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Volume #25 TL;DR:

• GPs and LPs are reducing the track record to it’s essence in such a way that they are missing out on critical pieces that would provide a better, more holistic understanding of the GP’s track record.

• There is a variety of things we can prove that help us as LPs get a strong indication of whether the GP has historically and going forward potential to access and pick the best founders.

• We need an increased attention span for people and a long-term view on people when we diligence Emerging Managers.

You can find more articles and resources on the Embracing Emergence website.

Table of Contents

• Reframing The Track Record

• A Holistic Track Record

• Ways to Reframe Your Diligence

Reframing The Track Record

The other day I enjoyed a great conversation with Evan O’Donnell, General Partner at Timespan Ventures. Evan was so kind to share our conversation on his blog “The Times”, which you can check out here.

We were discussing several topics spanning from what to look for in Emerging Managers, how GPs can address the “slowness” of some potential LPs, and how LPs can think about the track record of Emerging Managers.

I wanted to spend some more time on the topic of the track record for Emerging Managers, since it is a common friction point that still suffers from reductionism and a misunderstanding of what a track record can actually look like.

How is the topic of the track record suffering from reductionism? It’s because both GPs and LPs are reducing the track record to it’s essence in such a way that they are missing out on critical pieces that would provide a better, more holistic understanding of the GP’s track record.

Ultimately, the telos of how the track record of Emerging Managers is understood today is to see: “Have they done it before and can they do it again?”

What the track record should proof is the GPs’ ability to access and pick the best founders repeatedly. Repeatedly is a key word here.

But accessing and picking is not just reflected on an excel sheet that shows the angel investments or investments made at a previous firm. I would even say that just because you were able to access founders when you were at a previous firm, or had a job that financially enabled you to be an angel investor, does not directly apply to being a first time manager who barely receives a salary, has to be on constant plane rides to meet LPs, has to run a firm, all while investing in founders.

I am not saying the direct investment track record is not an indicator, but it is too singular of a source of truth to apply directly to predicting the investment execution of a Fund 1 or Fund 2. I am not backing your previous track record from a different environment.

So, what other pieces could GPs and LPs add to their definition of a track record that will enable them to understand the predictability of accessing and picking the best founders in their Fund 1 and Fund 2?

A Holistic Track Record

A track record only makes sense if it is provable. What I want to argue for is that we misunderstand what is provable as a track record. There is a variety of things we can prove that help us as LPs get a strong indication of whether the GP has historically and going forward potential to access and pick the best founders.

Here is a list things you can prove that add up to a holistic understanding of the GP’s track record:

1. Zone of Genius

   Has the Manager historically executed within the industry they are going to invest in. Have they proven that the strategy they want to execute with their Fund 1 or Fund 2 is their zone of genius. This is easy to prove by assessing their professional experience, reference checks with people that have relevant touch-points with the GP in the past, testing their expertise within the industry sector they are investing in.

2. Relational Capabilities

   We repeatedly hear of great investors who spent an unreasonable amount of time building relationships that at first glance did not seem to achieve the most urgent goal: getting capital. In our conversation, Evan was telling me about his time at Bridgewater and observing how he built a much deeper LP-GP dialogue that resulted in LPs keeping their capital with Bridgewater in economical cycles where other hedge funds would have to hedge against LPs pulling their capital out contractually. As LPs we need to assess that the GP has proven capabilities that will help them build a fruitful GP-LP relationship as well as getting an advantage with founders through their close relationships. I know many GPs who share stories about being explicitly invited in by founders, who expressed a desire for the GP to join their round despite it being full. These stories are easy to prove.

3. Scrappiness

   Being scrappy might be one of the most under-looked track records an Emerging Manager can bring to the table. Why is it important? Because many Managers will be spinning out from larger firms or are leaving their successful career position to enter a situation filled with a substantially lower salary, rejection, travel, constant self-doubt, operating a firm with a lack of resources, endless calls and meetings with founders, investing with a very limited amount of capital, legal compliance, looooong LP decisions, managing existing LP relationships, being present online, etc. There is not enough time in a day to be an Emerging Manager - but you have to make it work. Being an Emerging Manager is not like being an investor at a large firm. You might have successfully picked top companies, but now you are operating in a completely different environment. So how have you shown that you can execute in an environment where your ability to push through and endure while continuing to invest is crucial?

4. Thoughtfulness and Conviction

   Has this Manager a proven history of thinking about the world, society, problems that need to be solved, in such a way that they can translate their thoughtfulness into their thesis and successfully predict future winners?

5. Commercially Minded

   One of my favorite FoFs “Allocator One” states that the top 1% of Emerging Managers are commercially minded - meaning, they build a generational firm, not a personal brand. You can prove this in how they tackled their reputation and business in their previous professional experience. You can also assess how they are thinking about their firm, future hires, etc. This matters, because ideally you grow with the manager way past Fund 1 and Fund 2. You want to be the LP that finds the next generational firm.

The trick for Limited Partners is to accept the fact that a track record is more than a spreadsheet. A track record is something relational, it says something about the framework of thinking of the GP, it shows us something about their ability to operate a company, and it indicates the GPs’ ability to access and pick founders. And all this is provable.

You will have noticed that I am applying most of these points to Fund 1s and Fund 2s, for the simple reason that both of these funds require of the LPs to be more holistically minded in their due diligence. If you are an aspiring Emerging Manager or currently raising Fund 1 and are looking for frameworks of how to structure your fund, this original data report from Sydecar breaks down how Fund I managers are rethinking management fees and carry by implementing more flexible fee structures designed to build trust with their LPs.

Ways to Reframe Your Diligence

When we first started out investing in Emerging Managers we first had to assess our own capabilities anew and ask ourselves: what are we better at than almost anybody else and how should this influence how we pick Emerging Managers.

If you answer this question with having a wholistic map of the track record in mind, you can see: okay, this is what all I need to assess to determine whether this GP can successfully execute on this strategy. And here are the items I can prove. And here is what I can definitely prove with a high probability, based on my unique ability to diligence this certain element. For us, this was the relational capability of the GP.

Ask questions that reveal value in hidden places. It is our job to uncover the track record of the Emerging Manager that either leads to a clear “no” or a “yes”. Questions take patience and time. We need an increased attention span for people and a long-term view on people when we diligence Emerging Managers.

When starting Embracing Emergence, this was a rough visual of items I can diligence as part of the GPs’ track record. This is not exhaustive, but it might inspire a few to formulate their framework of what a track record is: