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Volume #29 TL;DR:

• Large amounts of time spent does not always equal inefficiency. Sometimes the inefficient path is the most productive one.

• Tinder can make dating “more efficient”, but not the process of getting married.

  There might be a “Tinder” for Venture Capital in terms of finding capital partners more efficiently through data providers, fundraising platforms, etc. But going through the dating process and committing to a person is a whole different ballgame. It simply takes time.

• The craft of backing people is a journey. It’s not an efficient one. But it is a productive one.

Table of Contents

• The Productivity of Inefficiency

• How We Shifted From One Inefficiency To The Next

• The Inefficiency We Cannot Solve

• My Invitation to LPs

The Productivity of Inefficiency

I started writing Embracing Emergence in December 2023. I started documenting my thoughts on this platform for several reason. One key reason was the fact that I was sick of being fed recipes for investing through an algorithm.

A lot of people share their conclusions online. And I totally understand why. There is also nothing intrinsically wrong with doing this. I still do this occasionally. It’s simply how the social platforms work. Engagement gets reinforced through the algorithm. The more engagement, the more priority the algorithm gets you. The more the algorithm pushes you, the more engagement you get. And, and, and.

But when I was building the LP strategy from scratch at a family office, I needed to learn how and what to think. Not just why. Conclusions by themselves were not helpful.

Every LP, every investor, has a WHY that will be nuanced specifically to who they are and their gifting. How we think about investing, the world, problems that need to be solved, technology, and people is more important than data underlining why and how we should back a certain asset class.

So, by writing how I am thinking and why I am thinking, I wanted to provide a space where people can come together and think. Getting rest from algorithmically enforced recipes on LinkedIn and spending intentional time formulating our thoughts and frameworks is probably one of the most separating practices we can do as investors.

Ironically, consuming pure conclusions and summarized reasons of why to back certain asset classes was less efficient than going on the journey of learning myself. Oftentimes inefficient journeys are the most productive.

Talking with 100s of Emerging Managers that I never had a follow up call with, or 1000s of startups that we never invested in, might seem like a waste of time. But it is what developed my taste of what to look for in the people I invest in.

The point I am trying to make is this: large amounts of time spent does not always equal inefficiency. Sometimes the inefficient path is the most productive one.

And in the world of Venture Capital, we are operating in an industry that is unlike any other. That is why we are all doing it. This industry is stimulating, every day is different, every person we talk with has a unique story to tell, the solutions to problems that are being developed are exiting, etc.

I can’t think of many other industries that are this dependent upon people coming alongside other people to develop creative solutions.

And this is exactly what makes this industry uniquely inefficient. People need to come together. A person needs to back another person. This is more like marriage than it is like people going on a first date with each other.

Tinder can make dating “more efficient”, but not the process of getting married.

There might be a “Tinder” for Venture Capital in terms of finding capital partners more efficiently through data providers, fundraising platforms, etc. But going through the dating process and committing to a person is a whole different ballgame. It simply takes time.

How We Shifted From One Inefficiency To The Next

A couple of years ago investing in Emerging Managers felt like a practice of intuition while struggling to prove with data that this is not a bad bet. I spent hours and hours in PitchBook creating benchmarks, and doing endless research around the risk/return profile of Emerging Managers. Today, PitchBook does not have good data on Emerging Managers - back than it was worse. The data was worth very little.

But it provided a narrative to us that was indicated by data: As a family office, our probability to access and pick top decile GPs vs. top decile startups was much higher. And our probability to create a bottom decile portfolio of several funds vs. pick bottom decile startups substantially lower.

Look, should you be investing in Venture if you’re focused on your investment not going to zero and optimizing for a “decent” return? Absolutely not. But we needed to know how bad it could get if we lean into this asset class. And it was going to look much worse for us to back startups vs. emerging funds.

Why? The best startup founders don’t want a family office on their cap table, unless they are absurdly strategic to them. That assumes you can access these founders as a family office. And we are not cool enough to sit in the hot tub with Travis and play Wii Tennis with him before he ever goes out to raise for Uber - but some GPs are. And those GPs will want our capital.

So, the inefficiency back then was the lack of a narrative that identified Emerging Managers as a good opportunity within the asset class of Venture Capital. The narrative around the attractive risk/return profile did not really exist yet. Other than the famous Cambridge Associates graphic of the top ten performing funds for each vintage being primarily emerging funds…

I actually believe that we have mostly overcome this inefficiency. We have a lot more data. The data is much better than it was i.e. 3 years ago, and will keep improving. And yes, it’s not perfect. However, we now have a public narrative around why Emerging Managers are a pathway to generating outlier returns in Venture.

Now, we might be facing an inefficiency that could be harder to solve. Limited Partners have recognized the attractive risk/return profile of Emerging Managers, but are now facing the question: “How are we actually supposed to conduct due diligence on these funds?”

The Inefficiency We Cannot Solve

So many Limited Partners are asking themselves this question: What are the best practices to conduct due diligence on Emerging Managers?

And it’s a very valid question. Investing in Emerging Managers is really difficult. I recently asked a fellow LP who was backing GPs in 2016, before “Emerging Manager” was a term. I asked him: would you rather be back in 2016, have less GPs fundraise and less bad noise to sift through, but you have less data. Or would you rather invest in GPs now, spend more time sifting through noise, but you have more data to make a decision?”

The LP indicated to me that 2016 was much easier than today.

And similar to when I started out, LPs do not really have a place to go ask questions. Sure, we have LinkedIn and Twitter where we can read the conclusions of fellow investors. But as I mentioned earlier, it is actually much more beneficial to be able to go through the process yourself and ask the questions rather than just utilizing someone else’s answers.

So, the problem we need to solve today is a lack of space for LPs to master the craft of underwriting Emerging Managers.

Some people think we need another platform that “matchmakes” between LPs and GPs, so we can solve the fact the LPs take a long time to pull the trigger on the investment. So they try to solve for better deal flow.

I think that actually makes the current problem worse or at least doesn’t solve it. We don’t need to be feeding LPs the GPs that they THINK they are going to like the most. What LPs actually need is to develop a taste for the GPs that they are best equip to back. LPs need to see the spectrum of Emerging Managers they could be backing.

You need to taste water, coffee, and wine first, so you can identify what wine is. Then you start tasting the wines next to each other. And then you know what wine you like. But let’s start with figuring out what wine even is.

The craft of backing people is a journey. It’s not an efficient one. But it is a productive one. And it’s a journey that we shouldn’t free GPs and LPs from.

A quote I love summarizes this:

If we free LPs from the process of discovering their ability to back people, we might be freeing them from being LPs.

Note for Emerging Managers: With the underwriting process bringing organic inefficiencies, focusing on eliminating unnecessary inefficiencies will give you the time you need to focus on building the relationships that matter. See how Sydecar’s Fund+ helps emerging managers operate with the polish and structure LPs expect.

My Invitation to LPs

If you are a Limited Partner or someone who is interested in backing Emerging Managers, please feel free to respond to this email.

I host an exclusive group chat for Limited Partners where we share transparent questions, data, reports, funds we’re looking at, references, events, etc.

We are ALL Limited Partners and most of us know each other personally or know of each other. Nobody is trying to pitch you.

If you are looking for peer to peer community, I can only recommend trying to join (I am biased).