• (Some) LPs Speak Up

    IMG_1919 (1)Venture capital used to be such an insular, under-the-radar industry that entrepreneur-investor Marc Andreessen has said that he’d never heard the term before arriving in the Bay Area in 1994. He’s hardly alone. It wasn’t until the mid- to late-1990s, during the dot.com boom, that the world became acquainted with what venture capitalists do. And it wasn’t until after venture capitalists Fred Wilson and Brad Feld began publishing insights about their work roughly 12 years ago that the art of VC blogging began to border on competitive sport.

    The exercise has paid off for many investors. Among those to actively raise their profiles (and presumably, increase their deal flow) through blogging are Jason Lemkin, whose new venture fund we covered here; Hunter Walk of Homebrew; and Mark Suster of Upfront Ventures. (CB Insights has a longer rundown of VC bloggers here.)

    Institutional investors, the money behind the VCs’ money, have not followed suit, though there’s reason to think the industry is thinking more about outreach at long last. Indeed, though these limited partners (LPs) have largely remained mum, not sharing much about their selection process, not blogging, and not talking publicly with reporters, a few signals suggest a change may be afoot, including recent feedback from one investor from a mid-size university endowment, who recently shared on background that he’s been asked to raise his profile.

    The reason, simply: competition. As you may have noticed, a smaller group of so-called top-tier venture funds now manages more of the money flowing into venture capital than ever before. Still, these firms can only responsibly manage so much, which puts pressure on LPs who want stakes in those venture funds.

    Perhaps because of uncertainty about the market, LPs are also less interested in brand-new funds right now than in the second or third funds of micro-venture firms that are starting to prove themselves. Forerunner Ventures, which has tripled the amount of money it is managing in the last four years, is just the latest example. These managers, too, can only make room for so many LPs.

    Then there’s foreign money. More specifically, there’s more of it than ever to compete with. Take Peakview,  which is the investment advisory arm of Shengjing Group and the largest global fund of funds in China. Its U.S.-based managing partner told this reporter in March that Peakview has millions of dollars to invest in U.S. venture firms. To curry favor with them, it’s promising to help their portfolio companies bridge networking gaps between the U.S. and China.

    More here.

  • The Industry Gets a New, $50 Million Micro-VC Fund of Funds

    Seed-Planting-SeedToday, Venture Investment Associates, a 21-year-old fund of funds group that commits capital to venture capital, growth capital, and private equity groups, is announcing that it has closed on an oversubscribed $50 million seed fund of funds that counts some pretty tony institutions as LPs. Managing director Chris Douvos — who joined the firm in 2011, having worked previously for TIFF (The Investment Fund for Foundations) and Princeton University’s endowment — won’t let StrictlyVC name those investors. But we talked recently about numerous other facets of the new fund, and who it’s liable to back. Our chat has been edited for length.

    This is your second formal micro-VC fund of funds, and half of it is already committed. Is that right?

    Yes, we’ve been investing in [micro-VC] since 2004; we were part of First Round Capital’s friends-and-family round. But we closed on an oversubscribed $25 million fund of funds in 2012, 80 percent of which went to four managers: True Ventures, First Round Capital, Data Collective and [O’Reilly AlphaTech Ventures]. And half of this oversubscribed $50 million fund is deployed among First Round, True, and Data Collective. We’re also likely to do OATV again when it comes back in the market.

    That’s concentrated.

    I believe investing is about conviction. I would give [First Round founder] Josh Kopelman the last dollar in my kids’ college funds.

    What kind of ownership percentage do you target?

    When we’re a major institutional backer of a new entity, we like at least 10 percent of the fund. In the case of OATV, back in 2006, we did 15 percent of the fund. At Data Collective, we [bought] 10 percent of fund in 2012. We have a group of [institutional] investors who are super sophisticated and we’re sort of bird-dogging ideas for them.

    What new idea are you spying? What other types of funds are you looking to back right now?

    We’re looking to find another group or two where we can really make an impact and put them in business. Having invested in the space for more than a decade now, it’s easy to tell who the tourists are and who the long-term players are. I focus on groups that somehow punch above their weight, that offer a platform dynamic where their companies will materially benefit from interaction with the VC but where the VC doesn’t end up being a bottleneck.

    I’m not looking for sharpshooters that are the next really smart ex-entrepreneur, because I’ve seen that model rise and fall several times. There are a plethora of these people raising funds; I think we’ll have a Cambrian explosion and the species will kind of die off during the next financial crash. It’ll be like a meteor hitting.

    Are you seeing many newer firms emerge with platform approaches? I take it you’re looking for another True or First Round – firms that do a lot to facilitate interactions between the founders of their portfolio companies.

    Firms that demonstrate platform dynamics are really special, but they’re few and far between. There’s no one on my radar screen right now.

    Do you care where a firm is based? Would you fund a firm that’s not in the U.S.?

    This is an information business, and when you’re investing far afield, you start outrunning your supply lines of information. You’re investing in people and you need to understand their motivations and their fears and their contexts, and it’s hard to know those when they’re thousands of miles away.

    Do you favor VCs who spin out on their own to entrepreneurs?

    I think operating experience is overrated and that people undervalue the investing experience of people who’ve written checks of institutional size. When I’m looking at an entrepreneur, I’m asking myself: How do they think about investing as a fiduciary, because it’s a very different skill set and thought process.

    There’s a bias in the Valley that [investing experience] is a secondary consideration and that finding a cool technology or exciting team will make everything work out. But we’re starting to see with late-stage deals that are heavily structured and sapping the returns of earlier investors that [those ties] aren’t sufficient to the end goal of making money for investors.

    What do you make of AngelList? Do you think more entrepreneurs should or will begin using it to form their own micro VC outfits?

    I think AngelList Syndicates and [the accredited investor platform] FundersClub could really reshuffle the landscape. We don’t know yet how those stories play out. We made a small investment in AngelList’s Maiden Lane [a fund that backs investors on AngelList] partially to have a front row seat as things unfold.

    But part of me wonders about a lot of people who are raising these small funds. Traditional fund structure is deeply flawed. The average fund lasts twice as long as the average American marriage. It often outlasts their LP’s tenure at an institution. They’ve got to be thinking: Why not raise money via AngelList instead?

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  • Chris Douvos: LPs Secretly Think “Certain Types” of Operational Experience Are Overrated

    Chris DouvosBy Semil Shah

    Earlier this week, we featured a Q&A with Chris Douvos of Venture Investment Associates, a straight-shooting LP whose career began at Princeton University Investment Company more than a dozen years ago. Because the interview ran a bit long, and because Douvos is a smart guy with interesting insights, we decided to run the rest of our interview with him here today.

    Are LPs starting to look for different kinds of backgrounds in the partnerships they back? If so, how?

    In terms of backgrounds, there’s not a lot of change; I think that classically trained LPs like to see some operational experience among their GPs, but there’s also a belief that certain types of knowledge and experience get stale quickly.

    There are a lot of people coming straight out of “hot companies” right now looking to raise funds, and I think that history teaches us that a lot of these funds will have unfulfilling results. In fact, some of the best investors out there — real titans of the VC world — had little operational experience.

    But there are many different routes to success. I think the flavor of the month right now is “the platform.” A position that a bunch of funds seem to be adding right now is “VP of Platform” or something similar. The archetype in this regard for me was Brett Berson at First Round. For years, I called him the unsung MVP of the venture business. And indeed, [First Round founder] Josh [Kopelman] and the whole First Round team have done an amazing job of conceptualizing, building, and iterating their platform. The True [Ventures] guys have done an admirable job, as well. Of course, Andreessen Horowitz has built something special, too. But having known all those guys since the beginning, I see how significant an investment the building of these platforms has been, and I think it’ll be challenge to replicate.

    What’s the one thing you believe founders should know about LPs in general?

    LPs are putting their GPs under an enormous amount of pressure right now as they evaluate if they even want to invest in venture capital. Aside from the [roughly] dozen firms that don’t need to worry about fundraising, everyone seems to be on the “watch list” right now. Proof points — whether they’re nice exits or strong telltales of progress — can mean the difference between an easy fundraise and a protracted slog for that stressed-out board member of yours.

  • LP Chris Douvos on the (Still) Difficult Case for VC

    case full o cashBy Semil Shah

    Chris Douvos is a rare animal — an LP who doesn’t shy from expressing his opinions publicly.

    Since 2011, Douvos has been a managing director with Venture Investment Associates, a fund of funds group that commits capital to venture capital, growth capital, and private equity groups. Douvos worked previously for TIFF (The Investment Fund for Foundations) and the endowment for Princeton University, “despite having not one, but two degrees from Princeton’s bitter rival, Yale,” as he says at his personal blog. We caught up last week for an email chat, part of which we’ll run separately later this week.

    Are you the only LP who blogs? Do you think other LPs will and/or should in the future?

    I think I was the most prolific blogger. Some others had tried it, but it’s time-consuming to keep it up; I’m not writing as much as I’d like nowadays, either, so I’ve got to sharpen the pencil again. Too many topics, not enough time! It’s also tricky for LPs because part of the voodoo we do is done in the shadows. We’re in an information business and knowledge is a scarce currency There’s a real “close to the vest” mentality and LPs are always glad to share their second-best ideas, but that’s about it. I’d be surprised if many LPs pick up the blogging standard, as a result.

    What’s the bull and bear LP view on the rise of equity crowdfunding and platforms such as AngelList, for example?

    I love crowdfunding and think that AngelList Syndicates has the opportunity to be massively disruptive to the funds world. I’m an investor in AngelList’s Maiden Lane fund and am watching what happens there very closely. My neighbors in Palo Alto are building a crowdfunding platform for real estate that’s really getting traction. There’s going to be evolution in all this stuff, of course, but having a front row seat is pretty exciting; after all, sometimes, we make the road by walking.

    As for the the broader LP world, it’s hard to say if there’s really a bull or bear view, as most LPs are still watching to see how some of this stuff shakes out. It’s more of a curiosity at the moment. Also, beyond [Bay Area] area codes, not that many people are really thinking about this stuff yet. As LPs, we’re trained to be patient, have an extremely long horizon, and gather data. Also, most LPs tend to be very risk averse. Jeremy Grantham famously says that 90 percent of decisions in finance first take into account career risk, and I think that’s true. It’s hard to get LPs to think — much less act — at start-up speed. That’s not a knock, it’s may even be a compliment as too many people have been run over by steamrollers looking to pick up shiny new pennies. That’s particularly true in long-dated, illiquid asset classes like VC.

    Companies are staying private longer, especially the breakouts. How does that affect an LP’s strategy?

    Venture capital is already the longest-dated, furthest-out-of-the-money option that most institutions invest in. In a post-Lehman world, institutions realized that illiquidity wasn’t free; it carried a risk premium for a reason. And once these institutions had touched the hot coal of liquidity risk, many started to actively seek to shorten the duration of their portfolios. Also, there’s a question about the evaluation horizon for funds. You rarely see results before a GP comes back with their next fund, and in a lot of cases, the evaluation horizon stretches longer than people’s attention span or tenure at an institution. This principal-agent problem is a big issue.

    To be sure, some risk appetite is seeping back into the market now, but people are asking hard questions about how long it takes to see distributions. Indeed, we’re seeing more interim liquidity, but seeing companies stay private longer makes it harder for the PE portfolio manager to make the case for VC in the Monday meeting at a multi-asset class pool of assets.

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