I think in emojis, but choose to write in English.

Themework

Writing is a more time-intensive way of thinking. It’s far easier to just walk around with unarticulated thoughts and feelings and beliefs; writing actually requires one to, you know, test those thoughts and feelings and beliefs. One such belief of mine is that institutional investors ignore what should be their core competency: identifying the investors whose business models create the most alignment.

Instead, I see institutional investors try to predict how the world will move. I know this because I do the same thing — then I snap back to reality and remember that we meet with more private equity and venture capital firms than anyone on the planet, who are (theoretically) much more qualified to make those predictions. In a perfect world we could have team members dedicated to understanding entire sectors or regions of the world, trying to do just that. Unfortunately, we don’t, as we’re a resource-constrained public sector organization.

However, apart from the practitioners themselves, the only ones who have a better understanding of the private equity and venture capital business model are institutional investors like ourselves. We should be able to more quickly determine whether we’re aligned with those firms: that is, whether or not they’re incentivized to generate profits from their investment decisions (rather than accumulating assets that generate fees).

To do this well we have to develop our own filters and frameworks. In my experience they’ve been more akin to tribal knowledge, discussed and debated and passed around, but never codified. This is my first attempt to put several such frameworks out there in digital ink.

Asymmetry. The projected return for an investment fits with the investment firm’s strategy and portfolio construction, with the upside scaling exponentially compared to the potential downside.

Motivation. The team wasn’t adequately compensated for past successes, they’re investing a significant amount of their own personal capital, and they’ll only generate returns through investment performance rather than asset accumulation.

Agility. The fund size is appropriate for the opportunity set, giving the firm the ability to sell into larger pools of capital while allowing themselves the ability to more easily manage a small, concentrated portfolio.

Focused optionality. The team and the fund have a specific focus that takes advantage of their own expertise, while not overly constraining their opportunity set.

Platform. The firm has built a network and a repeatable process around their strategy, and is resourced well-enough to both execute on their opportunity set and create further value with each of their investments.


These themes have little to do with which parts of the world are in or out of favor — they’re meant to cut across strategies and geographies, horizontals rather than verticals. They’re the reasons why we like certain groups and pass on others.

This approach to investing feels right, but I’m open to it being wrong. Where I think they could use work is that they’re not specific enough. If a private equity and venture capital firm tells me about how each theme applies to their strategy, I’ll have to explain that this isn’t meant to be a checklist, and outline how they probably don’t fit. Perhaps more specificity would deter those groups that don’t fit. Maybe not. Foundry Group and Union Square Ventures publish their own investment themes and they seem to do fine — though I’m sure they receive lots of less-relevant inbound trying to fit those themes.

Aside from potentially being wrong (and stumbling very publicly), I’m open to this approach changing over time. I don’t believe it’s okay to stop and just choose not to evolve. The world always changes, and anyone who ignores that fact will fail. Or, they’ll generate fees on the assets they’ve accumulated, forever and ever.