Jon Terbell and Ted Clark of FourBridge Partners joins Nick to discuss LP Insight on What Distinguishes the Good from Great VCs, Why VC Firms Fail, How to Mitigate Risk, and What to Look For When Metrics Mislead. In this episode we cover:
- Challenges and Best Practices in Venture Capital
- Performance Metrics and Leading Indicators
- Risk Management and Portfolio Construction
- Importance of LP-GP Relationships
- Current Market Conditions and Future Outlook
- Advice for Emerging VCs and Aspiring VCs
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0:18
Ted Clark and Jon Terbell join us today from Boston. They are the founders of FourBridge Partners, a firm dedicated to investing in top-tier U.S. venture capital and growth equity funds. Before launching FourBridge, Ted gained extensive experience at HarbourVest and Babson College, advising institutional clients and investment managers globally. And prior to FourBridge, Jon managed investments and operations for Babson College’s Endowment private equity portfolio. Gentlemen, welcome to the show!
0:49
Thanks for having us.
0:50
Thanks, Nick, nice to be here.
0:52
Absolutely like we know each other a bit, you know. But I’d love for the audience to get kind of quick two minute backgrounds on on each of you before we kick off.
1:01
Sure. Well, I was in the right place at the right time, and joined a firm called Hancock Venture Partners in the early 90s as an analyst focused on the emerging fund to funds business and that became harbor vest partners, and had a great career there, really learning the business, and we’ll talk more about that over time, but building that process, building that functionality, really laid the groundwork for what we did at Babson and now forbridge
1:28
and similar, for me, right guy, right time. I was actually an entrepreneur in my 20s in the retail world of all things, and went to Babson, not knowing that I’d become an investor, but then got hired, and again, was the right guy at the right time and help take over a portfolio and lead it after Ted started it, my career of absent. So that’s what led us to her to forbridge.
1:47
And what roundabout, what time did you launch the firm? Well, we
1:52
started it in the second half of 2019 really formulating it, but then truly launched our first fund and and formed the firm officially in February of 2020,
2:01
February of 2020, and you’re on fund two? Well,
2:05
no, we’re actually on fund four now. So, but I think the best way to think of it from a fund to funds perspective, is we’re investing our fifth and sixth vintages now, got
2:14
it and tell us a bit about the thesis and the investment approach at Ford bridge. Yeah.
2:18
Well, I mean, I’d say the most important element that we think about, which we brought from Babson is, you know, highly concentrated portfolios within venture you know, for us, doing 456, funds a year is sort of the perfect philosophy, and keeping the bar extremely high so that, you know, you are able to build a portfolio that has good diversification from a fund to funds perspective, But it’s concentrated, and can capture some of the benefits that you want when investing in this asset class. And
2:45
I’m curious, you know, you’ve had some formative experiences, of course, at harborvest, Ted, you mentioned, also at Babson, for both of you, what were the experiences that impacted the strategy most for forbridge?
2:59
Well, I think there are a couple things. And I think first of all, most firms in our business become pure asset management firms or supermarkets really trying to be everything to everybody. And it’s about growing dollars under management. And there are a lot of trade offs there in terms of performance. So I think we learned that in the in my harbor vest days and and that drove the concentrated strategy that John just talked about at Babson, which is three, four or five funds a year, so that what we believe is appropriate diversification, without giving up the upside of venture, which is why that makes sense in a portfolio and and aligning that strategy for your clients, so that you retain that upside. And it’s not just a fee game, it’s actually a performance focused game.
3:46
And does that also have implications on that the size of the funds that you’re partnering with to make sure that you’re maintaining that upside
3:54
Absolutely? And part of our strategy and experience is we’ve we’ve walked away from many of the firms that we believe got too large and have scaled venture, which we don’t believe is a way to optimize your upside. Those large firms are going to get into great companies, but they’re going to have 6080, 100 companies in those portfolios that we think dilute the upside. They may be a good index, maybe index, plus we believe that to have the true upside of venture, you’ve got to be a little bit more concentrated. And we think, what does that mean? It aligns capital with the team of people who are investing and the strategy. And so most of what we’re doing are venture funds that are sub 300 million in size. So I’ve been
4:38
studying this industry for about 10 years, pretty intensely, but I don’t have decades of sort of observable experience. I’m curious to get your take on why you think or why you’ve observed venture firms
4:54
fail. So it comes back to the point that I mentioned, which is alignment. And we there’s. So many great firms in this business that don’t exist today. You know, when I started in the early 90s, there were brand name firms that today really don’t exist. And I’d say, why is that? It’s the the alignment of the founders with the strategy and the capital and the people were not in place. Either they stuck around too long, they were too greedy, or they just didn’t set up a structure culturally or financially to really train and incentivize and give good space to future generations of star investors. So a lot of those firms, those people ended up the talent left, and that’s why a lot of those brand names don’t exist today in Boston and around the country Silicon Valley. Are
5:45
there best practices around that? Is there? Are there some playbooks? Or is it very custom for every firm? I
5:52
would say it’s, it’s pretty custom, but it starts with putting the firm ahead of your own ego. I mean, there’s a lot of ego in this business, and a lot of it, frankly, is justified, you know, in terms of performance and and oftentimes VCs feel like they’re king of the hill. I’d say the exceptional founders in this business, or leaders of firms, are not only good investors, but they put the firm, the longevity of the firm, ahead of their name. And what does that mean? It means delegating ownership, decision process and an opportunity financially within a firm?
6:28
I think there’s also a common theme there. Again, there’s a lot of different ways to do it, but I think one common theme you’d see in a lot of the folks that have been successful is transparency in terms of what leadership is looking for what it takes to keep going up the firm, and how they’re thinking about what the firm’s going to look like 10 or 20 years from now. I mean, one of the best stories we have was a transition plan that GP put in place 10 years before they even plan to think about leaving, and listed out all of the criteria for what the next managing partner of the firm should look like, with the expectation of this not happening for another 10 years. And that memo was sent to every single person in the firm. So everyone in the firm knew, Okay, there’s going to be a change at some point, and this is what they’re looking for. This is what the optimizer and the firm knew, like, I can be a candidate for that other people looked as like, wow, I’m not a fit for this, right? But everyone kind of knew where they stood. So I think that transparency is a thing you’ll see in different forms across all the ones that have been successful in sort of maintaining their talent.
7:21
I think one other thing that I’d add, and this is sort of from the boom and bust of the 90s and early 2000s is that, and we still see it at times today, is that sometimes firms do things because they can not because they should. And that has a lot to do with fundraising. And, you know, we saw a lot of tech firms, early stage venture firms become later stage buyout firms in the 90s, and they didn’t have the team or expertise to do that. We saw private equity firms trying to do venture and it’s tempting when clients are throwing money at you to do things that you may not have a skill set in. It’s tempting to build assets under management. That’s a recipe for mediocrity, let alone failure. I
8:04
mean, it reminds it’s like tail wagging the dog. It reminds me of the crypto hype phase, where I had at least 15 investors calling me up, saying, Nick, when are you doing a crypto fund like I’d really like to invest. And have to say, that’s not how this works. You know, I got to find the areas I have a unique edge and an advantage over others, not just you know that the splashiest, hypist, sexiest tech trend, 100%
8:31
100% I think one of the keys to the great firms is self awareness. Yeah, you know where you play. You know what the ecosystem is, how you fit and how you can add value and then hopefully generate amazing outcomes from that. But it’s the self awareness and the discipline, I think, is one of the key hallmarks, yeah, and
8:50
we’re in an ecosystem that is all about innovation and trying new things, and so you don’t want to squelch that. The question for a venture firm is, what new ideas they have are relevant to where they’ve had success. You know, it’s incrementally innovative to them, versus a quantum jump, which is a recipe for failure, and the magnitude of that matters.
9:16
You know, I’ve spoken with LPs to some degree on this show about persistence, I’m curious, is there a fun number that tends to perform best, and then also, is there a point at which there’s kind of a drop off in performance, whether it be age or generational changes or, you know, is there some stage where 2020, years into one’s career, you know, they no longer have, kind of their, their finger on the pulse of what’s going on?
9:49
Well, there’s no perfect answer. I mean, my short one is the median age of the GPS that we work with is probably about 41 so maybe that’s the perfect age for a GP in our mind. You know, I don’t like to be that. Prescriptive, but that’s one way to one way to measure it. Yeah, and
10:02
cause and effect is tough to catch here, but I think there are a ton of firms out there that exist today that had phenomenal fun ones, and you know, a that’s when they’re hungriest, maybe solo GP or two GPS, founding a firm, and where they’re probably the scrappiest they’re ever going to be. And what we often talk about is it’s not about outsmarting the competition. It’s about grit. And that’s not just a theme with entrepreneurs, because these fun ones are basically entrepreneurial journeys. It’s it’s that grit and that unknown of, is this going to be a firm or not, or is it just going to be a one and done? So the work there is often the best in terms of alignment and upside. I love that. I love
10:49
the grit comment. It reminds me of Jensen’s recent interview where he talks about how, like the most successful people are not the smartest. They’re the ones that have suffered the most. And there’s a
10:59
lot to that. Yeah, one of our
11:00
favorite firms sayings is, we might not be smarter than everybody, but we’re gonna work wonderful.
11:06
So while we’re talking about the good firms and the firms that are outperforming in your estimation, what distinguishes the good from the great?
11:16
So I think there are a couple of things the good from the great. There are a lot of good investors in this business, and the ones who are great. And again, there’s a couple of ways to look at Great. One is spiked performance and multiple of capital, of course. The other is sustainability, what firms are around today that were around 1020, even 30 years ago. So great is a sustainable franchise that has, say, three out of four funds in the upper quartile. Nobody’s perfect, but that kind of sustained performance, a lot of it is about things other than the investment decision itself. It’s about the process around it. Are you getting your best assets, people’s brains on a decision, and are people incentivized to do the best deals for the firm, not just for their resume and attribution and track record? And then I’d add to that, the process, especially in venture follow on investing. And you know, there are a lot of early stage firms that invest in 2030, companies. You know, in that initial check, the decision of which companies to lean into, and, frankly, concentrate your capital in, in 100 $200 million fund that often weeds out the good from the great. And then the last point I’ll make, and we’re running across this all the time these days, is, are they good sellers? There are so many firms who are licking their wounds right now for not having taken the opportunity to sell pieces of their best deals in the bubble in 2021 early 22 and frankly, we’re seeing some great DPI distributions from firms that sold pieces of their best companies during that time, and some companies who are good that didn’t do that, and they’re really wishing they had something
13:18
We talk a lot about here are leading indicators versus lagging indicators of success. So if we’re doing a look through to the portfolio companies, you know, arr is wonderful and ER is wonderful, but those are lagging indicators, right? There’s all these leading indicators and behaviors that the founders are doing in order to create healthy, sticky, you know, revenue on the back end. I’m curious if you monitor or if there are other leading indicators that you look for that suggest maybe a firm has some ingredients to be one of these great firms.
13:54
Well, I would say John sort of mentioned it, and it has to do with transparency. I mean, again, our we’re evaluating people at the end of the day, and when we close on a fund, investment that’s a blind pool, it’s got no deals in it day one. And so so much of our time is spent on evaluating the partnership. So even two or three years in, and we’re always evaluating the team, their process, how the ownership of that firm evolves over time. And you know again, is it aligned? You know, because there are firms we meet with all the time where, when the conversation shifts from how do you make investment decisions to how do you make hiring and firing decisions in your partnership, that can change the mood in a moment based on not just who has a deal authority or power, who has firm power. And that’s often separate. It’s usually separate and very different. And can can release a vulnerability of a firm that will manifest itself in investment decision. Decisions.
15:00
The number one leading indicator that we look at evaluating firms, which means we’re evaluating people, is fundamentally what are their most customers? Say About most important customers say about them. It’s the founders. So we find that what the founders tell us about managers, it’s typically the best leading indicator we can follow to figure out we’re going where the pockets go. Love it. Does
15:21
it matter to you if, if an IC makes decisions based on, you know, Democratic base, consensus based, or just one person can bang the table and RAM an investment through if they want, there’s a
15:34
million ways to be right and there’s a million ways to be wrong. That is one of the most beautiful things about this business. I mean, I think you probably find, you know, look, venture is a huge asset class now, right? This is not a cottage industry where there are subclasses within venture, right? And so there are definitely certain modes or models that we look at, and that doesn’t really work, right? So, like, you know, we’re not in any firms anymore, and there’s certain firms that used to have this strategy, and some still do not our portfolio where, you know, it’s a big firm, there’s dozens of GPS there’s a healthcare strategy, there’s a tech strategy, there’s this strategy, there’s that strategy, and there’s one investment meeting, committee meeting every week where every deal gets discussed. Everyone chimes in like, I don’t think that really works when you’re dealing with something that broad and, you know, sort of hairy, if you will, right? We, haven’t found one that really makes sense recently. But at the same time, you know, a consensus or team decision, when you’re three people you know going around the room, and each one of you is going to be touching and feeling and helping with this investment, and it’s a time investment for every single GP around the room. Well, maybe it does make sense for everyone to really come to a general consensus, or, you know, let one person lead, but make sure the other people are signing off on it again. There’s a million ways to do it in between, but typically, there might be a theme that might not make sense if we saw something for a certain type of
16:53
firm. I think one of the things that we try to poke at in our process is is dissension welcomed in an investment process. And this is a place where often founders are like, No way You know, they don’t like that disagreement. The best founders of venture firms welcome it because either younger folks or other partners on the team have a view that makes the firm better. The best firms welcome that challenge. It makes their decision process better. Some are threatened by it, and we spend a lot of time poking at that. Well, it’s
17:28
like, I feel like the great investors that I’ve interviewed have a healthy dose of humility, right? Because you almost need an open mind when you’re meeting with founders all the time to be able to walk the idea maze with them, right? If they see something that, you know the conventional wisdom would not accept. You know, those are often some of the better ideas. And if you’re, if you’re pretty close minded, whether it be within your team or with founders, you know, you’re gonna have a pretty narrow view of what, what can win 100%
17:59
I mean, our philosophy here, and the thesis really like boil it down, is, you know, we earn the right to partner with the very best managers who earn the right to partner with the very best founders. And the founders are the ones that take us to where we’re going. You know, we if we knew the right project in the right space at the right time, maybe we just build it. And I think you could say the same about any VC or anyone in the space. It’s the entrepreneurs that really take us to where we’re going. And so we got to be very respectful of that. And it goes back to that self awareness comment
18:28
as well. How do you, you guys think about metrics in the early years, right? You’re backing a lot of funds that may be fun, 123, some of these metrics may not be, you know, fully baked. You’ve got tvpis and IRRs, you know, maybe at year three and, like, there’s a lot of people running around saying, Hey, I’m top decile, or, Oh, I’m in the median, right? But, but it’s just not gonna end up that way, you know, when everything is fully exited. So, you know, what do you look for early, and how much do you use the metrics as kind of a North Star? Sure.
19:00
Well, I think first of all, the metrics are useful over time, but it depends on aligning those metrics with the strategy. So in year three, for example, a seed fund is still making new investments, and you’re not expecting performance. You’re expecting the J curve that’s normal, even with a portfolio that’s going to skyrocket someday. That’s year three in a in a growth or later stage portfolio, you might expect something different, and we’ve, we’ve certainly seen a lot of volatility over the last few years with valuations and even huge disparity in valuation policy. And so that’s to your earlier comment. You don’t want the tail wagging the dog. And so we double click under that and really try to focus on how is the manager executing relative to their strategy. You know, are they doing deals that fit with their strategy that they said they would? Is the pacing in line with what they said they were going to do? And are the under. Line companies developing, whether it’s idea to product or product to real revenue or revenue to scaling revenue. Does that fit with that moment in time? Because those first several years, it’s deploying capital, and then the next 456, years, it’s about growing those businesses and following on in those businesses, and then everything’s for sale, you know? And so that’s when it really matters, yeah. And the beauty of this business is that you don’t have to sell in a crappy market. You’re building assets. So when the markets are good or great, you’ve got good inventory. Especially in venture, there’s always a market for high quality growth companies. But especially in venture, you want to have a good portfolio of companies that are ready for sale when the markets are receptive. And if we’re looking at
20:50
it like, you know, for example, with an existing manager or someone, you know, we’ve done a fund, a first fund, with somebody, and we’re thinking about the next fund. You know, we do not look at the IRR and the DPI, the tdpi, in year three, late stage, maybe some specific strategies we would but we just don’t, you know, there’s a track record from beforehand that we’re evaluating pretty carefully, right? And that’s what we did, the original underwriting on, and we’re continuing to monitor that, you know, underwriting those numbers. So the numbers that come sort of before the fund that we’re actually in are probably more important if you want to think about specific metrics. When it comes to evaluating the fund itself, it’s two things. It’s one, starting to see breadth in the portfolio, multiple companies starting to do what Ted said. We’re not going to sit here and declare, Oh, this one’s going to work. This one’s not as LPs. We want to see a nice basket of assets being built. And then also talking to the founders. That’s really, if you want to know what our fund to diligence really is, it’s, it’s going to talk to the founders that are now in the fund, because we talked to everyone else from before, right? So now it’s okay. We had the blind pool. We put money to work. The founders are in the portfolio. Who are these people? Why are they there? Why are we there? And that’s the key underwriting for the second decision.
21:59
You know, I get the question all the time, how hands are, how hands on are you with the portfolio founders, right? And what do you do to help them? I’m curious how hands on you guys are with the funds that you’ve backed in. Are there ways like you brought up the example of knowing when to exit right, timing around exits and stuff, or are there times where, you know, you’re, you’re connecting and providing advice and guidance on on macro factors that maybe your fund managers might be, you know, abstracted away from to some degree.
22:32
Well, I
22:33
think, you know, similar to, like, I think our entrepreneurs sometimes think of VCs as being able to see the forest through the trees, right? With a bigger view. You know, it’s the same up the food chain. One more GPs to LPs, right? So, you know, GPs are very curious about what’s going on, what we’re seeing in the market, what are the best practices in terms of we have this issue, like, how should we handle this? You know, we’ve seen this movie before, and you know our position as you know, meaningful LPS with you know, a lot of experience. But also, you know, we’re not a massive asset manager that’s taking over entire funds. We get sort of slot in as a real concealer area to managers. And so we really relish that. And so some we have standing calls with, because we want that cadence. Others we’re just texting with, you know. So it’s definitely as needed, but we’re there to help them again, see the forest through the trees as much as possible.
23:25
So VC is risky, aside from diversification, you know? How can one mitigate risk?
23:31
So first I would double click on diversification, because people think about that in different ways, and a lot of people think of it as the number of managers in their portfolio. And so I think diversification can also not just mitigate the risk, but it can eliminate the upside if you’re in way too many managers in a given vintage. So there’s also over diversification, which is an element that people often don’t talk about, and the other pieces of diversification, industry, stage, geography. Those are important elements, again, to a degree, because you can over diversify your returns away. Quite frankly, I think the element of diversification that we’re the most significant fans of is time. You never want to do something quickly in venture. You want to take your time and build a portfolio gradually. Because time diversification, these markets change quickly. So that’s the first part of the answer. That wasn’t technically part of your question. The other part of it, you’re right. Venture is risky, and we hear that from people all the time. I think in our in our view, our process is understanding the people who are investing in these companies. And so it’s the subjective part of what we’re doing which is past performance. And so while we may invest in emerging manager, which is a new firm, those individual partners have been investing other people’s capital, probably at another firm, for eight or 10. Years. So our view of reducing risk is all about experience and a track record of investing, growing and selling companies that are similar to their new strategy, or their strategy, their go forward strategy, and we’re not going to get it right every time. But I think if you look at that track record of success, this is an industry where that’s more likely than not to continue. We believe, we believe that, you know, really minimizes the downside in terms of performance when
25:34
the alignments there. Because certainly there are many, many, many, many firms that have great performance, and, you know, maybe we wouldn’t want to invest, and you know that can come down to whatever form of alignment you want to describe, but it’s about making sure you’ve got people that are very experienced and you are aligned with and he won’t be perfect, as Ted said, but that’s a good way to mitigate risk.
25:56
Is there an ideal portfolio size for the managers you’re investing in, right? Like, there’s, there’s so many different strategies. I just earlier this week, I spoke with one manager that’s doing 10 companies in a pre seed fund. And then I spoke with a good friend, and she’s doing 100 you know, she does a deal a week. And, I mean, they’re very different. You know, size ends of the spectrum here, but I’m curious. Obviously, there’s custom strategies, and there’s a lot of different shapes and sizes here, but you know what? What is right for, like a seed stage fund? Yeah,
26:32
it is so dependent. I mean, the joke is that the perfect portfolio construction is you put 100% of the capital into one company that
26:40
10 x’s. That’s right, that we’re good after more portfolio sizes,
26:44
portfolio just do that and we’ll invest. Look, I think it’s an alignment. Again, we keep using the word alignment, but it’s lining up, you know, the the capital, the strategy and the people and so, you know, I think there’s lots of ways to generate amazing returns with either 10 or 15 companies, and there’s some extra risk that comes with being over. With being over concentrated. And then there’s also ways to do it with 100 companies, right? Because you do lots of little ones, but if you hit Uber or whatever like, then it can work, right? I mean, you can pencil out the math to make it do anything you want, really, in terms of modeling a funky what we look for is lining up again, that strategy, that capital, and then the horsepower in the firm, right? So for us, like we become less interested if we’re talking to a firm that’s trying to manage 100 or 200 positions with one or two people, because at the end of the day, we think that one of the keys is to get money in your winners and concentrate on the very best ones. And when you’re dealing with that kind of breath, it’s really difficult with that family. And so there’s a way that can work, and maybe there’s a way that fits in certain types of portfolios, but from what we do in our style, that’s not strategy that we’re likely to go after, right? So if someone grows, someone started with a 50 or $75 million fund, one with just a couple of GPS and now all of a sudden they’re investing a $300 million early stage fund. You know, the team’s got to look a lot different, right? And we’ve got to really believe there’s a culture and a bench and again, horsepower there to go invest that money, right? So it’s very case, dependent and dependent on, you know, what you’re looking for in your own portfolio, in terms of what you would want to Why should
28:15
managers care who their investors are? Right? We’re in a time of scarcity. Everyone’s complaining about fundraising right now, it’s it. You know, I’ve seen a lot of managers take take money that they regret. I’d love to hear from you both. You know why? Why a VC should emphasize selecting the right LPs and finding the right partners is
28:37
a long, long marriage, long.
28:40
Yeah, my flip answer also is that I think a lot you to your point about regret. I think a lot of folks don’t care. And I think that’s sort of the sad reality of fundraising, where a lot of GPS look at LPS as the necessary evil of their business, of they just want the capital so they can go do deals and have fun with that part of the business, and I think that’s it’s short sighted, because they may come to regret that at some point when they’re needed for a follow on fund or a decision or an amendment, et cetera. But I think the best in our business actually do care. And your question is, why? Well, I think first of all, the best in our business, venture growth managers can choose, there they have the performance track record to pick the LPS. If they choose to add new LPs to their stable of clients, they have a long list of people waiting. And so they can pick and how do they do that? Well, they want someone. They want an investor who a has knowledge of their business, so that they don’t have to continue educating them. What is a seed deal? You know, what is venture capital? Or in year two, you know, where’s my liquidity? They want an investor who understands their business and so. That in good times, that’s great, of course, but when the times are tough, then the investor has the patience to lean into the relationship and not run for the hills. I think that knowledge at the margin can also add value, again, not in every case, but there’s a lot of LP experience around the the industry, and we have a bunch of that ourselves as to best practices. What do firms do that works really well, and what do firms do that lead them to become mediocre? And having that discussion, that candid discussion, off the record is can be helpful, and that that two way street of helping each other, I think is a real positive to that relationship. I think the last thing that I would say, and this has been true for us in spades, is that when our GPS perform and we’re making five to 10 or $15 million commitments that are generally small in our business, it moves the needle for us. It matters to us. If they let in one of the mega funds at ten million it’s not going to move the needle for them. So they’re important to us really because of our concentrated strategy, and that’s something that makes the relationship that much more mutually meaningful. It’s a win win. Why should
31:19
medium sized endowments, foundations and family offices care about venture capital? Well, I
31:25
think that look as fiduciaries, they’re trying to optimize performance relative to risk. And I think that as having been a member of the Investment Committee at vamsan for a decade, you know, we were always trying to optimize performance while managing risk. And I think Babson was an entrepreneurial school. Always is and will be. You want exposure to the innovation economy, the fastest growing sectors in our economy, and that has informed forward to where we believe, and there has Babson DNA in this. Of course, entrepreneurship is the best asset class. It’s not the only asset class, but it is the asset class that will drive, we believe, drive performance in the future. And it’s that level of growth and innovation that is an important element. For many investors, it’s 234, 5% for some it’s 10 or 15 or 20% of your portfolio. That’s why endowments, foundations, family offices, should have an element of their portfolio in this asset class Ted.
32:35
What do you think is the hesitation? Right? There’s a huge portion of the investment community that has not yet allocated to the asset class. I’m curious, you know, what are? What’s the most common objection that you hear from those who really should care, but ultimately don’t commit? I
32:55
think they’re scared of liquidity, right? Absolutely, 100%
32:57
and we’ve seen this the last, gosh, three, four year. Three years is illiquidity, which everyone has always talked about for decades. Can be, can try your patience. And you know that’s why it’s important. Venture should not be your entire alternatives portfolio you want to be, have that diversification with later stage growth and maybe even some private equity businesses in your portfolio. So venture shouldn’t be 100% because there can be years where There literally is no liquidity. You may have a bunch of high quality companies where the market is not receptive, either m&a or IPO activity, or you may have just finished going through a bubble. The market may be receptive, and your companies need to rebuild to get to that point where they’re ready for sale. There can be periods of time that can be measured in years where there isn’t cash flow coming out of this asset class. And I think that’s what we hear. And so we challenge people we talk to and say, this part of your portfolio requires patience and selectivity, so that you have the quality when the markets are good, it really performs and makes it worth it. So you get that illiquidity premium, which you get in the upper quartile of this business. You don’t get it in the media of this business.
34:18
It’s very hard to access the upper quartile, and if you’re not in it, it’s probably not worth doing, right? You know, VC
34:23
funding was up 16% quarter over quarter and q2 of 24 primarily driven by 100 million dollar mega rounds and a $24 billion infusion of capital into AI first companies. What’s your take on the portion of the VC market that is not a mega round growth company or an AI inf company.
34:43
Well, I mean, I think, look, one comment is that VCs are well, incentivized to create hike and generate headlines, and that’s what you’re seeing with AI, right? And there’s a ton of promise. And, you know, I think we’re firmly in the camp of, you know, it’s being overhyped in the short term and under. Hyped in the long term, right? You know, in terms of the market today, and those companies that aren’t in sort of that moment of time in the hot sort of sector. You know, look, whether you are in that hot sector or you’re not, the recipe for success in this industry has not changed. You need to find founders that can do the most while using the least. And at the end of the day, we’re seeing a lot of companies that are sort of not in that hot zone, building slowly, quietly and very steadily, very high quality businesses. And while it’s a little quiet around some of those sectors, the managers that are on the inside are using the ability to invest more and keep giving capital to those companies and keep building their relationships and growing them. And growing them. And you know, there’s a lot of optionality now on the table for a lot of those young companies, where, you know, if you grow in a nice business and you have, you know, if you came full solid investors around the table, you know, you can choose your path going forward. You know, you don’t have to get on the old fashioned venture capital treadmill. Go A, B, C, D, E, F, and round and round and round. I think the world of capital light businesses is very much here, and it’s an option that we’re seeing a lot of companies
36:07
take. I’d add to that, it’s also much easier to buy low when you’re not in the headlines. Exactly, very
36:13
good, very true. So there is reason for optimism, right? Looks like we’re on the cusp of an interest rate cut. North America is up 30% quarter over quarter and 35% year over year. Yet 44% of VC capital raised this year went to just two firms. Based on your observations and discussion with portfolio managers, is there optimism that the VC markets are on the upswing and we’re going to rebound from this trough we’ve been in for a couple of years.
36:43
Yeah, I think there’s always been optimism that there will be a new market and markets will change over time. You know, obviously harder to see the optimism in the toughest moments in 22 and 23 but I think, you know, there’s a certain steady hand that we try to have with our managers is, you know, just keep building value every day and helping these portfolios grow. You know, I think that I don’t know if we’re truly on an upswing. It’s sort of hard to say that, but I think a new normal has arrived. You know, where? You know, if you look at the data over me, going back to the beginning of 22 you know, we’re sort of 10 quarters in now, right? Eight to 10 quarters has sort of been historically, sort of the down period you see where sort of funding kind of goes like bottoms out and it starts to come back up. So certainly, that trend in the data is happening today. I’d say the vibe, though, in terms of what we’re feeling from our managers, is nothing has changed. In terms of capital is scarce. You know, it is not easy to raise money, and you need to be able to have optionality, to build businesses on your own and not rely on anybody. And so I think that it’s more of the same. But again, we’ve normalized a bit here. People sort of understand what everyone’s looking for, and can, you know, I think, move forward on more solid ground, versus sort of the shifting tides that we’ve felt over the last couple years, as the market has sort of flushed
37:58
out. I’ll add one point to that as our optimism comes from the mix of the quality of the founders that we see out there. I mean, I think there’s always a steady flow of high quality founders, but today you’re seeing fewer tourists, you know, entrepreneurs that think it’s easy. I mean, in 1920 21 and early 22 it was easy to raise capital. And so I have concerns about those vintages in terms of the range of outcomes and the grit mix of those founders today, by and large, the quality and the grit of the founders, it’s hard, so they’ve got to be committed to taking these ideas through to fruition completion.
38:40
You will take a lot of pitches from a lot of managers. Is there a common omission or something missing that you find is, you know, consistent and infrequent in the ones that do not end up as a partner of four bridge?
38:55
It is shocking to me how many managers come to talk to us, and they are so focused on their pitch, they don’t ask us one question about what we’re looking for, what we’re interested in, what we like, what we don’t like. They want to get through their pitch. And these are incredibly smart people who’ve been successful. It’s the listening and being curious. To me, Curiosity is one of the best sales tools on the planet, and it’s remarkable to me how few people engage with it.
39:30
It is shocking to me. I go to a lot of pitch events and coach like some younger folks and stuff, and I went to this event, there were 10 pitches, back to back, funds, fund managers. And nine of the managers flipped through a deck, and I said, how often and like read from the deck? And I said, How often do you like it when a startup founder does that, you know, it’s like, you don’t like you want to hear a narrative, you want to hear a story, you want to get questions, you want to have a dialog, right? It’s like, your point. And catch with somebody. It’s not just a monolog, and that’s why
40:04
GPS should care where their capital comes from, because when you can develop those types of partnerships and relationships, it’s additive over time, right? You know, if you’ve got LPS that you know either don’t get it or are asking you things that are unnatural to your strategy or whatever, you know that’s a drag, right? But if you can find folks that you can really be constructive with, you know you fit. There’s a long term path here. You can trust them. You can be vulnerable with each other, like that’s gonna help the results of the portfolio 100%
40:35
before we wrap up here, any advice that you have for the existing, emerging VCs and or aspiring VCs out there. Do good deals.
40:43
It’s really easy,
40:44
and stick to where you have a real advantage. Take care of your entrepreneurs. Be authentic. There’s a ton of stuff here, right? We could spend hours on this topic alone, but it’s, I’d also say, listen to your entrepreneurs. Ask, ask for I mean, one thing that we didn’t really touch on is continuous improvement topic. We talk to our VCs about all the time, and we try to practice what we reach, if you will. And we’re always trying to make each other better. And because if you’re not learning, you’re losing. And so we challenge our VCs to always make each other better as partners, as colleagues and and as investors. And if you’re not listening to your entrepreneurs, then you’re not listening to your primary customer about how you can deliver what you’re delivering more than capital. It’s way more than capital. That’s why we love early stage venture, because it’s way more than capital. If you’re not listening, you’re losing
41:43
and to like, really boil it down tactically, you know, if you’re not listening to your founders, just know that the LPS that are doing the most work and paying the most attention are,
41:53
yeah, for sure.
41:55
I love the the continuous improvement that was the mantra of my former employer, Danaher. And quick shout out to Larry Kulp. We were just chatting last week. He’s running GE and doing a good job at it. I learned a lot. Sir. All right, guys, if we could feature anyone here on the show, who do you think we should interview and what topic would you like to hear them speak about?
42:15
You know, I’ve there’s a lot. You know, one thing that we we do at forbridge is we love to do a holiday book for some of our partners and clients and our families. We usually come together and pick a book and send it out with a note to handful people. And the one we did last year, we were thinking, and I’m thinking that would be an amazing interview. Would be Alex Ferguson, the former manager of Manchester United, wrote the book with leading with Michael Moritz. And, you know, he’s just got a really interesting philosophy from a totally different world that can be transported into what we do in how to, you know, recruit, train and then retain talent. Really like what he looks for and how he builds organizations like, it’d be really fascinating to hear those thoughts apply directly to the questions of how VC firms are built. Maybe it would be
43:05
interesting. Love it. Guys, what book, article or video would you recommend the listeners?
43:09
Well, besides leading, which I just mentioned, maybe I’ll mention another one, another book that we love, that isn’t directly read the business, but we think speaks a lot to sort of the character and the fortitude you need to be able to build firms and build portfolios in this business was called the River of Doubt, or the river doubt to Teddy Roosevelt book about an excursion he took down the Amazon after his presidency. So if you haven’t read the river doubt about Teddy Roosevelt, highly
43:36
recommend. And then guys, do you have any habits, tactics or behaviors that are a force multiplier.
43:42
It’s the continuous improvement thing. I mean, that’s we talk about it every day since the first day I started working with Ted. You know, every single thing we did, the question at the end was, how can we make it better? And, you know, even if it was a situation where we’d be going around the room, having different people present, you know, one of the the key elements of that was everyone giving each other feedback on how to make it better, right? This is what was great. But like, let’s make it better. So we try and weave that into every conversation we have. So that’s probably the force multiplier for us.
44:09
Perfect. And then finally, here, what is the best way for listeners to connect with you and follow along with forbridge
44:15
directly. I mean, we’re posting a bit on LinkedIn these days, so our LinkedIn page is a good place to go to see what’s going on with us, and you can reach out there our website. Also you can reach out to us directly through there. And yeah, we’ll be happy to hear from
44:27
you. All right, they are Ted Clark and John turbel. The firm is four bridge partners, gentlemen. Thank you so much for the time and the insight today. This was a lot of fun.
44:36
It was fun. Thank you, Nick. Appreciate it.
44:43
Brenna kyper, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guest 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. 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.
