Smaller venture funds have a more achievable path to high returns

Transcript

From the transcript How I Invest publishes with the episode.

1. 16:01

   Super angels are funds one and funds two. Why play in that part of the market? What's the risk reward like for you? We first started as we were first building out our portfolio, like I said, we have these broader categories and we have private equity as one, and then it's left to us to iterate on our allocation between, you know, buyout, growth equity, venture, etcetera. And we put venture to the side initially at first and we, because the conventional wisdom and the experience I had working with larger institutions and being a consultant is that if you can't access the really well known brand names, then you're probably not going to do well in venture.

2. 16:42

   And, you know, that that our trustees agreed with that kind of sentiment and I met some local investors here who were seed stage investors, running smaller funds and and you're doing it in Utah, and they've kind of made their case, had some data to back their story up, and so we worked on our philosophy for venture and decided that we probably don't have the connections or the bandwidth or the time or energy to try and get ourselves into, say, you know, Sequoia or whatnot.

3. 17:13

   If they're actually gonna be capacity constrained, then you would want that. And if they're not going to be capacity constrained, they're gonna raise many different funds and kind of push you or or, you know, require you to invest across all the different strategies and not just be in the early stage funds. That that wasn't ideal either, but perhaps there are, in our initial philosophy was early stage, meaning pre seed, seed, maybe series A, and kind of off the run markets that might feed up into the food chain of venture or some of these other shops that you need to write bigger checks.

4. 17:43

   And as we spent time on that, philosophy, you know, we we deviated from it a little bit. You know, we got in the in the heyday, you know, we got nudged into some bigger funds that an opportunity funds and so forth that, you know, we call them, you know, stapling on. And but we really honed the philosophy after we worked with a group called Sindana, a fund of funds, and they run an Michael, okay. I'm a two time guest.

5. 18:08

   Okay. Yeah. So you know the you know the story. So we we were drinking the Kool Aid from, Michael and his team, and then we also ran across another, you know, group of individuals that run a venture fund, a fund called Pattern, and, you know, you read some of their work, look at some of their data. Moonfire also has a great website with a lot of data, And if you think about, not just fund size, but also portfolio construction, and you think about relative ownership early on when valuations are arguably cheaper and you have the ability to size up your ownership, you know, early on and your check sizes are, you know, smaller, the deal sizes are smaller at that stage of the market, then your ability to generate a five X or higher, you mathematically should be easier if you have a, you know, if you, even if you have a $100,000,000 fund, you

6. 18:56

   kind of need five unicorns to get a five X, right? And are you reliably going to get five unicorns each, each fund, each vintage? That's, it seems a lot easier the smaller the check size, the smaller the fund size, the smaller the deal size. It it's it's similar for us in private equity. So all things being equal, you'd love to access the Sequoias and and the other capital constrained strategies, but knowing that you can't access those instead of going to second or third tier brands in that same space, you decide to go down market where you could get similar returns maybe with some more vol, but you actually had a shot to get those kind of great venture returns that you could get in the name brands.

7. 19:38

   Yeah. I think I I I agree with that, summarization or simplification. And and another interesting thing to us is, you know, you wouldn't you wouldn't think of it as, we didn't think of it as a good way to invest. But if you're if you're a solo GP and you have a small fund, you're really well networked, really well connected, you're, you know, able to add value one way or another to the ecosystem, people will, you know, invite you or allow you to write what's often called a collaborative check, and those funds tend to do really well.

8. 20:06

   And that, you know, those so it's it's just us trying to make sure that when we're investing in venture, we're not just doing venture for diversification. We're doing it for, you know, as large of outcomes as we can.