The Exchanges

Q And how about relative to other first time funds? You have this combination of an investor and call it an operator. How did that compare to other things that you might look at?

A It's our job to go out there and try to find the funds that we think are going to overperform, be it within our existing portfolio or ones that are not there yet, and we do look at a number of first-time funds. They just have some special advantages. I don't know if that's a polite thing to say to the rest of the world, but you have this marriage of Nikhil's investing acumen, and Mike is a phenomenal operator. I mean, you can read his resume and just see what it says on the words when you speak and do the references. Everybody wants to work for him. I mean, at the end of speaking to him, I wanted to work for him. So it's, he's very powerful in that way. And there's something about bringing that operating experience and integrating it into the fund. They're doing in a slightly different way than other funds, leading with who they are first versus tacking on an operator on the side and saying, oh, you'll get a little extra opinions on this two or three hours a week. But this is really much more of how they go to market and who they are. We think that has the potential to be very compelling.

AI assessment note: “They're doing in a slightly different way than other funds, leading with who they are first”

Q It also takes 20 years to get there, right? So it's hard to know.

A Quite correct. It is hard to know. There's a lot of noise, far less signal. So the lens that we've started using, and it's just a little of a catch-all phrase because it just, you need a rubric in your head, is why you? And we apply this to ourselves, which we already talked about, but why you, why this manager? Why have they chosen to come together? Why are these the right people to go after this opportunity? And what is the opportunity they're going after? How do they articulate it? How do they think about it? It can be a whole range. And then why are they the ones the entrepreneurs are going to pick? Because there have been times in the past, maybe times in the future when capital is not as available, but certainly today there is very competitive landscape. And so being able to be the choice of the entrepreneur, not just for a check, but the check that that GP wants for their portfolio construction, Is not a given. So understanding that is very important, and it's a simple statement, but you can unpack it in, you know, so many different directions.

AI assessment note: “Quite correct. It is hard to know. There's a lot of noise, far less signal.”

Q and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. So if the seed stage hasn't really moved that much, Beezer, when you start looking at the bees in that area, what are you seeing on valuations?

A Well, I think the NVCA put out a report along with, um, I think it's PitchBook that looks at these numbers, and yes, the twenty-twenty-one, twenty-twenty-two, we're seeing a retrenchment in almost every single level, back to 19 or 20 pricing, which doesn't mean to say it's falling off a cliff. You just have some of that spike coming out. And anecdotally, you're, again, like, very strong companies, you always have these couple that raise, I don't know, what is, a hundred million dollar seed round or series A, whatever it is, there's always a couple that For whatever reason, have been able to get those valuations, but I would say, generally speaking, there seems to be a reset, and that what you hear is a lot of anecdotal commentary from GPs about how they now understand that the benchmarks are what it takes to get a Series A and Series B is different. And again, I don't think it's a cratering hole back to 2002. I think we're just looking at things that are more like 2018 or 19, where you needed Some sort of metrics to raise your next round. You needed some evidence of product market fit. You needed some evidence of, to Chris's point, about what are these sustainable different cash burns you're having? Like, what's going on in these companies? And I think what you hear on the other side is that entrepreneurs are getting a different message than they had for two years. And changing…

AI assessment note: “we're seeing a retrenchment in almost every single level, back to 19 or 20 pricing”

Q That's true. What do you worry that you're missing in the due diligence?

A We always have more questions than we have answers, just because it's impossible, A, to ask every question, and then B, sometimes the answers are literally TBD. We have faith that somebody means what they say, but can they then go and get that allocation for their portfolio? You will not know until the entrepreneur says yes. And then will the entrepreneur be successful? Like, who knows? Crystal balls are unfortunately broken when it comes to all that. So there's usually lots of questions around that. Where will the tech funding landscape be? Are we in a land of profitability and margins? Are we still growth at any cost? What does that mean? And as an LP, like, this is the limited and limited partners. Zero. This is not part of the world that we can affect. You're just appreciating it. Most polite word I can use. There's a lot of things you don't have enough time to do. Sometimes it's also just getting out and seeing the landscape. One of the challenges, it's hard. Our team really is upset about it. Like, people will say, oh, there's something new happening here, and it might be somebody you know, but they're raising a new fund. They're looking at something different. How do you get smart on that opportunity set in the amount of time that you have? You know, blockchain, crypto, next generation of direct-to-consumer, like, pick your area. Or somebody will say, you know, it's not …

AI assessment note: “How do you get smart on that opportunity set in the amount of time”

Q Alright, so one of the things that might cause you to not re-underwrite it is changing the team. How about with the same team?

A Sometimes folks decide to go after different opportunities, and it's more of the underwriting of do we see the return potential for what we want to do? Because sometimes the later stages, it's not that we don't think it's productive, and you can have a three to five X growth fund. Like, we wish that for everybody. But a lot of times if you're going much later, the point of that is to de-risk it, and then theoretically that should reduce some of the return cycles. So that just becomes not what we're looking for in our platform. For us to hit the returns that we're looking for, it's Series A exposure. So it's really just things like that. Sometimes, We haven't had this, but I could see a possibility people are going to push into another area of investing that might be a bit more tangential. One of the cool things about the abundance of capital right now is that people can really explore what counts as a venture-backable opportunity, but there could be things that just end up out of scope for us. One of the things that LPs also juggle is portfolio construction just as much, and what happens if you already have a fair bit of exposure in a certain area? Do you want more right now? You can hit that as well.

AI assessment note: “Sometimes folks decide to go after different opportunities, and it's more of the underwriting”

Q And so the SAP is the only source of capital?

A The LP team. On the growth fund, there are other LPs now, and the sport fund has other LPs now. So I'm saying like, that's why the groups have that difference, because it's important. One of our philosophies as a platform, and very much so on the LP side, is that where you get your money from matters. You don't always have a choice. I understand in the market, it's always, it can be hard to fundraise. But if you have a choice, how do you choose and what do you do with that choice? And we believe very much in the responsibility when we're an LP in funds to show up and be strategic value, and that an LP can be as strategic in your importance as the direct investments are. And so we always want to walk our talk, and that's how we've approached it, and that's why we've kept a single source of capital on the LP side, because we believe that's what's best for the GPs. And so then people say, why do you do what you do? Because that's what's in service of the GPs, and I think as an LP that is a very, very important mantra.

AI assessment note: “On the growth fund, there are other LPs now, and the sport fund has other”

Q So before we jump into that, the time that you spent there, you were doing some direct investing, and how long did you spend doing direct investing?

A So I said my career was moved back and forth a bit. I started direct investing in 2000. So I had gone to business school a year after you, and I'd come out and I was coming to New York. I thought at the time actually I wanted to be doing business development for a startup. I came to New York and I met with a bunch of startups, and it was basically double click and very, very early startups. And it didn't land. I didn't want to be a double click. Some of the startups just didn't, it was very nascent. It wasn't the kind of opportunities that I was looking at. I'd been in the Bay Area and saw What was going to happen? And I thought, well, if I can't be part of the company, I'll be part of the funding source and help build new companies. So I joined a very early stage venture fund called Launch Center 39 that also had an incubator attached to it. I don't know if it was the first, but it was certainly one of the first, right, in the meatpacking district, which was then not the scene that it is today. Got to do the BD work for the portfolio companies as well as direct tech investing. And that was unfortunately a short career because come 2001, The world went belly up in tech, and to their credit, back then, GPs gave the money back to LPs. I know, shocking, right? Can you believe it? And so they did well by their LPs, and they gave the money back that wasn't invested, and they basical…

AI assessment note: “I started direct investing in 2000... unfortunately a short career because come 2001”

Q So let's dive into the investment process you go through, which always starts with sort of, where do you find these ideas from, and how do you decide?

A Well, the nice thing about venture is that there's both There's an ongoing on-ramp of new managers, but there's also an established set. So when you start, there's always a bit of, where do we want to play? And for us at Series A, predominantly, like, that's the predominant exposure you want in a fund, and there's different ways of getting it. And that automatically narrows the universe to a certain extent, right? So you cleave off a whole bunch. And then you look at it, and you say, are there geographies? Are there different tech trends? Do you want to be hyper-specific? Do you want generalist? And you get a portfolio theory. And then you deploy it. And so one of the early decisions we made was, loosely speaking, we're about 70% U.S., and then about 20 to 25% Europe, and the remainder in Israel. And we had that thinking from the outset as key technology hubs, and went out and just looked for it. And there was obviously some managers that were already in market, and you could look at their body of work. And then when you also open the doors and say we're open to new emerging managers, you get new work.

AI assessment note: “we're about 70% U.S., and then about 20 to 25% Europe”

Q How can it change in the sense that it does feel like there's significant, if not excess demand, all through the ecosystem for the top venture funds, all the way through to what you're doing, and then into the company level?

A Well, I guess the obvious simple answer is, could companies build differently to go public earlier than they are today? And what does that mean? And I think the sort of mantra of growth at any cost would make it difficult, because the public market obviously seems to have certain things that they're willing to take risks on, certain things that they're not, and so you might build a bit differently getting ready to go public than companies have been building in the past. If you asked me this question a year ago, there were some of the seed managers and Potentially in the A round that we're selling into some of these huge rounds. Maybe not their whole stake, but if you could one-X your fund on 25% of your ownership of a company, taking a little risk off the table was a nice thing that people were doing. I don't know going forward where that's going to be. We're in new, new territory, right?

AI assessment note: “could companies build differently to go public earlier than they are today?”

Q When you put your organizational behavior hat on and walk through some of these, there's the why are you here doing this, and what is it that you like to see in that key question?

A Usually it's some sort of resonance between the investor and the, the entrepreneurs or the type of investments they're looking to make, and it doesn't have to be a one-to-one ratio, just because, you know, you were an operator in X space doesn't make you the greatest investor in that space, but there has to be some resonance, and it's hard to define before you see it, and I know it's squishy, that's part of what makes the magic happen, to be perfectly honest, because sometimes you hear something on paper, like, as an example, we don't do seed a lot, When we did do seed, we were very reluctant to do single GP managers, because we felt the individual risk was so high. Now we actually have a few single GP managers, and we feel very differently about that risk. And it kind of goes to the understanding of who they are and what they're doing, and how do they run their business, quite literally. Which doesn't mean to say there's teams that run also beautifully, but we've opened up our aperture to that concept. And again, we don't do a lot. And I caveat this, because every time I say one of these things publicly, you end up with a, but you said you do this. But it's, Still more the exception than the rule, but then from a team dynamic, I mean, one of the things about venture that's so hard is that there's just so few external data points to look at and say, here's what makes for a grea…

AI assessment note: “Usually it's some sort of resonance between the investor and the, the entrepreneurs”

Q So the question was, as the market got hot, even if you felt it was hot, what did you do during that period of time?

A I think I have a more prosaic answer. I can't do the Chris lovely dialogue. I do have my thesaurus out. I was going to attempt a few, but I think I'm going to go. I learned this in conversation actually with the good people at floodgate, which is if you just consistently pace yourself in the up market and the down market, you bounder the size of the dollars you do every year. You win some, you lose some, who knows, but you, it keeps you from doing too much crazy, right? Stopping too quickly to Joelle's point or piling in too much. And so we just apply that math. We try to be consistent in the dollars that we deploy into funds every year. We try to make the best choices that we can, and we'll see how the cards fall. But a lot of it is just the consistency. To Chris's point, history has taught everybody you don't stop investing. Hitting the pedal to the metal and then pumping the brakes can be problematic on the reverse. So we just tried to keep going as best as we could.

AI assessment note: “We try to be consistent in the dollars that we deploy into funds every year.”

Q it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. When you dive in on trying to figure out effectively the optimal number of touch points or the time you want to take of your GPs, where have you seen other LPs that you feel like they're just asking the wrong questions?

A I have a lot of empathy. So when LPs cover multiple assets, you know, like from timber to private equity to Publix to physical real estate to venture, understanding the nuances of the difference between AI and ML, we live it. And I gotta tell you, if you gave me a pop quiz, not entirely sure how I'd do, right? I just think that's a big ask. And so I think they do their best. I mean, every fiduciary is trying to do good by whoever their capital source is, but I just think it's harder to always know some of those parameters. So I think sometimes GPs have expressed to us some frustration that folks don't understand the difference. And I just think at some level, like, what can be expected? And then on the flip side, how can GPs help facilitate that? I think it would be great if there was a standard data room, for example. And then could there be other pockets for education on certain things that folks didn't have to ask? We believe we have an onus. If you give us the information, it's our job to read it. So a lot of times when GPs will give us very thorough F.A. CQs or a pitch deck or whatever it is, and then they come in and they want to talk to it. We'd be like, no, no, that's cool. We want to ask you other questions that aren't in the deck because it's our job to read the deck. You shouldn't have to read it to me, which clearly isn't always the norm, because frankly, I think so…

AI assessment note: “understanding the nuances of the difference between AI and ML, we live it.”

Q You started your career in spreadsheets, project finance, hard asset projects, and now what you're talking about is so much more people-based and network. How do you split your time between trying to understand any of the math? So let's say the math is the size of an opportunity for a fund for the underlying companies and just meeting with people and ear to the ground what's going on.

A Well, we have a pretty stable set of analyses that we run. I don't think this is a secret. Math is usually just math. The analyses that investors run are pretty standard. So just as a shout out to one of my colleagues, Thomas, he actually wrote a blog where we share the data as in a spreadsheet, which is that we collect in it. What was your initial check? What was the ownership? What did you fall on? And I mean, it sounds basic, but how do you calculate TVPI and these things? So you can just, if you have the information, you That analysis takes some time, but it is what it is. The harder part is understanding the people, and why it is they made decisions, and what the opportunities were, and how did they solve, because life doesn't make things easier for GPs. You don't always get the allocation that you want, and then, especially in today's market, how do you maintain your pro rata? Should you maintain your pro rata? And that's a dialogue. I don't know any other way of doing it, and it goes to your question of spending time with GPs. There's this very delicate balance. I think LPs would like to spend a lot more time with GPs Just realistically possible. Some funds have 10 LPs, some have 55. And if every LP showed up every day to say, hey, could I sit with you and walk through your every deal? And hey, can I join your deal meeting? I mean, it's ridiculous. Like, there's no capac…

AI assessment note: “That analysis takes some time, but it is what it is. The harder part is”

Q In your funds, this focus on Series A, how did you think about the risk reward of that sub-sector of the venture ecosystem?

A Well, we had the experience set on the growth side. They come in sort of post-product market fit when the tech has been a bit more de-risked and it's more of expansion stage for a company. There's no need to replicate that. So what's a different part that's interesting? And Series A has been a durable portion of the sub-asset class that has strong returns. I mean, there's no guarantee just because you're investing in a Series A it's going to work out. But when you look at the risk-reward, as you said, it's a wonderful area to play. And we do some seed, too, and even our Series A managers sometimes do seeds, so it's impossible, especially in this market today, to be just in one little narrow window. The world's pretty fluid, and sometimes it ends up being a little bit later, but it's still an early risk, so that's what we're really sorting for. Usually at Series A, there's, the company themselves have been a little bit further along, so there's some de-risking, but there's still a whole bunch of opportunities set, and what's it going to be, and people say product market It can gel at seed, and that is absolutely true, but there's still a little bit more of the launching out of the gate, and there's still more pivots on the tech, like that's still a pretty fruitful stage.

AI assessment note: “there's some de-risking, but there's still a whole bunch of opportunities set”

Q What does the process look like in terms of how many touch points you'll have with a given manager before you make a decision?

A It varies. In a perfect world, we'd have many. We don't live in a perfect world, so that's not always true. It's not uncommon for us to say we want to get to know people over the course of a fund, which is, I think, not atypical in the LP world. Sometimes it's multiple funds, depending on how early the firm is in their creation, or if they're trying a new strategy. There's other times when you've watched people, I sort of call it watching the footprints in the sand, and you see them in market, and you see them doing things so you can get to know them Without them really knowing that you're knowing them. I mean, they might bump into you and you see them. And then when an opportunity arises to join the fund, you can move very, very quickly because you've essentially done your homework in advance. So it's hard, and it's when folks come to us and say, we haven't met. We have, you know, X, Y, Z amount of our fund left. Would you be there in the next few months? And it's not impossible, but that's much, much harder because it is such a people-driven industry. And if you don't know the people and how they work together and how they play, coming up to speed that rapidly is It's just a big challenge. It's not impossible, but it's just a bigger challenge, and I don't know if GPs are always quite as aware because it's a different dynamic in funding companies, and that's one of the places …

AI assessment note: “we want to get to know people over the course of a fund”

Q change in the opportunity set they're addressing, change in your portfolio that might cause that. Are there examples that you've experienced where you felt like you made a mistake? And so none of those levers have changed. It's the same team approaching the same opportunity set in the same size. You did the whole re-underwriting. It's three years later, maybe four, maybe it's two funds, but something doesn't feel right.

A That's a bit harder. It would have to be pretty abrupt, because the feedback loops are so long and ventured. I would interpret making a mistake to being underperformance in a fund. Unfortunately, you don't know if you're right or wrong for another 15 years, because there have been, right? I mean, this is, this is like the weird thing. You're like, if things end spectacularly badly, then maybe everyone knows that maybe the partnership didn't work. But it's actually hard to know if the investments don't work until they all play out. And again, there could be other markets where the availability of capital Is tougher, but like, for example, you should see, like, this is a prototypical fund return thing. 30% of your early stage company should not work. 30% will be mediocre, and 30% will be awesome. I gotta tell you, the member of seed companies, you hear it coming in the Series A crunch. We look through, we do not have the loss rates at seed that should fit that level. Over time, it should work out because life is long, but you're seeing so many companies, and you can raise Multiple follow-ons on seeds. You're just not seeing those loss rates. So it's very, very hard to know if the companies are just building slowly. I'm not totally dodging the question. It's just incredibly hard to know right now. And there's also really different fundraising patterns in different kinds of compani…

AI assessment note: “Unfortunately, you don't know if you're right or wrong for another 15 years”

Q On Twitter. Anytime I sit down with anyone in the venture ecosystem, I always reference the old Michael Lewis book, and I always want to ask, what's the new, new thing? So what is on the cusp of what venture is funding that we might not have heard about?

A Oh, I was going to say profitability. Yeah, that's true. Well, no, I mean, So I'm in New York this week, and I've been meeting with a bunch of folks, and actually, listening to the number of managers, like GPs now talk about revenue, and that happening, and the folks at Series A looking to see more revenue metrics, it actually feels, I know it's a bit of a, like, return to an old new thing, but it's a bit of a new new thing. We see a whole range in our portfolio, right? Because we have, in our underlying portfolio, we, we're conscious of the value of consumer and enterprise, and some of the new industries with frontier tech, so we see a broad range. Even industries, say, fintech, which, Has been around for generations. There's always something new and interesting, and so it's hard to say ML being applied to drones. I mean, there's isolated incidences, but the reality is you never know what's happening until it happens. And as an LP, frankly, you mostly hear about it either in the quarterly report or the annual meeting, so sometimes I feel like the GPs know what they're sorting for, and they'll come and say, we're looking for new mobile consumer platforms. You're like, great, we all need more of those. But can I tell you that it's landed? When you see 15 of them in your portfolio, you know that it's landed.

AI assessment note: “I was going to say profitability... GPs now talk about revenue”

Q And of that capital you're putting to work each year, what percentage of it does go to re-underwriting funds you've invested with in the past compared to new funds?

A I don't have a hard and fast number, but I can tell you there's not been a year when we haven't added a net new manager to our platform. And that could be a new manager to the world, or it could just be somebody that we're now working with for the first time. And that's also been something that we've been very, very focused on making sure happens. If you look at some of the Kauffman studies and the Cambridge studies, the emerging managers play a very important role in the universe. So making sure we're open to that is important to us. Again, it's art. We wish there was more science in the world, but part of what makes early stage fantastic is the art. So if you take the art out, you're not going to get the glory either.

AI assessment note: “I don't have a hard and fast number, but I can tell you”