VC Fundamentals Part 4: Portfolio Construction & Management (with Jaclyn Hester & Lindel Eakman of Foundry Group)
We continue our VC Fundamentals series with Portfolio Construction & Management — how do you build and manage a fund's portfolio as a whole, beyond each individual portfolio company and investment decision? We brought in two of the very best people in the world to help us dissect this topic: Jaclyn Hester & Lindel Eakman of Foundry Group. Jaclyn and Lindel have been early and longtime LPs in some of the best venture funds in the world: USV, True, Spark — and of course Foundry — and now also sit on the GP side of the table at Foundry. Tune in for a master class on how the best VC managers think about generating and optimizing fund performance.
Sponsors:
Sierra: https://bit.ly/acquiredsierra
Topics Covered:
1. The bar for what "good" venture fund performance looks like in terms of returns:
Where venture sits on the spectrum of capital allocation options available to limited partners
The difference between "gross" and "net" fund returns and why IRR is still important
The distribution of returns across venture firms & funds — how many hit the performance bar — and the importance of diversification vintage years
2. Portfolio construction: how do you allocate the fund's capital across companies?
Why have a "portfolio" at all vs. loading up on a few high conviction investments — and what an LP's incentives are for diversification vs. a GP's
How to determine overall $ size you should target for a fund
Concentration vs diversification and the concepts of "shots on goal" and "groups" of high-potential companies within a portfolio
Fund reserves planning — are you "making your money at the buy", or able to buy up over time in your winners?
3. Balancing playing offense and defense:
The upside potential of "interstitial rounds"
Whether it's possible to save a company with more capital, and if pivots are a good idea
4. Time allocation vs capital allocation within a fund:
Understanding and managing your own cognitive biases
Why time & effort allocation across a portfolio rarely matches capital allocation (and shouldn't)
Why a firm's partnership dynamics are typically the most important driver of funds' outcomes
Links:
Foundry Group: https://www.foundrygroup.com
Seth Levine's post on skewed VC returns: https://www.sethlevine.com/archives/2020/10/vc-fund-returns-are-more-skewed-than-you-think.html
Fred Wilson's posts on losing money and portfolio outcome distributions: https://avc.com/2016/04/losing-money/and https://avc.com/2012/07/the-power-of-diversification/
20VC: Why Many VCs Fail To Raise, Why LP Compensation Is A Massive Problem & Why Fund of Funds Will Become More Prominent with Lindel Eakman, Managing Director @ Foundry Group
Lindel Eakman is a Managing Director @ Foundry Group and is a nationally recognized leader in the LP community having successfully managed the private investment program for the combined $35 billion pool of capital managed by the University of Texas Investment Management Company (UTIMCO). There he was responsible for overseeing a portfolio of private equity fund managers which represented approximately 25 percent of endowment assets. Prior to UTIMCO, Lindel worked for KPMG in the mergers & acquisitions tax practice where he worked with many fund managers across due diligence processes and private investment partnership activities. Check out Lindel's Partner @ Foundry, Brad Feld, on the show here.
In Today's Episode You Will Learn:
1.) How Lindel made his way into the weird and wonderful world of LPs and then Foundry? What is the origin story behind is first fund investment, Union Square Ventures?
2.) Question from Michael Kim @ Cendana: How is Lindel approaching portfolio construction for Foundry Next? What combination of GP portfolio & direct exposure diversifies the portfolio while retaining upside through individual deal performance?
3.) With the direct co-investment platform how does Lindel look to mitigate the negative signalling that can occur with opportunity funds? Does Lindel agree with Chris Douvos in stating this could lead to the 'hybridisation of GP and LP'?
4.) Where do most prospective fund managers fail when pitching to LPs? What does Lindel look for in a risk strategy for a potential fund investment?
5.) What are the biggest problems with the LP community today? What would Lindel like to see change? What do the financial compensation plans look like for LPs?
Items Mentioned In Today's Show:
Lindel's Fave Book: The Creature from Jekyll Island, Daemon
Lindel's Fave Blog or Newsletter: Reiley Brennan: Future of Transportation, Fred Wilson, Benedict Evans
Lindel's Most Recent Investment: Resolute Ventures
As always you can follow Harry, The Twenty Minute VC and Lindel on Twitter here!
Likewise, you can follow Harry on Snapchat here for mojito madness and all things 20VC.
Angelloop is the leading post funding management platform for private market investors and their portfolio companies. They help investors manage and track their portfolio companies on the cloud while providing them with access to their investments performance data. Angelloop helps founders of startups track their performance, manage their cap table and keep their investors in the loop. Investors get free access while their portfolio companies pay only $49/Month. Use or share the promo-code 20MinVC to get your portfolio companies online with a two month trial.
I'd like to thank Wealthfront for sponsoring today's podcast. Wealthfront are financial advisors that can help you invest your hard-earned dollars. Wealthfront's modern financial services helps tailor plans specifically for you, making it easy to reach your financial goals. Wealthfront has low fees and no trading commissions… It's financial advice at a fraction of the cost of a traditional advisor, all online. And if you sign up using my URL, you'll get your first $15,000 managed for free. Go to Wealthfront.com/20vc.