The Exchanges

Q So let's start with evaluation then, and, and I'm often told by managers, uh, Harry, LPs look for one thing. Cash on cash. So to what extent do you think this, uh, summarization is true? Uh, other than realized returns, how do you look to evaluate a manager?

A Well, at the end of the day, it is all about cash on cash. You know, fortunately or unfortunately in venture, at the, the end of the day can be very far away. So one needs interim measures to evaluate fund opportunities. And if you're, you know, strictly looking at the numbers, uh, We use the same things that everybody else uses, net IRRs, TVPIs, DPIs, benchmark comparisons, etc. But of course, those interim measures won't provide the whole picture either. So, you know, we have to evaluate many other things and construct a mosaic of the opportunity. What is the quality of the portfolio at this stage? You know, one good signal is, do other GPs covet this portfolio? Um, is the portfolio on strategy? Which partners produce these returns? Do we think they can repeat? But Harry, when we're evaluating these opportunities, the view of the entrepreneurs or founders is the most important part of our process, since it's the entrepreneurs and the founders who Who are the people who produce the VC industry, industry returns.

AI assessment note: “at the end of the day, it is all about cash on cash”

Q So let's start with evaluation then, and, and I'm often told by managers, uh, Harry, LPs look for one thing. Cash on cash. So to what extent do you think this, uh, summarization is true? Uh, other than realized returns, how do you look to evaluate a manager?

A Well, at the end of the day, it is all about cash on cash. You know, fortunately or unfortunately in venture, at the, the end of the day can be very far away. So one needs interim measures to evaluate fund opportunities. And if you're, you know, strictly looking at the numbers, uh, We use the same things that everybody else uses, net IRRs, TVPIs, DPIs, benchmark comparisons, etc. But of course, those interim measures won't provide the whole picture either. So, you know, we have to evaluate many other things and construct a mosaic of the opportunity. What is the quality of the portfolio at this stage? You know, one good signal is, do other GPs covet this portfolio? Um, is the portfolio on strategy? Which partners produce these returns? Do we think they can repeat? But Harry, when we're evaluating these opportunities, the view of the entrepreneurs or founders is the most important part of our process, since it's the entrepreneurs and the founders who Who are the people who produce the VC industry, industry returns.

AI assessment note: “Well, at the end of the day, it is all about cash on cash.”

Q And say you get a set of brilliant opinions and referrals from founders and entrepreneurs, and you're looking to actually make the investment. What excites you about the funds that you work with today?

A You know, I'll tell you, there's, there's, A lot that excite us. What we're really trying to, to find here is the teams that are well regarded by founders, and we like VC teams who are just scrappy as hell. The VC teams that we love are, are very proactive. They're winning high quality deals. They're putting founders first, and they work every bit as hard as the founding team to help the company succeed. You know, another, you know, new characteristic or new work Characteristic that we're solving for is, you know, these VCs are using data in a very smart and a very systematic way, and they're using data both to find and evaluate new deals, but also to accelerate a company's growth, and, you know, that didn't really happen in the past. You know, certain VCs would, you know, have a somewhat systematic approach to their relationships with entrepreneurs, and they would help in, you know, in material ways, but in more informal ways. You know, sort of one-to-one, uh, GP to founder ways. The use of data now, I think, in the VC process is a really powerful change, and the, the people we like are using data in, in a very systematic and important way, and both to, you know, find deals and win deals, but also to help the companies succeed. So, and then, you know, of course, the, the teams that we like are doing the, the usual blocking and tackling, helping the company make connections, to…

AI assessment note: “we like VC teams who are just scrappy as hell”

Q What are the most common reasons you find yourself repeating for, for why you're not investing?

A Most of the time, it's undifferentiation. We, we see managers who, you know, have spent some time in the field, and they have a credible record, but it's not an exemplary record after, you know, having done it for a while. Uh, for new managers, you know, maybe the track record is short, and we will underwrite that, but, you know, we find ourselves with, You know, at least notional coverage of the same opportunity set. These managers may be good and may be interesting, but it's not demonstrably different or better than the managers with whom we're already investing. And sometimes, you know, and sometimes the returns are just awful, or, or the opportunity is poorly articulated, or, you know, it's just not well thought out. We don't want to be rude about it. This is, you know, people's life work, and, and frankly, you Above a lot of other asset classes. So nobody's terrible. You know, there's certainly people who are, seem to be better at it than others. Yeah.

AI assessment note: “Most of the time, it's undifferentiation.”

Q But I do want to slightly switch sides of the table and discuss the managers and the startups themselves. So, so first, the LP community, it's, it's always been pretty covered in mysticism. As you said, um, before, much like, uh, Fred Wilson did in unveiling the VC community 10 or so years ago. So why do you think VCs struggle to navigate the, the supposedly mystical, uh, LP community?

A Well, I think it's because most new fund managers have had little or no exposure to the process. You know, once you've done it a time or two, it becomes less experienced. There's no place to go to find out how this goes. All pretty much word of mouth. You know, the second thing is, is that, you know, newish managers have a tendency to want to use the same process of raising a fund as they use when they make a company investment. And there are some similarities, but there's some really important differences. And, you know, the time to close cadence, the sort of interaction with the LPs, the documentations, these are three really big, important differences between, you know, raising capital for a company or deciding to, to Capital to a company and getting an LP to decide to commit capital to your fund.

AI assessment note: “most new fund managers have had little or no exposure to the process”

Q So let's take no to another level then, and say you've committed to a fund for fund one. To what extent are you then committed to investing in follow-on funds for fund two and fund three in the ecosystem? To what extent does that commitment persist?

A It's certainly true that most institutional investors consider the first commitment Fund commitment. You know, that's because really when Fund Two goes, you know, rolls around, you don't really have enough information to make a change from Fund One. And if you've done really good due diligence, and you've not made a mistake, then most people do think that these are at least a two fund, you know, a set of two fund commitments. But there's no guarantee. You know, something could change between Fund One and Two, or Fund Two and Three. For us, when we decide to stop backing a VC firm, It's usually based on the loss of relevancy with founders, and we ask ourselves every time, how does this particular team find and win deals versus their top competitors? Everybody has been upping their game in the last few years. You know, there are fewer people who are coasting on track records, and again, you know, it's about the top founders calling the ball. These founders are much better informed than ever before, and So the table stakes for a VC firm are so much higher than they've ever been. You know, if the VC firm that maybe we've backed before has not been investing a significant amount of their management fee and income and effort back into the firm and into resources to help their companies, then that firm's already behind. And then there's some other reasons that we stop backing, and som…

AI assessment note: “most people do think that these are at least a two fund”

Q And say you get a set of brilliant opinions and referrals from founders and entrepreneurs, and you're looking to actually make the investment. What excites you about the funds that you work with today?

A You know, I'll tell you, there's, there's, A lot that excite us. What we're really trying to, to find here is the teams that are well regarded by founders, and we like VC teams who are just scrappy as hell. The VC teams that we love are, are very proactive. They're winning high quality deals. They're putting founders first, and they work every bit as hard as the founding team to help the company succeed. You know, another, you know, new characteristic or new work Characteristic that we're solving for is, you know, these VCs are using data in a very smart and a very systematic way, and they're using data both to find and evaluate new deals, but also to accelerate a company's growth, and, you know, that didn't really happen in the past. You know, certain VCs would, you know, have a somewhat systematic approach to their relationships with entrepreneurs, and they would help in, you know, in material ways, but in more informal ways. You know, sort of one-to-one, uh, GP to founder ways. The use of data now, I think, in the VC process is a really powerful change, and the, the people we like are using data in, in a very systematic and important way, and both to, you know, find deals and win deals, but also to help the companies succeed. So, and then, you know, of course, the, the teams that we like are doing the, the usual blocking and tackling, helping the company make connections, to…

AI assessment note: “we like VC teams who are just scrappy as hell. The VC teams that we love”

Q But I do want to slightly switch sides of the table and discuss the managers and the startups themselves. So, so first, the LP community, it's, it's always been pretty covered in mysticism. As you said, um, before, much like, uh, Fred Wilson did in unveiling the VC community 10 or so years ago. So why do you think VCs struggle to navigate the, the supposedly mystical, uh, LP community?

A Well, I think it's because most new fund managers have had little or no exposure to the process. You know, once you've done it a time or two, it becomes less experienced. There's no place to go to find out how this goes. All pretty much word of mouth. You know, the second thing is, is that, you know, newish managers have a tendency to want to use the same process of raising a fund as they use when they make a company investment. And there are some similarities, but there's some really important differences. And, you know, the time to close cadence, the sort of interaction with the LPs, the documentations, these are three really big, important differences between, you know, raising capital for a company or deciding to, to Capital to a company and getting an LP to decide to commit capital to your fund.

AI assessment note: “most new fund managers have had little or no exposure to the process.”

Q Well, thank you so much, and, and we all love LPs, um, but it's not the traditional career path to choose growing up, so I'd love to get started today by hearing how you got interested in the venture ecosystem. And why do you think it's such an interesting asset class?

A Yes, it's, you're right. It's certainly not a traditional career path, especially, you know, back when I started, but I've really always been interested in how things work and how things fit together and by economics and the various motivations of economic actors and, and, you know, somehow the investment business lends itself to, you know, that kind of curiosity. So, uh, I've been in the investment business for quite some time now, including stints as a, Portfolio Manager of Public Equities is a CIO of, um, uh, Ewing Marion Coffman Foundation, and now is one of the four co-founders of a VC in Growth Equity Fund, a fund called WeatherGage Capital. So, parenthetically, we, we started WeatherGage in 2006, uh, we're on our fourth fund, and we have some nine hundred sixty million dollars of assets under management. But what really interested me in, in venture was when I used to run

AI assessment note: “what really interested me in, in venture was when I used to run”

Q And out of pure interest, I'm too intrigued. One of my friends in Europe is raising a fund of funds. How was the LP reaction to fund of funds itself, and how did you avoid the kind of traditional perspective of some LPs that it's a middleman game?

A Well, it is. Our reaction to that is, if you want exposure to the kinds of opportunities I just outlined, you know, they generally do come from young private companies, and many of them are venture-backed. There are a lot of venture funds out there, but of course they're, and we think a broader number of them will, are positioned to produce really good returns. However, you know, the opportunity set for top quality opportunities in venture in both the U.S. and I'm sure in Europe Is not a large one, and so, for us, uh, we provide a vector into that world, and we like to think that we earn our keep by doing something for ILPs that they can't do for themselves, or they can't do for themselves in the quantum in which they would like to have exposure. People find that this is an important aspect of their portfolio, and it's difficult to prosecute the opportunity to Uh, yourself. Many people can, but many people can't, and so we like to do things that, that people find valuable, but they can't execute on their own.

AI assessment note: “we like to think that we earn our keep by doing something for ILPs”

Q So let's take no to another level then, and say you've committed to a fund for fund one. To what extent are you then committed to investing in follow-on funds for fund two and fund three in the ecosystem? To what extent does that commitment persist?

A It's certainly true that most institutional investors consider the first commitment Fund commitment. You know, that's because really when Fund Two goes, you know, rolls around, you don't really have enough information to make a change from Fund One. And if you've done really good due diligence, and you've not made a mistake, then most people do think that these are at least a two fund, you know, a set of two fund commitments. But there's no guarantee. You know, something could change between Fund One and Two, or Fund Two and Three. For us, when we decide to stop backing a VC firm, It's usually based on the loss of relevancy with founders, and we ask ourselves every time, how does this particular team find and win deals versus their top competitors? Everybody has been upping their game in the last few years. You know, there are fewer people who are coasting on track records, and again, you know, it's about the top founders calling the ball. These founders are much better informed than ever before, and So the table stakes for a VC firm are so much higher than they've ever been. You know, if the VC firm that maybe we've backed before has not been investing a significant amount of their management fee and income and effort back into the firm and into resources to help their companies, then that firm's already behind. And then there's some other reasons that we stop backing, and som…

AI assessment note: “most people do think that these are at least a two fund”

Q What are the most common reasons you find yourself repeating for, for why you're not investing?

A Most of the time, it's undifferentiation. We, we see managers who, you know, have spent some time in the field, and they have a credible record, but it's not an exemplary record after, you know, having done it for a while. Uh, for new managers, you know, maybe the track record is short, and we will underwrite that, but, you know, we find ourselves with, You know, at least notional coverage of the same opportunity set. These managers may be good and may be interesting, but it's not demonstrably different or better than the managers with whom we're already investing. And sometimes, you know, and sometimes the returns are just awful, or, or the opportunity is poorly articulated, or, you know, it's just not well thought out. We don't want to be rude about it. This is, you know, people's life work, and, and frankly, you Above a lot of other asset classes. So nobody's terrible. You know, there's certainly people who are, seem to be better at it than others. Yeah.

AI assessment note: “Most of the time, it's undifferentiation.”

Q What is the time to close cadence for fund investing then?

A It's longer. It's much longer for most people and for newish managers. Uh, there are some exceptions to this rule, but, you know, if you were raising capital for, uh, you know, a reasonably well-regarded company, um, it can be, you know, as short as a week or two, right, if there's some known quantities involved. And yeah, there are cases where that could drag out. But if you're raising a fund, especially a first-time fund, and you have no special extenuating circumstances like, you know, three LPs who are going to, you know, take up the fund, you know, themselves because they've, you know, worked with you for the last five years on some other project. Unless you have extenuating circumstances, there is, you know, the LP process requires a period of time to get acquainted with The new VC manager and the opportunity and to calibrate them, you know, inside our network. So, uh, it just takes, it can just take a lot longer for all of that to happen.

AI assessment note: “It's longer. It's much longer for most people and for newish managers.”

Q to kickstart a relationship potentially for fun too, and to start that kind of time to close really then. Do you agree with this assessment, and what advice would you give to those then looking to relationship build with LPs? You know, it's not, I don't know, you probably do hang out at the, the Rose, is it the Rosewood Sand Hill? But, but, but what advice would you give?

A I think, you know, I think his observation is perfect. That's how the good ones do it. That's how you do it right. Um, you do establish long-term relationships. You know, I would just back up to say there, you know, there's one important, another important difference between deciding to invest in a company and deciding to invest in a fund. You know, in a company, you certainly hope that it's a long-term, um, you know, investment and, and the company succeeds, but very often they don't. And, The economic relationship stops there. Um, you know, these venture capital funds are 10 or 12 or 15 year entities, and so you're involved with, with, with these venture managers for a much longer period of time than perhaps, you know, venture managers involved with the portfolio company. So these are, you know, important long-term relationships, and I think Chad, you know, demonstrates to me that he is building the groundwork for A sustainable firm, and to have these conversations with LPs in preparation for subsequent funds is exactly the way it needs to go, and I think he demonstrated that, you know, that preparatory work, work, uh, was, uh, well-rewarded when he raised fund two. You know, one of the, one of the things you have to, you know, that fund managers need to, to remember, uh, is that, you know, LPs respond to You know, different kinds of stimuli at different times. You know, anot…

AI assessment note: “I think his observation is perfect. That's how the good ones do it.”

Q I'm really intrigued. You said about engaging with LPs in useful ways there. What does engagement usefully look like with the LP to GP relationship, other than the traditional kind of, um, emails and outbound, inbound, sorry, that I'm sure that you get? What does a useful engagement look like?

A Our process is to calibrate as many managers who are in our wheelhouse. There are a number of reasons for that. One is, You have to calibrate a lot of managers to know what great looks like, and it's really important for us to, you know, assemble a portfolio of what we think groups that have the right characteristics. Of course, we're not always right, but, you know, we do have a point of view, and we want to assemble a really good team on the field, and to do that, we have to have the aperture wide open to new opportunities. Harry, as you know, this is a business, is once you, you know, think you have a pat hand, In terms of your manager list, you know, you're probably, you know, So we have, uh, the aperture for viewing new groups is wide open. We also have a very concentrated portfolio, and so it's hard to earn a place in our portfolio, but not impossible. So if people want to pitch us, they are more than welcome to do so. We want to talk to them. We want to hear what they're doing, and we want to calibrate them to see if it's a possible fit in our portfolio. So of course, you know, a warm introduction is always good, but we don't require it. Um, we do look at data. We do want to have information about a portfolio company information. I'm not talking about operating information. I'm just talking about the basic blocking and tackling of, you know, cost and valuation and how mu…

AI assessment note: “we look at loss ratios and multiples and which partner has produced returns”

Q to kickstart a relationship potentially for fun too, and to start that kind of time to close really then. Do you agree with this assessment, and what advice would you give to those then looking to relationship build with LPs? You know, it's not, I don't know, you probably do hang out at the, the Rose, is it the Rosewood Sand Hill? But, but, but what advice would you give?

A I think, you know, I think his observation is perfect. That's how the good ones do it. That's how you do it right. Um, you do establish long-term relationships. You know, I would just back up to say there, you know, there's one important, another important difference between deciding to invest in a company and deciding to invest in a fund. You know, in a company, you certainly hope that it's a long-term, um, you know, investment and, and the company succeeds, but very often they don't. And, The economic relationship stops there. Um, you know, these venture capital funds are 10 or 12 or 15 year entities, and so you're involved with, with, with these venture managers for a much longer period of time than perhaps, you know, venture managers involved with the portfolio company. So these are, you know, important long-term relationships, and I think Chad, you know, demonstrates to me that he is building the groundwork for A sustainable firm, and to have these conversations with LPs in preparation for subsequent funds is exactly the way it needs to go, and I think he demonstrated that, you know, that preparatory work, work, uh, was, uh, well-rewarded when he raised fund two. You know, one of the, one of the things you have to, you know, that fund managers need to, to remember, uh, is that, you know, LPs respond to You know, different kinds of stimuli at different times. You know, anot…

AI assessment note: “I think, you know, I think his observation is perfect. That's how the good ones do it.”

Q And out of pure interest, I'm too intrigued. One of my friends in Europe is raising a fund of funds. How was the LP reaction to fund of funds itself, and how did you avoid the kind of traditional perspective of some LPs that it's a middleman game?

A Well, it is. Our reaction to that is, if you want exposure to the kinds of opportunities I just outlined, you know, they generally do come from young private companies, and many of them are venture-backed. There are a lot of venture funds out there, but of course they're, and we think a broader number of them will, are positioned to produce really good returns. However, you know, the opportunity set for top quality opportunities in venture in both the U.S. and I'm sure in Europe Is not a large one, and so, for us, uh, we provide a vector into that world, and we like to think that we earn our keep by doing something for ILPs that they can't do for themselves, or they can't do for themselves in the quantum in which they would like to have exposure. People find that this is an important aspect of their portfolio, and it's difficult to prosecute the opportunity to Uh, yourself. Many people can, but many people can't, and so we like to do things that, that people find valuable, but they can't execute on their own.

AI assessment note: “we earn our keep by doing something for ILPs that they can't do for themselves”

Q Well, thank you so much, and, and we all love LPs, um, but it's not the traditional career path to choose growing up, so I'd love to get started today by hearing how you got interested in the venture ecosystem. And why do you think it's such an interesting asset class?

A Yes, it's, you're right. It's certainly not a traditional career path, especially, you know, back when I started, but I've really always been interested in how things work and how things fit together and by economics and the various motivations of economic actors and, and, you know, somehow the investment business lends itself to, you know, that kind of curiosity. So, uh, I've been in the investment business for quite some time now, including stints as a, Portfolio Manager of Public Equities is a CIO of, um, uh, Ewing Marion Coffman Foundation, and now is one of the four co-founders of a VC in Growth Equity Fund, a fund called WeatherGage Capital. So, parenthetically, we, we started WeatherGage in 2006, uh, we're on our fourth fund, and we have some nine hundred sixty million dollars of assets under management. But what really interested me in, in venture was when I used to run

AI assessment note: “I've really always been interested in how things work and how things fit together”

Q What is the time to close cadence for fund investing then?

A It's longer. It's much longer for most people and for newish managers. Uh, there are some exceptions to this rule, but, you know, if you were raising capital for, uh, you know, a reasonably well-regarded company, um, it can be, you know, as short as a week or two, right, if there's some known quantities involved. And yeah, there are cases where that could drag out. But if you're raising a fund, especially a first-time fund, and you have no special extenuating circumstances like, you know, three LPs who are going to, you know, take up the fund, you know, themselves because they've, you know, worked with you for the last five years on some other project. Unless you have extenuating circumstances, there is, you know, the LP process requires a period of time to get acquainted with The new VC manager and the opportunity and to calibrate them, you know, inside our network. So, uh, it just takes, it can just take a lot longer for all of that to happen.

AI assessment note: “It's longer. It's much longer for most people and for newish managers.”

Q I'm really intrigued. You said about engaging with LPs in useful ways there. What does engagement usefully look like with the LP to GP relationship, other than the traditional kind of, um, emails and outbound, inbound, sorry, that I'm sure that you get? What does a useful engagement look like?

A Our process is to calibrate as many managers who are in our wheelhouse. There are a number of reasons for that. One is, You have to calibrate a lot of managers to know what great looks like, and it's really important for us to, you know, assemble a portfolio of what we think groups that have the right characteristics. Of course, we're not always right, but, you know, we do have a point of view, and we want to assemble a really good team on the field, and to do that, we have to have the aperture wide open to new opportunities. Harry, as you know, this is a business, is once you, you know, think you have a pat hand, In terms of your manager list, you know, you're probably, you know, So we have, uh, the aperture for viewing new groups is wide open. We also have a very concentrated portfolio, and so it's hard to earn a place in our portfolio, but not impossible. So if people want to pitch us, they are more than welcome to do so. We want to talk to them. We want to hear what they're doing, and we want to calibrate them to see if it's a possible fit in our portfolio. So of course, you know, a warm introduction is always good, but we don't require it. Um, we do look at data. We do want to have information about a portfolio company information. I'm not talking about operating information. I'm just talking about the basic blocking and tackling of, you know, cost and valuation and how mu…

AI assessment note: “We do look at data. We do want to have information about a portfolio company”