249. Common Traits Shared by Top GPs, Why Underrepresented Fund Managers Will Produce Superior Returns, and SPACs vs. Direct Listings vs. IPOs (Lo Toney)

Full Ratchet Lo Toney Plexo Capital

Lo Toney of Plexo Capital joins Nick to discuss Common Traits Shared by Top GPs, Why Underrepresented Fund Managers Will Produce Superior Returns, and SPACs vs. Direct Listings vs. IPOs. In this episode, we cover:

  • Walk us through your background and path to VC?
  • Why are Product Management skills similar to the skills required for VC?
  • What’s the thesis at Plexo Capital?
  • Do you think a thesis on investing in underrepresented founders will produce superior returns?
  • What do you say to pundits that claim you’ve restricted your options and will have far fewer managers to choose from… which will adversely impact returns?
  • On a percentage basis… will there be more outsided outcomes from diverse founders (or managers) vs. those that are not diverse?
  • How are you innovating on the LP side?
  • We talked about some of the challenges of raising funds… are there ways that you work with and help emerging managers raising a first-time fund?
  • Not just about performance… especially early on.  What are the common success traits you see in GPs?
  • What’s your position on investing in the management company or even the GP itself?
  • Where do you see the market for secondaries evolving?
  • I’d like to talk about the exit market a bit…
  • What are your thoughts on companies listing direct?
  • How about the explosion of SPACs — net positive or negative for venture?
  • Any unintended consequences that founders (or investors) need to watch out for?
  • Zoom is now worth more than Uber, Airbnb, and Stripe combined… Are the three companies undervalued or is Zoom overvalued… or is the pricing about right?
  • Amazing to see companies like Paypal and Square have surpassed Goldman in market cap
  • “3 Data Points”…
  • You’re approached by a first-time fund manager.  The fund manager did not work for a large, brand-name venture firm before and she has never had an institutional investor.  She has been actively investing for 3+ years.  She plans to raise $20M to invest in 30 seed-stage companies w/ no reserves.  The catch is you can only ask 3 questions (for 3 additional data points) to make your decision.
  • What 3 questions do you ask? 

Guest Links:

Key Takeaways:

  1. Plexo Capital invests in emerging seed-stage VCs led by diverse teams and also invests directly into companies sourced from the portfolio of VCs where Plexo has an investment.
  2. The path Lo thought made the most sense to VC was to learn the functional skill of product management, have the ability to run a large P+L at a tech company, and become a CEO of a tech company. He believed that one would learn empathy with the founders on the other side of the table.
  3. All of those things that a product manager thinks about are the same things that a VC thinks about, particularly a VC at the early stage before there’s an abundance of data to be able to do more data analysis comparables to other companies.
  4. The product management functional skill set has allowed Lo to understand how to be successful as a VC and to be able to provide a different perspective to the entrepreneur.
  5. At Plexo Capital, they focus on underrepresented GPs, and they are disciples of the power law distribution of returns. And one of the things they’ve done is that they have married these insights and network access from this GPS that they focus on with the power law distribution of returns. 
  6. The fact remains that when you have a diverse set of investors around the table, the data tells us their portfolios are going to be diverse.
  7. Plexo Capital was designed to be the best value add LP to their GPs. The same way Andreessen Horowitz was known early for innovating around being an extremely founder-friendly firm Plexo Capital is extremely GP friendly. 
  8. Lo looks for GPs that are behaving like entrepreneurs. He likes operators who turn to GPs because that’s just how they behave. They know how to operate in terms of building a company. And when they are at the early stages in building a venture capital firm, it is very similar to building out a company. 
  9. “I think there’s two things I’ve learned are like talking about religion and politics, portfolio construction, and management investments.”
  10. Lo is bullish on secondaries. Both secondaries on the direct side, and secondaries for interest in GPs.
  11. Lo thinks that one of the trends he is starting to see is more GPs that have a strategy that focuses exclusively on secondaries.
  12. He thinks that we’re going to see secondaries be an essential component of liquidity increasingly. And he believes that GPs need to and will become much more sophisticated than they are today in the world of secondaries.
  13. On a CNBC segment, Lo mentioned that he believes that companies are hacking the IPO process because they are listing direct. There hasn’t been a lot of innovation on the ability to take a company public. And he is now finally starting to see innovation to realize liquidity for investors. 
  14. A SPAC is another way to hack the IPO process. Lo thinks we’re going to continue to see this level of innovation, and who knows whether these will ultimately be the vehicles, processes, and methods that persist long term with success.
  15. Lo’s response to Nick’s Three data points question: What’s her track record? What’s her portfolio construction model? What’s her thesis?