The view from within: Assessing VC fund managers

An interview with Accolade Partners founder, Joelle Kayden

“There are a lot of newer funds in each vintage year that are near the top. Our job is to find those early.”

When is a first-time fund worth the risk? What makes a partnership work? In her seventeen years at the helm of Accolade Partners, Joelle Kayden has encountered these questions a lot. We caught up with the founder and managing member of the DC-based fund of funds to discuss that illusive search for emerging managers, getting access to the best of the best and a disturbing trend emerging in fundraising.

Joelle, how do you and the Accolade team assess a VC fund manager?

As a fund of funds, we have a slate of existing managers, so we evaluate all prospective managers in the context of our existing portfolio. Would they be accretive to the portfolio? Do they provide diversification? Should we replace an existing manager with a new one? We spend a lot of time getting to know managers who are of interest after an initial call or meeting. This is not a long list. As we are entering into 10-year partnerships, these are not easy decisions that require time. We value transparency, track record etc. We do a lot of reference calls with our network and focus particularly on relationships with entrepreneurs.

How can LPs and GPs build a mutually beneficial partnership?

Partnerships take time and are two-sided. We try to be helpful where possible, whether it be introducing managers to other LPs or to people in our network who could be helpful to a portfolio company. We help a lot on operational questions, portfolio construction etc. While we are loathe to be Monday morning quarterbacks, we are available for advice. We are interested in getting to know a handful of promising portfolio companies and maintain a frequent dialogue with fund GPs. Relationships are built on trust and mutual respect.

Do you deal with first-time funds? If not, why? If yes, what indicators are you looking at before making a decision?

First-time funds are tough, particularly in venture where there is so little data and realised track records are hard to come by. We have a database of over 250 funds under $100 million. Picking the right fund is like trying to find a needle in a haystack. Where we have invested in a first-time fund, we spent months if not years getting to know the GP or team. All had been investors at their prior firms and understood what managing a fund entailed.

How do you get access to the top 10 percent performing funds?

It is not clear what funds constitute the top 10 percent at any given time. There are five-to-ten well established firms that most consider the best. If one is not an investor currently, access is impossible and not a good use of time. Cambridge Associates did a study that really challenges the notion of persistence of returns by certain funds. There are a lot of newer funds in each vintage year that are near the top. Our job is to find those early.

Is the LP industry too brand name driven?

Some investment committees and LPs are very brand driven. It is hard to argue with that strategy when figuring out what is really going on at 250 new funds is so challenging. It is an opaque asset class.

Do you find that VCs are now returning much faster to their investors? Is it now a two-year cycle?

Fundraising has accelerated. There is another disturbing trend, which is that funds raise quickly but actually don’t activate funds for six months to in some cases a year. The notion of “raise a fund when you can” seems pervasive.

You can meet Joelle, along with 100 other funds of funds, sovereign wealth funds, family offices, and institutions, at Venture — the exclusive investor gathering held alongside Web Summit in November.