The money behind the money: Being an LP in venture
An interview with Vintage Investment Partners founder, Alan Feld
“The difference between a good fund and a great fund depends on the manager’s ability to identify the winners and the losers early”
We caught up with Vintage Investment Partners founder and managing partner, Alan Feld, to get his take on the current investment climate, and to learn more about his investment thesis when it comes to investing in venture capital funds.
Alan founded Vintage Investment Partners in 2002, which is now Israel’s leading venture fund of funds, secondary fund and late-stage co-investment team. The firm today manages $1.3 billion through nine funds and a managed account.
Alan, how do you and the Vintage team assess a VC fund manager?
Venture is all about seeking the really big outcomes and this is all about finding and attracting the truly great entrepreneurs who think big and can execute in a big way. We look for managers who can attract the best entrepreneurs and coach them without micromanaging them. In my many years of working in this industry, I have never seen a seed or early-stage company execute against their first business plan. The great entrepreneurs know how to pivot, how to listen to the market and identify the pain that needs to be addressed, the opportunity to disrupt incumbents or be the category leader in a new, emerging market. The second thing we look for is the ability to effectively manage a venture portfolio. In many cases, the difference between a good fund and a great fund depends on the manager’s ability to identify the winners and the losers early and preserve or increase their percentage holdings in their best companies. Reserve management is crucial for this.
How can LPs and GPs build a mutually beneficial partnership?
A fund is a partnership. Fundamental to a true partnership is trust. At the end of the day, LPs are essentially giving a blank check to the GP. Obviously returns are crucial. But transparency is also crucial. Transparency means hearing the bad news on a timely basis and not just the good news. It means valuations that are realistic. It means LPA terms that are fair and reasonable. LPs give a lot more slack to GPs that are transparent.
Do you deal with first-time funds? If not, why? If yes, what indicators are you looking at before making a decision?
We invest in first-time funds, but not in first-time investors. In other words, we look for teams that have individual track records as investors and have come together to start a new firm. Like everything else, it takes a while to learn how to be an effective investor, not only in strong markets (as we have seen in the last eight years), but in weak or turbulent markets. Second, we like to see partners who have worked together in some capacity in the past. A general partnership is like a marriage. We want to know that the partners have the kind of honest and respectful relationship where they can support and challenge each other. Being in the trenches together in the past is a helpful indicator of the relationship in the future. We also invest in small, single GP funds on a very select and limited basis.
Investing in emerging managers can be both rewarding and perilous. How difficult is it to invest in first-time funds?
It is challenging to invest in first-time funds. But, we also see it as an opportunity. In some cases, when a manager is “proven”, access becomes more challenging in subsequent funds. So, identifying great future managers is important for LPs. Second, relatively few GPs have done a very good job in managing succession. We see our relationship with a GP generally as a multi-fund relationship. We want to ensure that the team is stable and will be able to take the firm forward for at least 20 years. First-time funds, managed well, could be the replacement relationships for those managers who do not manage succession well.
How do you get access to the top 10 percent performing funds?
There is no shortage of capital available for investment in top decile funds. To a certain extent, LPs are “selling” money to the great GPs. Great GPs are looking for more than just money. They are looking for long term investors who know and are committed to the asset class. They are looking for LPs with a stable source of money who can invest when the asset class is in a down cycle. They want investors who can help with data and guidance based on years of experience as investors in venture funds. Finally, just as Andreessen Horowitz fundamentally changed the venture market by offering a broad basket of services to their portfolio companies, it is time that we as LPs also work for our GPs. In our case, we created a value-added services team at Vintage to help underlying investments of portfolio funds to find potential customers. This is a free service intended to create value for our funds. Over the last two years, we have set up over 500 qualified lead meetings between portfolio companies and potential customers, which have generated tens of millions of dollars of contracts. We are exploring other ways we can add value to our GPs and to their portfolio companies.
Is the LP industry too brand name driven?
Our investors pay us to generate returns. It is a huge responsibility managing pension, endowment and family office money. We are not looking for logos. We are looking for funds that can generate outsized returns. In many cases, there is an overlap between brand and track record. But we tend to look forward: are the partners who generated the track record still there and motivated? Can the younger partners continue that track record? We have turned down a number of brand name funds because we were not convinced that they would be able to generate top decile returns going forward.
Do you find that VCs are now returning much faster to their investors? Is it now a two-year cycle?
We have seen several funds return recently after a two-year cycle. My sense is that the next cycle will take longer to deploy. Many of our GPs are looking at the market and concluding that it would be prudent to take their time and raise the bar even higher for new investments. We are encouraging that approach. We are in no rush to deploy our money. Again, as this is an industry of big game hunting, we want our GPs to go after the best companies and wait until they think that those investments represent value in a normalised market.
Are European VC funds more risk averse than their US counterparts?
I am very careful about generalisations. We have a committed to a number of European GPs and are very pleased with the portfolios that they are building. We are starting to see some very big companies come out of Europe and that would not have happened had GPs not been prepared to take risk. Just Eat was a big risk and was a big outcome for our portfolio funds. Klarna should be for others. The list of potential multi-billion dollar exits that were seeded by European funds is getting increasingly long. I think that European GPs have learned from their US counterparts that this is all about building really big companies and you cannot do that without taking risk.
There has been a lot of talk recently regarding initial coin offerings (ICO’s) as a means of raising capital for startups. Can methods like this really disrupt the VC model of fundraising in the near future?
Some of our funds are doing this, but I think that the jury is still out. It is way too early to tell if this is a long-term trend.
If you’ve any questions you can get me on twitter, Declan Kelly, or just email email@example.com