What LPs are looking for in first-time managers

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Institutional investors are increasingly interested in partnering with emerging managers and investing in first-time funds. But what exactly is an “emerging” manager, and how do institutional LPs evaluate funds? In a panel from the 2021 Carta Equity Summit, Kanyi Maqubela of Kindred Venture asked those questions. Three institutional LPs—Lara Banks of Makena Capital Management, Charmel Maynard, of the University of Miami, and Sara Zulkosky of Recast Capital—shared what they’re looking for.

This transcript has been edited and condensed for length and clarity.

Kanyi Maqubela: Everybody, thank you so much for joining our panel for the Carta Equity Summit. I’m Kanyi Maqubela from Kindred Ventures, and I’m very pleased to be joined by three esteemed guests who are limited partners, institutional investors, brilliant minds, and very kind people in their own rights. Their bios are intimidating to me, so I’m honored to be among them. We’re hoping to keep this session casual and hopefully informative. So if and when you have questions, please, please, please, please drop them in the chat and we’ll make sure we leave some time at the end to address whatever comes up. Nothing is off limits, so please feel free to ask whatever’s burning. But let me just do a very, very quick round of intros, and then I’ll jump right into questions.

First is Charmel Maynard. Charmel is over at University of Miami, where he’s treasurer and chief investment officer. We also have Sara Zulkosky. Sara is co-founder and managing director at Recast Capital. And we have Lara Banks, a managing director at Makena Capital. 

Let’s get started with the program. I’m going to start with you, Sara, if you don’t mind, because this program is called “Benchmarking First-Time Managers.” And I think the most important thing to contextualize is: Why are there so many first-time managers right now? What’s happening? How did we get here?

What’s behind the rise of first-time fund managers?

Sara Zulkosky:  I think a confluence of things, certainly. 

One, there were lots of gaps to be filled, frankly. The market is shifting and founders are looking for help very early in their journey. And they’re looking for that deep industry expertise to help build their businesses from day one—rockstar operator angels that can bring that level of expertise to the table early on are a wonderful fit for that, right? It would be natural for them to start managing outside capital to do so. Also—just different networks, different approaches. There’s room in the market for folks to be tackling this space differently. 

I think another driver is that it’s easier than ever, operationally, to start a fund. We have AngelList rolling funds and other models that—if you do get the fund up and running—make running the back end extremely easy. But getting to that point, of course, is the hard part: raising the fund. 

Finally, you’re seeing some established investors at the mid and senior level leave their current roles. It may be because they’re looking for increased autonomy or improved economics. Or in some cases, we’re seeing folks stepping away because they didn’t feel valued or respected in their prior roles, and would rather start their own firm, build their own culture, and hang out their own shingle.

Defining a first-time fund manager

Kanyi: Let’s talk about that shingle. Lara, I’m going to pass this to you. What is a first-time manager? There’s a lot of technical terms that limited partners sometimes use when talking about getting funds started, and I think it’s helpful to explain a little bit. What is a first-time manager and how do you distinguish that from a first-time investor or a first-time VC? What exactly is a first-time manager?

Lara Banks: Technically, a first-time manager is someone who’s on their own, raising their first fund. A lot of institutional investors have looked at what we call “spinouts.” They’re not first-time investors. To Sara’s point, they generally have invested in the past, generally at a larger, well-established firm, and they’ve decided, for some reason, to spin out and do this on their own. A lot of times, those can be very aligned and thoughtful first-time managers because they have spent time seeing other organizations, honing their craft, and thinking about what it is they want to build, and learning from the organizations that they’ve been at in the past. 

And so historically, that has been how we have thought about first-time managers—not first-time investors—first time on their own, building a firm. It mitigates some of the risk, but it’s still a lot to bite off in terms of building a culture—if you are going to have more than yourself—and figuring out how you build your brand in the market. 

Fast forward to today, we have—because of some of the changes in the market—started to evolve our thinking around, “Well, could we do a first-time investor, an investor in the sense that they are doing professional, institutional investing?” Sara alluded to rolling funds. We would consider that a first-time investor. Some of these AngelList types of platforms are people who have done a lot of angel investing, but have really spent their time and cut their teeth on the operations side.

In venture, we see just the value of the network and the power that some of this operating expertise can provide to founders. And so we’re starting to expand, maybe not the definition, but the area of the first-time manager subset that we invest in. It’s something that we’re continuing to work on. When we look at a first-time manager, it’s much easier to do someone who’s spinning out. I think the step of “You’re an operator who’s done a little bit of investing,” is a harder one, but it’s something that institutional investors are, across the board, looking more at.

What does it mean to be an “emerging” manager?

Kanyi: OK, let’s add one more definition then, while we’re on the subject. What’s an emerging manager, and is that different from a first-time manager? And when do you stop being “emerging?” What’s the distinction there?

Lara: Everyone defines it differently. We see emerging managers as Fund I and Fund II. And then we graduate people into Fund III. That had been also because of time horizons. These funds had been two-year cycles. By then, you’re at six years, and you should see some proof points. It might be that emerging is still Fund III, because the fund cycles are now a year in a lot of cases. And so three years in, there’s obviously markups. But the proof points on this actually being an institution or a person who has established a reputation that is sustainable over time—I think it takes slightly more time than that. But historically, that’s how we had defined it.

Kanyi: Charmel, Sara, maybe if you don’t mind chiming in, I’d love to hear how you think about emerging managers, too, and if it’s uniform across LP types. 

Charmel Maynard: Similar to Lara, we think about emerging managers as mostly Fund I and Fund II. Now, we don’t have a hard definition for some. And there’s so many definitions out there, Kanyi, and I think you’re sort of honing in on the right questions by defining these things because I think it’s pretty loose. I’ll throw a name: Would you consider Addition an emerging manager? Is Lee Fixel an emerging manager? I don’t know if anyone would put him into that bucket. So I think it gets a little murky, and I think none of us probably want to put an actual definition or a hard definition on it because we want to be a little bit more versatile and be able to move quickly. But I think broadly speaking, it’s first-time Fund I, Fund II people who may not have had an extensive track record leading an investment practice at another firm, and someone who’s sort of just getting into that space. Now, that doesn’t mean that they haven’t been successful at their prior job. It’s just that this might be the first time handling institutional capital.

Kanyi: Sara, I know you come in very early. How do you define it?

Sara: We generally define it as institutional Fund I, II, or III. And by institutional, we mean raising outside capital. So when we’re looking at an investment opportunity, if a particular manager has an angel track record that they call their proof of concept fund “Fund I,” that doesn’t necessarily count for us in the Roman numeral game. But certainly, from a track record perspective, it’s something that we can sink our teeth into—which is great from an evaluation standpoint. So that’s typically how we think about it. But much like Charmel’s answer, there’s a lot of gray area here. Every emerging manager is different. And so thinking about how best to support them and where they fit in our program is definitely a case-by-case basis.

What LPs look for in a first-time manager

Kanyi: This question is off script, but you bring up an interesting point. Hearing all three of your answers about the definition of a first-time manager and an emerging manager, it sounds like it helps to have already been at a fund. And it helps to already have done fund stuff before you’re starting. But I have to imagine that there’s tons and tons of people in this new class of investors who just haven’t done fund stuff. So how do you identify, first of all, their ability to do fund stuff? Do you need to see them doing it a little bit before you get comfortable? What is the fund stuff that you’re looking for in the first place? 

And then the second question—and I’m sure you’re seeing this at scale—is a bunch of new partnerships. And so I could be a spinout from a fund and Lara could be a spinout from another fund. And who’s to say that’s going to work? How do you think about evaluating—even if it’s a spinout and it’s got all the sort of characteristics of safety that you’re looking for—how do you make sure that stuff works? 

Sara: I’m happy to address the first part. We very intentionally look for managers who aren’t necessarily just spinning out of funds. We think that there’s really interesting opportunities coming from the operator space, or those coming from adjacent to the venture investment bubble specifically. I think there’s different things you need to look at in that case. I think if they’re early in their journey—so, an early fund iteration—are they coachable in the sense that we can step in, given our institutional LP backgrounds, and provide support? And will they listen to that support? And are they receptive to us helping them as they think about building their firm? 

There’s stuff that I think your LPs can be very helpful with. But at the end of the day, it comes down to your ability to pick and support amazing companies. And the best way to figure that out is to do your references, to get to know that person as an individual, how they interact in the broader community—not only with their co-investors, but specifically with entrepreneurs. Are they a net positive to the space? I mean, you’re spending the bulk of your time answering that question, and this is true even for a spinout, or two folks coming from different funds coming together. That question is still at the forefront, regardless of whether you’re spinning out from an existing firm, in my opinion.

Charmel: Just to piggyback on Sara: I agree with everything she said—just to add a couple points:  Running a fund—It’s difficult, right? We want to make sure that they’re spending their time on what we’re hiring them to do, which is to find great investments—not worrying about fund valuations and audits and payroll and all the things that come with starting the fund. 

And so, for us, when we’re diligencing, it’s really: “Do you have the foundation and the back office?” We use that term, “back office”—and that can mean a lot of different things—to ensure that this person is spending their time on meeting founders, thinking about fund economics, thinking about the fund models, and actually going out there and executing. Because that’s one of the arguments that you hear about solo GPs. I’m not saying that’s correct, but a lot of times it’s, “Is this too much for them to shoulder by themselves?” Either you have a strong number two, or you’re outsourcing. What gives us, the LP, comfort that they’re not going to be bogged down with the day-to-day things? 

So, I would just add that on: Sometimes it’s helpful to have someone who may have come from a fund background—because they would’ve seen that stuff, right? They would’ve seen how you put together an AGM, how you put together a quarterly letter, and what the steps of those things are—that can take a lot of time. And that matters to LPs, in terms of keeping up with how the fund is performing.

Lara: One thing I would add to that is just that we look for a little bit of humility around those points. To Sara’s point, asking us, “What should we do? What do you need?” Not over-engineering things for LPs, too. And to Charmel’s point, it’s outsourcing as much as you can, especially if you are a solo GP. It’s knowing what matters, which is, to Sara’s point, finding and connecting with the right entrepreneurs and being able to back them. And then, to Charmel’s point, thinking about portfolio construction, depending on your strategy. Those are the two core things you should be spending your time on. The rest, as much as you can—give that to others who have more experience. We are looking for people’s willingness to understand where their expertise is, where their time should be spent, and where they should be outsourcing to others.

And then, to your second question, in some ways the partnership dynamic can be harder. It’s actually almost a harder underwrite for us. It can be a more stable and longer-lived potential investment in some ways, too. So, there might be more payout to us and to the organization, but it’s an area where we spend a lot of time in understanding if they have not worked together, then how will that dynamic evolve? We do take on the risk, but I’d say almost every time we put one of those types of managers in the portfolio, that’s the first risk: How does that evolve? And what we’ve seen in the data, historically, is that teams that have worked together in the past do better. Ideally there would be some connectivity outside of one or two deals and some longer-term track record together. But that’s not to say it never works. It’s just that we’ve seen that the longevity of a team working together in the past, in some context, is predictive of future results.

How do LPs think about track records for first-time managers?

Kanyi: That’s all really helpful to me. Track record: I hear things like “attributed track,” “attributable track.” I hear things like “joint track,” “partial track.” What does this all mean? When you’re looking at someone’s investment performance historically, what are some of the signals that you’re looking for? And what is the depth of the data that you’re looking for? How do you verify it and validate it? Maybe we can start with you, Charmel.

Charmel: Venture, more than most asset classes, is probably on the easier side to diligence track record. For example, if a large-cap equity person is spinning out to do a large-cap equity fund, it’s a lot more difficult to say, “Hey, I invested in Apple, I invested in this.” It’s a little bit harder to diligence that. With the new venture fund, if they say, “Hey, I led Twilio, I led Twitter”—or whatever it is—that is a little bit easier to diligence. So I think step one is saying, “Hey, please tell me the names of the deals that you would say are attributable to your name.” 

And then—Sara and Lara, tell me if you disagree—but we all talk, right? We’re all meeting with various managers. So, suppose someone said, “I led Twitter.” I could probably pick up the phone and call someone at Spark [Capital] and say, “Hey, did this person actually lead this deal?” Right? I think that part, Kanyi, is somewhat easy. 

What we think about a lot is: What deals did they not do as a result of being part of this larger organization? Right? It’s easy to see what the wins were. But what could have been a terrible investment? Marc Andreeson said, “Hey, we’re not doing this deal. You didn’t think about it this way.” And they passed, right? So, we all know, we all cut data, we all cut it to make it look better. But I think the harder part to diligence, for us, is we think a little bit differently, beyond just diligencing the names that are attributable to them. How do you try to dig into what names they may have whiffed on, or that they passed on, as a result of being part of that previous firm?

Sara: On the other end of the spectrum, when you’re talking about operators coming to the table leveraging their angel track record—yes, I think it’s important to focus on the data to dig into which deals they did—but the nuance of it is super important, because your angel track record may have been writing a $10,000 commitment into each of these companies. And is that reflective of the strategy of the fund that they’re building? Likely not, right? They’re likely trying to put more money to work. So then the question becomes, “Could they have put that level of capital into the companies in which they invested? Why would an entrepreneur want them around the table? Why would they win over someone else at a similar check?” 

And then, of course, there’s the approach that you have—whether you’re part of a broader syndicate and a friendly player alongside your co-investors, as opposed to someone trying to lead these seed rounds. You have to have a little bit sharper elbows in order to get that done. All of those characteristics have to map—in some way, shape, or form— to what you’ve worked on previously. And if not, then we have to spend our time digging into how we can draw the lines to make ourselves comfortable that they’ll be able to do that moving forward. That’s why I always go back to the references piece. It’s much more about how the entrepreneurs and your co-investors are speaking about you, even when you were an angel.

I think a big part of the emerging manager space is just relatively nascent track records—largely unrealized. How do you think about those? If you’re fortunate enough to be spinning out of a firm with decades of experience and realizations, it’s just a cleaner process. But when you look at the market today, everyone’s performance looks fantastic. So how do you think about that? I think it requires a lot of rolling up your sleeves and going line by line, thinking about what end-of-day outcomes could be. Was it just the hot deal? Or was there a thoughtful reasoning around why those investments were made? Were the follow-on investors experts in that space? Looking for these other signals that can help you get comfortable. Certainly not perfect, but they can at least be pieces of data that you can leverage to make a more informed investment decision. So, opposite end of the spectrum—but it’s a wide spectrum, right?

Building a solid reference base

Kanyi: Well, what I’m hearing from both of you is that calling references to be able to get a little bit more color is an important part of closing the loop. It’s not just putting the spreadsheet into a number machine, getting a thumbs-up or a thumbs-down on the other end. Let’s talk about those references, because that’s another nuanced and big topic that I think is really important. 

Who goes on a reference list, and who doesn’t? Who is getting called off the list, and who isn’t? Maybe Lara, you can start by tackling that one, because it’s meaty. And before you answer, my personal opinion is that references are both very poorly understood by GPs and feel a little bit like a bummer if you happen not to have gangbusters references as an emerging GP—because you’re locked out of the system. And so, maybe we can get to that in a second. But, regardless, what goes on a reference list? How does it all fit together?

Lara: I’d say for us, the first thing we try to do is reference the CEOs. What we are looking for is an understanding of how this person connects with the founder, or maybe the second in command, at a company. And that’s really important in understanding the track record, as well . “Was it the person? Was it the brand? Or were they just really fast, and it worked out? Was it a pull from the person? Those are the references we get excited about, where the founder is like, “I had to have this person—it’s worked better than I expected. They provided X, Y, Z.” Those are the references where we come away with, “This is special.” So, that’s where we spend a lot of time. We also do some references—and I know that LPs probably do too much of this—of co-investors because we just have the networks there.

Sometimes those can be really helpful, particularly for the growth rounds—understanding if you’re talking to the early stage managers: Who do they want to bring into their later stage rounds, if they’re not going to do it themselves? And so, those are things that have been useful. I’d say for those who are probably earlier in their careers, and particularly on the investing side, some operating experience references can be useful in understanding, “What will this person bring that’s differentiated to the company? What perspective? How will they connect differently with the founder?”—because they were so close to being in an actual operating role. I know VCs, sometimes they do a lot—but it’s really the founder who’s building this company. The more we understand what this person did when they were a founder or when they were in an operating role, and how they can then parlay that–it can be really useful. What I think we find less useful are the service providers. We don’t need to talk to lawyers or anything else of that sort. Those are the areas where we usually spend most of our time.

Competition and community

Kanyi: I have a follow-up question, which is implicit. And you made reference to it. You’re calling co-investors and CEOs. The CEO one makes a ton of sense to me. On the co-investor question, I have two points of curiosity. Charmel or Sara, either one of you, please jump in: do people want more competition? Are they excited to give good references on somebody who’s going to scale and take their deal away from them? That seems kind of weird, right? And what if I spend all of my time working really closely with the CEO and not going to the VC drinks, not socializing with the other VCs, and end up not having much of a co-investor set of relationships—but I’m talking to all the engineers and I’m in other networks. Does that exist? And if that exists, then how do you make sense of that? It seems like there’s something missing there, but I want to unpack that a little bit.

Lara: It’s not a “need-to-have” for us. It’s an easy reference for us to do, so we generally do it. But it’s something that we’re seeing more around, particularly if you’re a growth investor versus very early stage. But even at an early stage, how much a brand name likes or sees you, if you’re a seed investor, as a good lead gen for their platform—that can be indicative for us.

If I talk to Sequoia and they’re like, “Yeah, we really like a lot of the deals that Kanyi brings us.” Those are the types of signals we’re seeing. It’s not just you as a person, but the quality of the companies that you’re bringing. But there are different ways. And that’s what’s interesting about the market. There are different ways to skin the cat and to win.

Sara: I think there’s co-investors and then there’s co-investors, too—to your point about competing. There are firms that are built where the strategy is simply being part of a syndicate. “We like to be bringing people together. We’re a more modest check, but we like to roll up our sleeves.” So there may be other investors that participate alongside them that value their participation because of the value that they add. And there isn’t a competitive nature because no one’s necessarily trying to elbow the other one out at that point. And then downstream investors, to Lara’s point—there’s an interesting signal to say, “Hey, I’ve seen a lot of interesting deals come from them. We’ve actually done a few of them. Here’s where we think they’re super impactful.”

We’ve had a few reference calls where a big brand multi-stage firm comes in and is co-investing with this particular emerging manager quite a bit. When you call them and talk to them about it, they’re one of the few early investors that they let stay in the follow-on rounds. Because oftentimes, they’ll take that whole round themselves, and that’s what happens. But sometimes it’s hard to maintain your position as a really early stage investor next to them. They’re one of the few that we’ve heard that they actually kind of just want them around even longer, despite the fact that their pro rata is not very meaningful at that point. They would’ve just taken it themselves, but they want to keep them happy, keep them engaged. And that’s a huge signal. So again, less of a competition element, more of a, “Boy you’re adding a lot of value.”

And then to your other point about, “Wow, if you’re not participating much with the other investors, you’re really building strong relationships with the founders, spending more time on founder references”—then I would spend a lot of time on the companies that they didn’t invest in. Because we’ve also had really interesting references of, “Hey, such and such manager didn’t end up backing us. But boy, the feedback we got was super helpful. They still made introductions for us. You can really tell that they’re super plugged in where it matters.” And so on and so forth. So it’s just kind of tweaking it based on what information you know you’ll be able to get.

Kanyi: So theoretically, I could put on my reference list a set of companies—maybe ones that are in my “anti-portfolio”—something that went well, but that I didn’t fund—and that person might have nice things to say about me. That’s a novel concept that never crossed my mind. But the way you frame it makes a ton of sense. Thank you for helping me plan my next fundraise.

Challenges to diligencing first-time funds

All right, Charmel, maybe we can start with you on this one: What’s broken with the current diligence process? Or maybe I can frame it more constructively and say, what’s the hardest part of it for you, and where do you feel like you’re stuck in the mud and it’s consistently the most troublesome part of the process?

Charmel: Well right now, Kanyi, it’s the speed of funds coming back to market. For us, if we were not in the prior fund and we’re diligencing the new fund, it’s really hard to diligence the progress of the Fund I. When we’re looking at Fund II, it’s hard to diligence Fund I. Right? So especially in this market, as Sara was saying, every fund looks good. Every deal and fund have been marked up. How do you sift through that? I think that has been the hardest part.

The quantitative side, a lot of the time, has been taken out of it. Because how do you benchmark? Everything looks good. So it really goes back to that qualitative—which, it’s tough, right? You could have a strong conviction on something and be completely wrong. I’m sure all of us on this call try to make data-driven decisions. And a lot of the time in these new funds, that’s been taken out. Sara and Lara touched on that: How do you diligence that? A lot of it is brand, right? So you’ve got to start trying to figure out, “What’s the brand that this firm is creating?” It could be with their current portfolio companies. It could be with the ones that they passed on. It could be with the co-investors, with the follow-on investors. But how does this firm distinguish themselves from their peers?

And Kanyi, you could probably speak to this better than all of us. It seems like for every single good investment—and good is relative—is going to have a handful of term sheets in front of them. There’s no more proprietary sourcing and deal flow. Everyone’s going to have a couple of them, but how can they distinguish themselves and win deals? I think that’s been the hardest thing to diligence. You could talk to the ones that did go with the firm. You can ask for the ones who did not go with the firm, and ask them why they didn’t. But again, at the end of the day, it’s going to be a lot more qualitative than quantitative. And that’s been the hardest part for us in this current market to diligence funds.

Kanyi: Lara, Sara: any further thoughts there?

Lara: No, I would just double down on that. I think even as we think about markups, even just the progress of the portfolio—there might be markups, but it’s hard to see how much. There’s strong growth, but it’s such a short time period. So understanding the longevity and the sustainability of that can be hard, even if we start digging down into the company. So I would just double down on Charmel’s views. We’re looking for understanding the brand, understanding the person, understanding the sustainability of them getting into good companies going forward. I think the question mark we all have is around how many of these seemingly strong companies are going to make it all the way through—which is hard.

Sara: I agree with what was said. I guess we have a different perspective in the sense that we’re a newer organization. So I don’t necessarily have a book of 50 funds that are coming back quickly.

Lara: You’re lucky.

Sara: Right. But I’ll say from our perspective, as we build our roster, where we spend most of our time—and where we think it’s most important that we spend our time—is on differentiation. There are so many managers we’ve started the conversation with, and it can feel like a sea of sameness at times. So many are telling the same story, focusing in the same areas. You can’t have this many funds have proprietary deal flow from Stanford, right? There are folks that have it and then there’s folks that talk about it, right?

So it’s this interesting space right now where we are spending our time looking for contrarians. Something that truly stands out where the team is exceptional in mapping to the area in which they want to invest and how they want to invest. That can be hard. 

My partner has a funny saying: “We spend our time trying to determine if something is contrarian-good or contrarian-bad.” And that’s probably the best way to put it, right? We are looking for things that are pushing the envelope, but you want to hit it on the right side, not the left side. So that’s the hardest part. But I think that’s honestly what we’re supposed to be doing. And also what keeps it interesting.

The underdog factor

Kanyi: I have another observation or question as I listen to you, which is that so much of how you assess and understand a fund is what they’ve done at the individual level or at the institutional level before. How predictive is what they’ve done before? How well does that map to what they’re going to do tomorrow? And especially if they’ve super crushed it. Part of me wonders if a little bit of hunger and “I have to prove myself” might actually correlate with having a little bit more of a chip on your shoulder. A friend of mine says, “Chips on shoulders put chips in pockets.” So I wonder how you guys think, at a general level, about leaning on the historical track record. And to that point, Brian Davis actually asked an interesting question: “Is there any proof that track record matters to show future performance?” It has me wondering, too. How do you lean into the future rather than overly leaning on the past? 

Lara: I’d say there’s research about persistence in venture, and there have been a couple of reports just recently released on that. There’s an element of a flywheel, where one founder has done well and has spoken well about you in their success journey. Others gravitate to you. So I think that in itself can be very valuable. But we also are looking for that hunger. I think a lot of people can still have it after a success, but you almost want a little bit of success, but also a little bit of failure in continuing to have that chip on your shoulder, as we think about people who have long track records. 

One of the reasons we lean into this space of first-time funds and emerging managers is because we see so much more motivation, generally—alignment and focus. Generally, people are early in their career. There are emerging managers or spinout managers that we do who have longer track records. But a lot of that is to your point about having that intrinsic motivation because you haven’t necessarily made it. But I think having some semblance of, “These things are working, these people like me, these people understand the value of what I bring to the table,” is what we’re looking for in the track record. It’s not that you’ve found all the great companies in the past.

Kanyi: I have a question about specialist versus generalist—and it came up in the chat, too. There’s a quote from Mike Moritz, who used to run Sequoia. He says something to the point of, “I rarely think about themes. This business is like bird spotting. I don’t try to pick out a flock, and my own personal editorial on it is that if you pick out a flock, you’ll find crows and sparrows. They fly south for the winter and they fly back.” Ross Perot calls it eagle hunting. You just look at the top of the mountains and then you see a bird of prey somewhere up there.

It feels like great founders come from surprising places, even if they’re in well-known networks. And that the future—almost by definition, if it’s an innovation—is not that predictive. How do you think about choosing a generalist VC versus a specialist? Do you have a bias one way or another? The benefits to a specialist seem apparent to me, but picking a generalist seems interesting. I’d love to just hear you touch on that a little bit.

Charmel: It’s a tough question, Kanyi, and I hate to be the guy to say “It depends,” but it really does. I’ll give you an example: If we’re looking for a crypto fund, I would personally need to see some very, very deep experience within that space versus a generalist floating over to Web 3 investments. Maybe their background is computer science and they’ve been in crypto for a long time—that’s one thing. But I think it’s harder to hit some of these deep tech–type spaces if you’re just a generalist. 

Now, if you’re talking about consumer tech versus SaaS or whatever, then yeah, generalists can be okay, and I like the ability of the fund to be versatile and move to where the good deals are. But I think for some of these very specific investments, like Web 3, we like to see more specialization than generalists.

Sara: I’d second that. Another point I would add is that even when we’re looking at generalist firms, there’s almost always a common thread among the deals. And by that, I mean the value that the GPs are bringing to the table. You may be investing across a few different verticals, but perhaps you’re the talent person—you’re really good at spotting holes in executive teams and you can help recruit for those roles given the prior roles you’ve had. Perhaps you’re the go-to-market specialist who really understands channels in your broader spaces, and that can be applied across the board. I think we’ve seen that ring true.

At the earliest stages, where a lot of these emerging managers are playing, having that kind of deep focus—either on the industry or on the value that you’re providing—is essential in winning the hearts and minds of the founder. So I think you end up finding more of that, both on the generalist and sector-specific fund side.

What’s an institutional investor, anyway?

Kanyi: One more question. What is an institutional investor? We use the word “institutional” to signify some level of…something. And I’d love to hear you talk about what that something is—and I’ll share a tiny bit of context before you answer the question. 

Lara, if you don’t mind, love to hear you start. The context is that so often, when a fund is getting started, they say, “Oh, I’m not ready for institutions yet.” And “institutions” is sort of bucketed as this big monolith. But that doesn’t sound right. And so I’d love to hear how you think about an institutional investor at the general level, and then what the distinguishing factors are between the different types, to the extent there are any distinguishing factors. So maybe we can close with just a little bit of discussion about that.

Lara: It’s a great question. And I don’t have a perfect definition, but I’d say when we think about institutional investors, it’s those that have a team focused on investing in external managers over a longer time period. So it’s not just doing one or two through friends or relationships, but trying to create a portfolio that lives for multiple years—decades. And therefore it’s a partner that you can have for the rest of your fund’s life. And that’s what the attraction should be. But because we do have processes, generally, it’s a higher bar and it takes more time than individuals who can make that decision by themselves on the spot, and write you a check without going through a number of hoops.

They can come in a lot of different forms. We’re an endowment-style fund, we have an evergreen pool of capital, and we manage money for lots of different organizations. But there are also family offices that are very institutional, that similarly have family money but are thinking about multi-generational kinds of investments. They have a process that’s very similar to what an outside investor would have, like an endowment-style fund or a fund of funds. So it really depends, I think, on the organization, but those are the things that I would think about. Generally, it’s a hard step—because those organizations go through a little bit more work as they think about this. When we make an investment in a first-time fund, it’s not just one fund—we’re thinking about this as a long-term relationship. And so that’s the reason, and I think that’s one of the big distinctions in my mind.

Kanyi: You’re all really generous and thoughtful in your descriptions of some of these answers. The definitional stuff I also find to be so important because it feels a little bit like fundraising is like any other sales process, where pre-qualifying and making sure you’ve got the right people in your funnel and how to get them down is 90 percent of the battle. 

Unfortunately, there isn’t a glossary for what being “institutional quality” is, is there? There isn’t a glossary for whether you’re in the “emerging manager” bucket or not. There isn’t a glossary for attribution. You can’t just look this stuff up. So I’m grateful to you all for offering the real talk and the nuanced questions.

My main takeaway, as I’m listening to this all, is that it’s really, really hard to get institutional investors excited—maybe because it’s really, really hard to be a VC. It’s just competitive out there. There’s so much opportunity, but there are other funds. 

Thank you all for giving us a little window into how to make it a little bit better. I look forward to seeing you all in data rooms in the future. 

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