2021.01.03

Finding balance through escape, with some help from Dune

I’m laying down on a blanket, staring up at treetops, broiling in the shade under a July sun. This park is empty, save for people just passing through, no one staying any longer than their pets deem necessary. The grass and trees aren’t as fortunate, stuck in place, yellowing and browning day after day in a show of botanical malaise.

Somehow, the park is a means for escape. My world through much of spring was a three hundred square foot studio, every crack in the walls and creak of the floorboards an over-familiar friend. I could travel back to past memories of watching a sunrise over the Persian Gulf and a sunset over the rooftops of Barcelona, but denying the present couldn’t change it. Video conferences gave views into other worlds, but those worlds were all just the same off-white spare rooms we were pretending to call offices. I could change my daily routine, but that only underscored how much my world was staying the same. But time still moved as March simmered into April and boiled into May and exploded into June and now it’s July and I’m ready to go anywhere and everywhere. 

Which leads to this moment in this park, waiting for stray clouds to slide through the sky and blot out the sun, laying in the grass and reading Dune. Whereas I know the world around me, this novel’s world is new. It’s undiscovered for me, an exploration of Frank Herbert’s imagination through my own—people and plots and planets I’ve never before dreamed. It’s somewhere I’ve never been.

The world around me seems to slow and slow and slow as the journey of a young protagonist awakening to his power progresses faster and faster and faster. This tree-strewn park fades from my reality, being replaced by the red-brown hues of a desert world lifetimes away from ours. Adventures playing across hundreds and thousands of years in a universe that exists, in this moment, only in my mind.

This moment is my escape. My reality outside of it is filled with broken promises of seeking more balance in life and avoiding burnout. Much of the year before and after this point was and will be spent pushing myself further out of balance, ignoring the call to escape, all for the sake of ambition. But for now, I’m here.

I’m choosing to recognize the need to break from answering emails and analyzing investments and writing for an audience that isn’t me. I thought I had been making art by doing those things without pause, but I wasn’t. I was just grinding myself further and further and further down into a single-purpose tool, dulling my effect and affect with every use. It’s only by exercising the choice to escape that I do reach a balance for just a moment.

But moments do end, and July melted into August and stumbled into September and slid into October and accelerated into November and crashed into December and here I am in January of a new year. I don’t have any resolutions. I don’t want to lay grand, multi-decade plans in a world intent on destroying them, but I also don’t want to sit here waiting for the world to do that.

I do want to play at the intersection of creativity and conviction in everything I do. It’s not possible though as a single-purpose tool with tunnel vision, unbalanced and unable to escape and see where the new wild things are. I’ll just have to flow back into balance whenever I fall out. I’ll have to recognize those moments where my pace veers into the unsustainable. And I’ll have to give myself permission to escape.


2020.12.01

Investing artfully, publicly

Though it doesn’t apply to me directly, I’ve been thinking about this tweet below:

By investing on behalf of a public entity, our performance is public, as is the performance of the funds in which we invest. However, our portfolio construction decisions remain hidden behind the veil. Though I like to believe I’m open about how I think about investing, I haven’t publicly shared enough on why we’re building our venture capital portfolio the way we are.


I joined the Texas Municipal Retirement System in 2018, not so long after their first private equity commitment in 2015, and their first venture capital commitment in 2016. There was white space for investing in the private markets broadly, but the venture opportunity appeared near-limitless. There were limits though that I missed from the outside.

Our size (over $30 billion in assets under management) precludes us from making small commitments—our investments have to translate not just into percentage gains, but dollar gains. A $5 million commitment requires the same amount of work as a $50 million commitment, a $100 million commitment, or a $500 million commitment, and when we need to commit over $1 billion annually across private equity and venture capital with a four-person team, we have to brutally focus our time and energy. 

Our status as a public entity presents challenges as well. As I mentioned earlier, the performance of our underlying fund commitments is public (inviting further scrutiny to the managers of those funds), but there’s also the historical reputation of public entities being cumbersome limited partners, less nimble and flexible than their endowment, foundation, and private sector peers. I don’t have much sympathy for fund managers afraid of their performance being public, but I do understand that we’re not the easiest type of LP to accept.

These limits constrain where we can play in the venture capital world. Unlike smaller LPs we’re less able to participate in access situations, to compete for a small position in the over-subscribed fund du jour, and when we want to play we have to communicate our public entity-specific needs to those fund managers well in advance. Our scale sometimes makes us attractive to funds managers seeking concentrated capital bases filled by larger LPs—but, those situations are unfortunately not common.

I didn’t internalize those considerations right away. I used to believe we could build a venture fund portfolio like every other LP, despite the constraints of our reality. At first, I looked outward for the playbook to overcoming these challenges—ultimately, I realized such a playbook didn’t exist, and that we’d have to write it ourselves. 


Close to three years later, we now have the foundations of a portfolio built like a wheel: the “hub” being a collaborative, strategic relationship where we can more easily scale our capital, and the “spokes” being the interesting, opportunistic situations where we can still make commitments of scale (ideally at $40 million or greater per vintage).

The original venture commitment we made in 2016 was to a hybrid direct/fund investor. We’ve scaled this into the hub of our portfolio, committing $175 million to this relationship ($145 million since 2018), with a focus on that manager’s fund investing activity. Such a relationship helps function as an allocation solution—rather than making $5 million commitments to twenty separate funds, we can make one $100 million commitment to a team that has spent their careers successfully evaluating and investing in funds too small for us to consider on a direct basis.

We’ve subsequently added three spokes to that hub over the past year, totaling $150 million in commitments. We approached these commitments agnostic towards stage or sector—they were made through bottom-up evaluations of those fund managers within their categories rather than purely top-down predictions on the performance of specific sectors or stages. These fund managers also have high “slugging percentages”, architecting their portfolios to create a higher likelihood of asymmetric risk-return outcomes. And, we were able to make commitments of scale with these managers.


Despite playing different roles as hubs or spokes in our venture portfolio, these fund managers do share a common trait: they approach investing like art. Though doing so should lead to the high slugging percentages (and returns) that we seek, those metrics are still lagging indicators. We have to evaluate their investment decisions before the outcomes are apparent, requiring us to focus even more on the people themselves. And, if art is the blend of creativity and conviction, then these people should be acting upon the world, creating opportunities and sizing positions independent of whatever the crowds are chasing.

As I mentioned earlier, the playbook for building a venture fund portfolio doesn’t exist. That said, I don’t think it’s possible to make art with another’s playbook, by defining one’s investing through the words of others. Trying too hard to emulate Notre Dame, or Yale, or other LPs more experienced in venture capital would lead us to mediocrity—we would be playing an access-based diminishing returns game as the latecomer to a large, ever-growing crowd. Instead, we’re playing a game for an institution of our scale, while still architecting a portfolio made of investors who make art through their work. And hopefully, while making art ourselves.


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2020.08.08

An attempt to determine what "risk-adjusted returns" in PE and VC actually are

All investors seek strong risk-adjusted returns—some use Excel to try calculating this, others just stick their finger in the air. For starters, there’s not much agreement on the best way to measure returns in the private markets (though the flaws of IRR seem to be bemoaned more than others). And, the standard deviation of those returns doesn’t measure the risks investors accept (i.e. the potential for losses on our investments). The pursuit of alpha across private equity, venture capital, and the broader private markets remains fraught with underperformance amidst those debates.

One issue is the lack of data limited partners receive from general partners. Private funds (and their underlying portfolio companies) are valued quarterly, not daily like public market assets. Additionally, GPs are constrained in their ability to provide information to the LPs—their bandwidth is not unlimited, and they have to worry about making new investments (while helping the existing ones). What’s interesting to LPs can be distracting for GPs.

However, based on the data GPs provide, LPs can easily measure the following three types of risk:

  • The amount of capital invested in portfolio companies marked below cost;

  • The amount of capital impaired in those companies marked below cost; and

  • The amount of debt those companies carry (which is more relevant in private equity than in venture capital).

Of course, LPs also receive return data from the funds in which they invest (and from prospective GPs who aren’t afraid to send their performance [you’d be surprised]). With this data, LPs can see how much capital is invested in companies marked above cost, and what the gain is on that invested capital.

With this information, I created another framework to think about the risk-adjusted return proposition—or at least I haven’t seen anyone post it before, so maybe it’s new ¯\_(ツ)_/¯? The goal was to create a framework to apply across the entire private asset spectrum—outperformance can come from anywhere, whether it be private equity or venture capital or something that defies simple categorization, and investors shouldn’t be overly-wedded to any one source.

Risk in this framework is the ratio of capital impaired to total invested capital, the measure of how much of an investor’s capital is ultimately lost.

Returns are presented… differently. “Slugging percentage” would be a more accurate description, which I define here as the ratio of the dollar gain on investments marked above a 20% IRR to the dollar loss on investments marked below cost. I used IRR instead of the multiple on invested capital, as money does have time value, and IRR better allows for like-to-like comparisons across different strategies.

In the example above, PE GP 1 and VC GP 5 are exceptional at managing risk—they generate massive outperformance with minimal capital incineration. Credit GP 10 delivers less outperformance, though that’s expected given their credit investing focus. As one moves away from the left side of the chart though, the evaluation becomes more interesting: an efficient frontier emerges. One can argue whether or not PE GP 2 is a better investor than PE GP 3, but PE GP 4 is better at protecting capital while outperforming. Credit GP 9 may outperform slightly more than Credit GP 10 but does so while impairing much more capital (which is not ideal in credit investing). VC GP 6 may impair a lot of capital, but they do so while generating sizable outcomes. VC GP 8, however, sits in the “here be dragons” section of the chart, impairing capital with reckless abandon and little to show for it (which is also not ideal).

As with everything everywhere, there are caveats. Though I think IRRs greater than 20% are strong, that specific benchmark is still arbitrary. Like all models, it’s “garbage in garbage out”—including unrealized investments places an extremely high reliance on how specific GPs value their portfolios. Past performance also doesn’t predict future returns, and performance can erode over time as organizations change shape with additions and departures. Lastly, it doesn’t account for qualitative information, like the actual interactions LPs have with GPs, or what LPs learn about GPs and their portfolio companies through backchannels.

That said, I think this goes further towards answering the question of risk-adjusted returns than simply slapping IRR and standard deviation onto a chart. Despite the clear imperfections it does account for the dollars at risk, the dollars returned, and the degree of outperformance, while also evaluating a GP’s skill in portfolio construction. Applying some version of this framework could help an LP build a better mosaic in diligence on a GP, and maybe even lead to more artistic investing.


Hopefully, you made it this far—this edition was drier than most. Enjoy the rest of the weekend.

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2020.07.18

"Solo capitalists" in venture capital & the fundraising game behind the investing game

For more than a decade now, successful angel investors have been encroaching further into the realm of venture capital. Whereas in the (slightly) more distant past individual investors only had the scale to play at the earliest stages of company formation, the more successful and connected ones have been leading larger and later rounds of venture financing.

Nikhil Basu Trivedi calls the latest evolution of this trend The Rise of the Solo Capitalists, describing them as follows:

They are the sole general partner (GP) of their funds

The solo capitalist is the only member of the investment team

The brand of the fund = the brand of the individual

They are typically raising larger funds and writing larger checks than super angels - i.e. $50M+ funds, and able to invest $5M+ in rounds.

They are competing to lead Seed, Series A, and later stage rounds, against traditional venture capital firms

In the 2010s, several successful angel investors scaled their activities into full-fledged firms (e.g. Jeff Clavier with Uncork, Kirsten Green with Forerunner). But others would keep an even more individualistic streak, leading investments on their own rather than creating institutions with distinct brands (e.g. Chris Sacca and Suhail Rizvi purchasing pre-IPO Twitter stock from existing shareholders). Today, these “solo capitalists” are raising more and more capital for funds and singular transactions, moving beyond those earliest stages of company formation and competing with the well-known institutional venture firms. These people, like Lachy Groom and Elad Gil, are neither building investment teams nor creating separate brands—they’re playing the investing game their way. Unfortunately, they’re also playing another game, one that isn’t well-equipped to serve these solo capitalists—that one being the fundraising game.

For GPs, the game of fundraising exists atop the game of investing. It’s one designed to benefit both under-resourced institutional LPs and well-resourced GPs—however, despite fundraising being so critical to the survival of investment firms, most GPs aren’t well-equipped to fundraise. The largest firms can sink tremendous resources into their fundraising and investor relations functions, creating products (i.e. funds) that are easy for institutional LPs to buy. Smaller firms will have fewer resources for this purpose, requiring them to pull their investment professionals away from investing. And, the solo capitalists will have only themselves.

That’s not to say solo capitalists are unable to fundraise—they are, or else we’d be discussing something else. The challenge they face (assuming they have such aspirations) is scaling both their investing and their LP base while remaining solo. Funds do solve problems for larger institutional LPs: they allow for those LPs to commit large sums of capital every few years across a diversified set of companies. Committing smaller amounts to smaller funds or investing transaction by transaction is much more difficult—it would effectively prevent an LP from spending time on other opportunities. Issues like key person risk and the lack of team or infrastructure will also push LPs away from solo capitalists (or search funds in the private equity realm), and towards the easier option of funds.

Funds should continue to unbundle, and the rise of the solo capitalist should happen. But, we don’t live in a vacuum where institutional LPs can commit to individuals with ease through a platform like AngelList. Instead, the fundraising game is both laden with technical debt yet functional enough for the players involved, those under-resourced institutional LPs and well-resourced GPs. Until that technical debt is removed solo capitalists won’t be the option for LPs and entrepreneurs alike—but that’s okay. There just need to be more options.


As always, enjoy the weekend.

2020.06.28

Emoji-driven movements & creating momentum in fundraising

Throughout Thursday and Friday, the emojis 👁👄👁 and the phrase “it is what it is” flooded the news feeds of tech Twitter. A new Twitter account @itiseyemoutheye linked to 👁👄👁.fm, which at the time only featured a sign-up that said: “give us your info”. I assumed it was another exclusive, private invite-only social media app, like Clubhouse’s launch several weeks prior, but I had no idea. Neither did Forbes. Neither did The Independent.

It wasn’t an app though. At 7 pm PST on Friday the website launched, with calls to action of donating to several non-profits, as well as a statement with the following quote:

In a strange way, this sort of became an anti-statement against what we’d all seen on tech Twitter. We’re a diverse, ragtag group of young technologists tired of the status quo tech industry, and thought that we could make the industry think a bit more about its actions. Despite calls-to-action like that “It’s Time to Build” essay we’ve all read, most of the industry (from product teams to VC) still stays obsessed with exclusive social apps that regularly ignore — or even silence — real needs faced by marginalized people all over the world, and exclude these folks from the building process. As an industry, we need to do better.

Since Thursday, the creators of 👁👄👁 .fm have helped raise over $200,000 for causes like Loveland Foundation, The Innocence Project, and The Okra Project. They dominated the attention of many—venture investors included.

The creators of 👁👄👁 .fm proved they could generate momentum more effectively than those same venture investors and other GPs do when raising capital from LPs. To paraphrase a friend, every investment requires two champions on either side, and it’s a lot easier when the party fundraising can either remove friction or generate momentum from a standing start. Granted, GPs don’t have an LP-only forum that allows them to broadcast their thesis and then raise their funds in days (e.g. “here’s why the future of work is on the blockchain and oh by the way sign up for my fund”). But, they can still do better building interest in how they’re investing, while finding the true believers who make their fund more of a movement rather than just another fund.

I don’t believe there’s a one-size-fits-all playbook to fundraising, but that instead, every pitch requires an approach specifically customized to each potential investor. However, there are similarities among the opportunities where we rapidly gained conviction and became true believers. The people raising already had the credibility to carry out their thesis—we wouldn’t be meeting otherwise. From the very first meeting, they demonstrate this intensity and sense of conviction in how they invest. And lastly, they allowed us to feel like the decision to invest was optional. They allowed us to feel like if we invested it would be a collaboration (to a degree), as if we would be a part of a movement together.

What the creators of 👁👄👁 .fm accomplished doesn’t translate perfectly to fundraising in cottage industries like institutional investing. And in their words:

a lot if you are really overthinking this there was no elaborate planning and marketing strategy we were literally just vibing

So yes, I know I’m over-thinking it. It still takes a special type of natural intensity to do what they did in so little time though. It’s also true that many GPs have successfully fundraised with elaborately-planned, less natural strategies. But, it is what it is.


Enjoy the rest of the weekend. Here’s what I’m listening to.

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