LPs as remix artists & "hype" in fundraising & the investor playing field

“I’d like to say that it’s a hopeful sign that the art market still has hunger for innovation, and that, as much as buyers reward artists for churning out the same thing year-over-year, there’s still room to branch out,” says Kevin Wiesner, a creative director at MSCHF.

Several weeks ago the art collective MSCHF bought a Damian Hirst print, cut out its 88 spots, and sold the now hole-filled print for multiples of its original cost. This “new” piece is derivative—and yet, it somehow became more valuable with every missing spot. The destruction was just a remix though. It’s still art.

I believe limited partners underestimate their ability to make art through their investing. It’s an easy mindset to fall in—we’re just limited partners, with little-to-no influence with investment firms and their portfolio companies. However, by making the effort to meet investors who think differently and showing the conviction to invest with them, one will build a portfolio of styles that otherwise wouldn’t be replicable in a single opportunity. Thus, art.

This art isn’t so different from the kind painters and singers and writers make. The investor canvas just happens to be a spreadsheet, the portfolios their product. And like all art, the portfolios are never finished—they’re ever-changing as positions fall in and out of favor, and as new opportunities branch out. Or spring anew.

What I’ve read recently:

Clubhouse, Hype & Startups. For those of you who productively spend your free time off of Twitter, you may not know about the new/exclusive social app Clubhouse. Despite not being one of the cool kids on the platform (c’est la vie), what’s interesting to me about their story is how they created hype among potential investors. To quote Fred Destin:

It’s quite the shortcut, creating a hype wave within the circle that’s going to fund you. I can only admire the marketing prowess.

It’s amazing how few investors (both emerging and established) understand this—raising capital from limited partners is much easier if there’s some sense of hype around the process. Otherwise, potential limited partners won’t feel the pressure to invest. This doesn’t mean an investor should use high-pressure sales tactics (please don’t, you’ll just pressure me into a quicker “no”). The pitch and the interactions still need to be authentic to the investor. That said, if a fundraising process doesn’t generate hype, that investor should probably examine their chosen approach.

The Playing Field. I wish I’d discovered Graham Duncan’s post sooner. To single out just one quote:

“The critical challenge for Level 3 investors is to find a way to be exposed to Level 4 investors. If their world consists of only Level 2 and 3, they may stay where they are for the rest of their careers.”

This quote still works if you replace “investors” with any other profession: athlete, musician, TikToker, etc. Being exposed to the best in any field shows you the real benchmark to strive for (and exceed).

I remember the last time I met with an investor who fit Graham’s definition of “Level 4”. By the time of that meeting, I was already familiar with this investor’s firm: the performance, the team, the strategy, the vast majority of the information that plays into an investment decision. It was my first time meeting the founder however.

Most pitch meetings follow a similar path. We easily could have defaulted to that path and re-hashed information in their pitchbook, but instead we took a different route. We talked about the firm’s direction to that point, the way forward over the coming years, and each of our approaches to investing. The game being played wasn’t the rehearsed fundraising pitch—it was the conversation itself.

It brought me back to my experience as a boxer in college, how the punches themselves were only a piece of the action. The real action was the dance: the in-between, the movement in the ring as each fighter decides how and where and when to engage and disengage. Questions and answers calculated in the moment, thrown back and forth—the text of the conversation may have been about investing, but the subtext was the dance.

Leaving that meeting, I realized I was probably following the right path. That combining creativity and conviction could maybe separate me not just from other limited partners, but investors in general. And, that leveling up further would require me to find more of those “Level 4 investors”, to partner with the masters in the field, and to continue learning from them over and over and over again.

This was a much longer post than usual. Apologies. Enjoy the final two episodes of The Last Dance. And here’s a painting that used to have 88 spots.


The two-month sprint & "out of business" LPs & the blurring of LPs and GPs

As limited partners, it’s strange to realize that our “response” to the current crisis took place over the past five years. If our response only just began in March, it would be too late. If we’ve done our jobs correctly, then we already committed to GPs who prudently invested our capital over that time, who now have resilient portfolios and the dry powder to capitalize on further market distress. The outputs of our decisions today are (relatively) far in the future, but I believe the score will take care of itself.

But the last two months were still a sprint. Throughout a global pandemic, a shift to working from home, and onboarding and offboarding of team members, we didn’t hit pause—we continued to execute. Shifting between the immediate pipeline and the long view amidst those circumstances was a shock at first, but that feeling did fade. And with much of that immediate pipeline executed, I feel like I can come up for air at this point.

Coming for air feels like the end of the beginning. The immediate opportunity triage is over. To paraphrase Bill Gurley, our job is to partner with GPs who see the present clearly. We already know which of those GPs can stay active in the present—now we just need to find the ones who can become active as the crisis evolves and fades into a recovery.

Here are some recent reads/listens I enjoyed:

  • Learnings from our community. LPs may be “out of business” through year-end due to COVID, but not entirely. Barring exceptional circumstances (e.g. Benchmark deciding they need a Texas-based public pension LP, in which case, hello), if we’re meeting a GP for the first time this late in the year, then a commitment that same calendar year is unlikely. In normal times, we already have a sight-line to fully allocating our capital for a given year before it starts. In COVID times, we have even more options, so we can be more selective. Also, I disagree with Lindel saying his post “was way too long”. Being one of a few firms that are both direct and fund investors, Foundry Group can credibly deliver those insights. Whereas if I ever opine on direct investments, you can credibly unsubscribe.

  • Innovation from Asset Giants at Capital Constellation. What’s wonderful about this podcast is that it highlights LPs who approach the private markets not as allocators, but as investors. Wafra, Railpen, and the Alaska Permanent Fund are LPs with infinite time horizons, who had an idea to better align themselves with the other side of the table, and are actually executing on that idea. I found Daniel Adamson’s comments towards the end interesting as well, on being a contrarian in thinking about structure and not accepting the false distinctions between LP and GP. Such views have led large scale institutional LPs (mostly outside of the U.S.) to bring their investment activities more in-house. The world and the markets may present imperfect options for investment, but that doesn’t mean we shouldn’t try to create our own.

Happy Mother’s Day weekend. Here’s some In Rainbows.


The "time to build" for LPs & banded returns in software companies & unlocking talent in the private markets

To quote Marc Andreessen’s recent call to arms:

What are you building directly, or helping other people to build, or teaching other people to build, or taking care of people who are building?

For limited partners with infinite time horizons, it’s surprisingly easy to fall into short-term games. We’re human, it’s our nature. We face constant pressure to invest without creativity or conviction—to become trapped on the fundraising treadmill, only committing to legacy brands and existing relationships that haven’t met expectations.

Crises force introspection, and it’s fair to expect limited partners to re-evaluate how we build. This current crisis has broken that fundraising treadmill, creating an opportunity for change: to avoid the fear-of-missing-out games played by shorter-term participants and to instead approach potential investments with longer-term mindsets.

There’s much we can do to change how we build. Lay the foundation to proactively meet other investors, forming relationships over time. Take every opportunity to top-grade our portfolios, investing with the strongest of those new relationships, and sunsetting the existing relationships where the risks outweigh the future returns. Help create solutions for problems those new relationships are working to invest behind and solve. Get to know the next generation of investors before everyone else. And, treat our portfolios like artwork, and acknowledge they’re never finished. Counterintuitively, keeping our eyes on the horizon will allow us to react to coming changes more quickly than our counterparts focused on the immediate.

It’s impossible to say what the outcomes of our actions in this current crisis will be, let alone those of other investors and market participants. However, I believe by re-orienting our view towards the longer-term the score will ultimately take care of itself. On the other side of this crisis we’ll be even better positioned to build, and to support other great investors as they build.

What I’ve read recently:

  • When Tailwinds Vanish. John Luttig writes that “Once Sand Hill Sachs exists, it will become clear that VC dollars should be reserved for R&D, not S&M or G&A.” I believe venture capital shines when applied towards capital-inefficient problems. Eye-popping outcomes may still happen in enterprise software or the consumer internet, but as value levers become better understood in those spaces the potential returns will become far more banded. Investors who’ve previously thought of themselves as venture capitalists may need to shift towards more capital-inefficient areas: to earlier and earlier stages, or frontier technologies. Or, they can rethink their toolboxes and become more creative in the solutions they provide companies.

  • $1 trillion in equity: How Carta is set to unlock the private markets. The rise of Carta is pushing the mid to late stages of venture capital towards a future with even more efficient price discovery. I wouldn’t describe the platform as a headwind for its customers given the value it provides them, but it’s potentially a strong tailwind for the talent at those companies. To re-phrase Arjun Sethi and the Tribe Capital team’s argument, Carta may unlock the private labor markets, allowing for both more fluid talent movement between companies and company creation itself. And in providing those on- and off-ramps for equity ownership, more value will accrue to Carta for serving as the gateway of record.

Enjoy the rest of the weekend. I’ll be trying to make a larger dent into Dune (as Preeti Singh at the WSJ reported), probably as I over-play the song below.



Scott Malpass' retirement from Notre Dame & private equity's reckoning & health security & the "time to build"

I didn’t know Scott Malpass, and yet it’s still a surprise to read the news of his upcoming retirement. At Notre Dame he’s been a constant, leading their endowment since before I was even born. I guess I always assumed he would lead it forever.

Since I entered the LP world out of college in 2012, people would ask if I ever had the chance to meet him when I was a student. He’s one of few legends on the LP side of the table, growing the endowment from $425 million to over $12.5 billion and in the process making a small private university in northern Indiana one of the most highly-sought LPs in the world. His retirement coincides with the beginning of the next economic crisis, but the endowment isn’t a fragile undiversified collection of stocks and bonds—he built it into what’s now a fortress impenetrable.

I have to imagine every Notre Dame graduate in the investment world gets that same question I’ve faced. And even though we’ve never met, and even though I’m far from South Bend, as both a Notre Dame graduate and an LP it’s hard not to feel the pressure to live up to the standard Scott Malpass set. He’s been an investor for us to aspire to be.

Three recent posts I’ve found interesting:

  • The Day of Reckoning for Private Equity. The rumors of private equity’s demise are… perhaps not so exaggerated. Demise is a strong word for me to use—over the past twenty years the venture capital and hedge fund worlds had their respective reckonings, and yet they still carry on. I think Ted Seides’ comparison to hedge funds is apt: “Fees compressed, the industry bifurcated into the mighty and minnows, new entrants faced uphill battles”. Maybe we’ll even see a movement towards not levering portfolio companies into debt-filled foie gras, towards an emphasis on real operational value creation. Lastly, Ted states that “every CIO I have interviewed on the Capital Allocator podcast speaks of the quality of people as foremost on their mind when making manager selection decisions”. I’m not sure who these LPs are that don’t consider the quality of the people the most important factor in diligence, but I imagine their track records are less than exemplary.

  • We need health security, not just health care. To quote Noubar Afeyan, “we have sickness systems, not health systems”. In this op-ed Noubar discusses the concept of health security, of finally treating healthcare like the public safety issue it is and devoting more resources to the prevention of diseases and other health conditions. And if now’s not the time to shift our mindsets around health, as we experience a pandemic shattering our fragile societal systems, when will it ever be?

  • IT’S TIME TO BUILD. I should spill more digital ink soon about Marc Andreessen’s call to arms. But for now, in the wake of this crisis I hope that investors and governments alike will decide to build and invest much more heavily within areas of high gravity. The life sciences, frontier technologies, the capital-inefficient spaces where venture capital truly shines—the areas that help push the future forward.

This has already been a longer post than usual. My condolences. Hope all of you enjoy the premiere of The Last Dance tonight.



The fundraising window & preparedness for change & the new social contract

Now’s not the time to fundraise at all. Entrepreneurs learned this very quickly. It was only several weeks ago that GPs were telling us they were moving ahead with their fundraises as planned—now reality and uncertainty have set in, and fundraise timelines are being pushed out further and further.

LPs and GPs have similar questions to answer. Can we make new investments without meeting in-person? How much time should we spend worrying about our current portfolio versus those new investments? Even if our portfolio is healthy, are there even interesting and actionable opportunities for us to consider right now?

I believe the answer to the last question is yes. We’re still open for business—but the bar is even higher now as the uncertainty has grown. And I have to imagine if this public market volatility persists, the denominator effect will prevent even more LPs from re-entering the private markets (assuming they were already close to fully-allocated in private equity and venture capital). If a GP hasn’t already launched their fundraise, they should probably just wait until LPs become buyers again. They may be forced to regardless. Much like the IPO window right now, the fundraising window is effectively closed.

  • Inside the Story of How H-E-B Planned for the Pandemic. Whole Foods may be more well-known outside of Texas, but H-E-B is the real national treasure. Texas Monthly presents H-E-B’s response to this current crisis, but the company has done well adapting to industry trends. They launched their premium store line in the 1990s (Central Market), they’ve acquired a venture-backed delivery platform (Favor), they’ve built bars and performance spaces into their stores. Change will never find them flat-footed.

  • Virus lays bare the frailty of the social contract. Crises require hard decisions and harsh self-assessments. It’s quite striking to see the Financial Times editorial board suggest the need to consider universal basic income and wealth taxes as potential reforms. It’s also surprising to see no mention of expanding access to healthcare, given what’s become a more clear relationship between public health and national security. Either way, striking the balance between implementing a strong enough safety net while allowing for free-market capitalism to thrive will be a necessary challenge for governments to address going forward.

Happy Easter everyone. Here’s the view from the home office right now.

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