, trying to get more into them. We’re working with people we know for all the logical, super rational, great reasons, but you’re like, Oh, God, this is gonna be a lot. This could really leave some people out in the cold.

Nick Moran 52:56
Well, maybe we can come up with some new initiatives and ideas for you know how to counteract that trend?

Speaker 1 53:03
Yeah, that’s a great idea. I love that. Let’s do that.

Nick Moran 53:06
These are what do you know, you need to get better at.

Speaker 1 53:10
I always try to my husband, I want to give him credit for this always says you can say anything, you just need to say it in a way that’s digestible. And someone can hear it. And I always try to think about that, because there’s a lot of times when you want to ask questions, and you know, they’re hard questions, right? Because every investment doesn’t go right. And every team there’s not all sunshine and glory. And it’s the how do I ask this question? Because it’s an LP have a fiduciary responsibility to ask these questions. And they’re hard and they’re uncomfortable, and how do I do that without breaking relationship? And that’s the daily journey, my friend. Yep.

Nick Moran 53:47
Yep. And finally, what’s the best way for listeners to follow you and Safar?

Speaker 1 53:54
Well, I am on Twitter, and open LP Of course, we have a website, you can sign up for our newsletter. If I didn’t say this, our head of marketing would be horribly disappointed me because we redid the website, I get so much more better. That’s probably easiest email. I am the only these are at Sapphire ventures. So you can find me apologies in advance if I’m slow to respond. I’m faster and other mediums. But I when I get online, I can kind of power through stuff.

Nick Moran 54:20
Awesome. Well, these are this is such a pleasure. I’m glad we were able to, to get it in and get your perspective. And I think it’d be really helpful for a lot of the emerging fund managers out there and those that are, you know, trying to support the next generation of great founders amidst a really trying time. Well,

Speaker 1 54:39
thank you. It’s a huge honor to be on and I appreciate all the good work that you do putting information out there and supporting both the CEOs and their teams as well as the GPS. Appreciate that Beezer.

Nick Moran 54:54
That will wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us