Capital Formation and the LP / GP Relationship (with Altimeter’s Meghan Reynolds)
01:16:46 Share

Megan Reynolds, welcome to the Acquired LP Show. Thank you. It's such a pleasure to be here. It's great to have you. It's fun to do this. We talked about it almost a year ago at this point, and then we got to hang out all through the Altimeter Investor Day and chatted about it then. And here we are 10 months later actually making it happen. I'm so glad it finally came together. Awesome.

Well, listeners, for those of you who are not familiar with Megan and her pretty prolific tweets, we call this the Acquired LP Show, but most of the time we're not actually talking about

the interface between venture firms and their limited partners. Megan spends all of her time thinking about the interface between VC, private equity, capital management of all sorts, and the owners of capitals, the limited partners. She is currently at Altimeter, which is a about $10 billion assets under management firm. Of course, we had Brad on the show. It's interesting looking back across the three chapters of her career. So starting in

2000. She joined Goldman Sachs, stayed for nine years, got to watch basically the growth of private equity and venture from this cottage industry to what it is

today. And so over her tenure there, it went from about $8 billion in assets to $40 billion in assets in private markets, all at Goldman. Chapter two, she joined TPG in 2010. Is that right, Megan? Yeah, that's right. And was at the firm while it grew from about $40 billion in assets to about $120 billion and was

co-running fundraising globally. So think about the insights gleaned if you are sort of running the fundraising practice for a firm like TPG, and then of course, doing a very similar thing in a very different way at Altimeter today. So Megan, we are lucky to have you and learn from all your insights. Well, I'm so happy to be here. It feels appropriate that we're talking LPs on the LP show finally, only what, four years in to this journey? When did you start?

Acquired seven years old, but the LP show is maybe 2018-ish. I went back. It looked like LP shows started around 2018. I saw you subscribe this morning. Thank you so much for doing that. I paid my fee. It's our growth strategy for the LP program as we have people on the show. Do things that don't scale. Exactly. Exactly. Oh, thanks. Well, Megan, I wanted to...

Maybe start with a high-level overview of... Let me state the obvious first. When a startup raises capital from a venture capitalist, it's not that person's money. A little bit is that person's money. Most of it is raised from LPs. Can you talk to us a little bit about what the different shape that can take? What types of LPs invest in venture firms and private equity? Yeah, absolutely. So

You know, I think pointing this out and starting here is really important because I think that it's a piece of the industry that's missed so often. One of the surprising things about me starting to talk about Alt-P's on Twitter is how many founders have subscribed to what I'm doing and comment on what I'm doing because it's kind of this black box that actually the ownership of the company is through an entity that has underlying ownership for some really important reasons.

and people, and it's creating returns that are so critical to our economy more broadly. So the underlying LPs really take two forms. I would say there's individuals, largely high net worth individuals, and then institutions.

And the institutions, I think people have a tendency and venture to think endowments and foundations. The history was that it started with Harvard and Yale and the Ivy League institutions. But it's so much more broad than that today. And where the growth is coming from in the industry is actually not on the endowment foundation side, but it's

sovereign wealth funds, it's public pension plans, it's corporate pension plans, it's healthcare balance sheets, corporate balance sheets more broadly. It's really important to know and understand that

The differences between each of those types of organizations, who they represent in their underlying constituents and the advisors and the counterparties and all of the pieces that come together to bring that capital to bear in a venture capital fund and then ultimately invest.

into a company. Even obviously, the difference between a university endowment and a public pension fund, what they need from their capital, the returns they need on what timelines, their distribution, their consumption of the capital, the public reporting requirements, the nature of the people who manage the capital, completely different. And yet, to founders, at least, and even many VCs, too, they think it all looks the same.

Yeah, they think it all looks the same. And I think one of the things that's missing in the industry, and one of the things that I spent all of my days thinking about is that translation of not just who gave us capital.

But who is involved in the bringing of that capital to bear and having a lot of empathy for the allocators in what is required of them and from them in the allocation to a venture fund? So if you're investing on behalf of a public plan,

and you have exposure to something that your pensioners may be sensitive about, you need information and you need to be responsive or what your investment committee is focused on. Or, you know, you have boards, you have investment committees, you have teams, you have underlying constituents. And all of that is really important to the people that are making the decisions to invest in your fund. And we haven't done a very good job as an industry of spending time

Yeah, it's funny. We opened the episode talking about you sort of getting to witness real estate.

venture and private equity going from a cottage industry to a more industrialized sort of professional capital allocation. But sure, it's a lot more professionalized than it was in 2002. But it's still... It's not yet what I assume you experienced and helped build at Goldman and at TPG, right? Yeah. And I mean, TPG, for an example, you would think that when I joined TPG at $40 billion in assets...

that they had figured it out, right? That the buyout industry had, since it had been operating at such a large scale, coming right through the financial crisis, that clearly the infrastructure had been laid to, you know, efficiently and effectively raise capital and service investors. But it was actually not the case at all. I mean, I joined TPG in 2010, our, what we called capital formation or fundraising practice, and,

had four people. I was probably higher number six or seven, and three of us had joined that month. And there was very little communication. There was very little transparency. There was very little proactive marketing, brand building, all these things. And we should talk about what is actually included in capital formation. None of that infrastructure was laid. That was actually the case for other firms that were growing and building at the same time, like a KKR or Blackstone. And we were all evolving those practices at the same time.

Wow. At that moment in time, let's take TPG as a snapshot. How many funds were there? How many different vehicles and how many LPs across those vehicles? They had raised TPG Capital Fund 6, which was a $20 billion fund two years before that.

Fund five had been a $15 billion fund. They had TPG Growth. They had TPG Biotech. So it wasn't all buyouts at this point. It was not all buyout, but we had not yet grown into it. But the objective and why we now had to grow our team was because we wanted to build a real estate practice and a credit practice and build on the TPG Growth franchise and with a view toward impact and all the things that we ended up building fairly successfully and

Now, looking back, that seems like, oh, very logical. But in 2010, we were still in the teeth of the financial crisis. TPG had faced some severe performance declines, luckily temporary, in the financial crisis with some of the large buyout deals like Wamuu and Caesars and TXU. I mean, there were some marks on the track record that investors were

reeling from. And in particular, why this is an issue is, you know, in the buyout industry, a firm like TPG would take a company private, buy it. And then, of course, when something like 2008 happens, you know, that company's profitability isn't nearly what all of the forecasts said it was going to be. So servicing the debt required to do the leveraged buyout

becomes very difficult. And so that's when you sort of get yourself into this downward spiral. If you're a buyout firm who just bought an asset, you expected a predictable set of cash flows, but because of a macroeconomic shift, now you don't experience those cash flows. Is that sort of how that happens?

Exactly right. Now, it turns out that a lot of those deals ended up being not great, but okay. There's levers that you can pull in operational efficiencies and refinancing over time and that's

The track record ended up going, you know, shifting. But at a moment in 2010, our fifth fund was marked at 50 cents on the dollar, ended up being, you know, around 2x. And the sixth fund had a lot of dry powder, but the first deal in the fund was Wamuu, which went to zero. And so the question is, how do you build a $40 billion in assets with four people?

And that's because performance had been amazing. And I talk about this because it's what's happened in venture, right? Performance had been an amazing at the same time that investors were increasing allocations to the asset class. Institutional investors were accepting that private equity needed to be in a meaningful part of their portfolio less than it is today. Most places were growing from 5% to 8%. But if you're CalPERS and have 300 billion in assets, that's a lot of money flowing into the industry.

And so performance had been great. You didn't need to have great communication. You didn't need to have a lot of servicing because so much capital was flowing in. And so what shifts? The macroeconomic picture shifts. There's black marks on your track record. Underlying constituents are angry. And you need to work really, really hard to get the trust back there.

of your investors in order to grow going forward. And that requires people. And you have a strategic plan to grow and add all these additional products. Because market had shifted and now it's really interesting to build credit and talent had become available because of disruptions at firms and dynamics and banks. Regulatory changes were meaning that private market teams within banks could no longer operate as they had been. So those folks were becoming available. So downturns create great opportunities, right?

You need capital for that. And that's hard when your capital base is really upset because not only had your performance suffered, but you didn't communicate well. And I think that there's such an analogy at play with what's happening in venture today. We just had massive increases in allocations to venture. We just had a 10-year run of incredible performance.

And capital flowed very readily into the asset class, which fueled the growth of mega firms, which fueled emerging managers and teams. And now the macroeconomic picture has shifted. Interest rates rise, growth assets fall, and investors are pissed.

And need to know what's going on. And almost no firms have capital formation and LP relationship infrastructure in place like you. Exactly. And that's what's such a head scratcher that it's actually in capital formation. Senior talent is almost always the last piece of the organizational puzzle to be added. Yeah.

Makes sense. You basically have the smallest team possible at first. You have one person who's both raising the capital and deploying the capital. And then over time, you start to figure out what functions you need to add. And as that person gets stretched too thin, and as that person or team, that sort of small general partner team is...

focused on triaging the portfolio, perhaps, or you're toward the end of a fund and you need to figure out how to allocate scarce dollars, then you really need someone who's communicating a lot of the hard decisions to the LPBs. Yeah. Yeah, that's exactly right. And you understand why organizations evolve in that way, because I think investing...

is the most core piece of the firm. And firms tend to be founded by people who are investors, not salespeople and relationship managers. But can you imagine having a product without a sales team?

Right, right. The right analogy here is sales, service, and product. The venture investment business is like any other business where you need a product, and that product is picking the companies you're going to invest in. You need a sales arm who's going to go and raise the capital. But you also need service for those customers, for your clients, for the allocators to keep them informed rather than just a quarterly YOLO letter that gets sent out of, hey, here's what we did. No real additional color.

We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple.

Yep, Vanta is the perfect example of the quote that we talk about all the time here on Acquired. Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers.

It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools, no manual reviews to cobble together your security and compliance requirements. It is one single software pane of glass that connects to all of your services via APIs and eliminates countless hours of work.

for your organization. There are now AI capabilities to make this even more powerful, and they even integrate with over 300 external tools. Plus, they let customers build private integrations with their internal systems. And perhaps most importantly, your security reviews are now real-time instead of static, so you can monitor and share with your customers and partners to give them added confidence. So whether you're a startup or a large enterprise, and your company is ready to automate compliance and streamline security reviews like

like Vanta's 7,000 customers around the globe and go back to making your beer taste better, head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired.

So Megan, you said a minute ago, we should talk about what are the elements of a capital formation team? What are the elements? What did you build a TPG? Let me ask a dumber question. What is capital formation? Capital formation is the strategy of bringing investors into an investment management organization. And it's all of the components that are required to do that, to bring them in and service them on an ongoing basis.

And the servicing, because of the way that private market closed-end funds operate, is that it's capital formation ongoing because you raise the fund, you invest the capital, and then you need new capital. It's not evergreen in nature. Capital needs to be constantly formed in order to service the business because of the structure of the industry. And the reason capital formation is important

a virtuous thing for the world is because when you get a bunch of capital in one place, it can act with agency. Whereas if all the capital sat disparately with its owners, one, it's not going to find its way efficiently to opportunities. But two, let's say you're a founder. How are you going to go raise $100 million when there's not a pool of $100 million to raise from? You're just going to go knock down 150 different doors of individuals and institutions and pension funds. It just, it wouldn't work. You need to form capital into a pool to

allocate efficiently. Yes. The industry has evolved to have either internal or outsourced functions in order to do that. But I think there's some components that are often missing. So what are the components of capital formation? There's two pieces that are well understood. And then I think the most important piece is less understood. The first one is IR. People say, oh, you know, I have a fund and I have an IR person. So what is IR? IR is the servicing of your existing investors and

from an administrative standpoint and from what is required of you in the agreement you make with them when you invest in a fund. So I have to send you a capital call when I'm making an investment and money is due from you. I need your contact information to do that. I need to know who and where you are. I need to give you reporting that I have told you I will send to you. So there's an administrative function there.

of IR. And people have a tendency to focus on that, which is understandable because these are basic bolts that are required to service the business. And often the contractually required components or legally required components. Often, almost always, because when someone is signing up for a fund, you have said that you will provide an annual meeting once a year or you will provide a certain level of quarterly reporting. And so you need a team that's going to do that. The second piece is

The fundraising piece of it, I am going out and I'm raising my next fund. So I am going to do that either from my existing investors or from prospective investors. So I call that, you know, kind of the action of campaign management when you're going out to raise a fund.

And people can do that with their own teams. You can have either as placement agents out there that can do that very effectively. It takes an incredible amount of time and effort. And, you know, it's a draw on massive resources of the firm, you know, when you're going out and marketing a fund.

Those are the two pieces that I think are well understood. We need to service our investors in a legal obligation. And then there's the, you know, we need to raise a fund at the time that we've run out of capital and are almost out of capital. And we need to raise a new fund. And we're going to do that ourselves. Or we're going to hire a placement agent and pay them on a success basis to do that. You know, I think this all goes back to someone whose day job and all of their energy is spent knowing and understanding the customer. Having that as a part of your team is really important.

Whether or not you outsource it or whether or not it's internal and whether it's internal, if it's someone that's dedicated like me or someone that's on your team, who's going to own it and really make that a part of their mission every day. Okay. So we've talked about the two basic building blocks. What's the third piece? The third is what I would call product management. And that's looking at the portfolio that you're managing or the fund that you're managing and

with the lens of what you need in terms of capital and what your customers need from you. And I say that in that it's actually part of the investment process. It's part of the exiting process. It's the looking at everything that you're doing with the lens of how our investors think about that.

And are we delivering on what we marketed and promised to investors as we manage the portfolio? I include in this the thinking and the preemptive thinking about fundraising strategy, timing, fund size, etc.

portfolio construction. Because there's actually a whole strategic alignment that needs to happen here. If you're a very basic early stage venture fund where you're like, I'm going to be a $250 million fund and I'm going to lead Series A's,

Maybe there's less thinking that needs to happen here. But if you're an organization like TPG or Altimeter with multiple products, multiple different types of investors, I totally see what you mean here. There's a lot of strategic thinking that has to happen. There's a lot of strategic thinking. And this comes to some firms very naturally. But I'd argue it's really important for the $250 million Series A fund as well. Because some examples, you've got an opportunity to back your healthcare fund and you're backing a

You see great opportunity to invest in a company that's mental health related and there's prescription of benzodiazepines involved. Incredible economic model, incredible growth. We should make this investment.

How would our investors think about this? You know, is this like what are the headline risks involved in this investment? Is this in line with the strategy? We were mainly traditional health care. Is this is this on the edge? The fun part for me in this role has really been the integration. And some of the biggest value that I've provided is the integration into the investing process to say, like, let's think about how our investors respond to this, not just the

market and whether this is a good investment opportunity. And it's most relevant and has been most relevant as related to exits. I think that often GPs have this view of maximize carry, maximize capital, and the best GPs are really thinking about what do our investors need in terms of liquidity. There's been extreme examples of this more recently with people holding onto public positions and

longer than investors might want them to. And you can debate it and different investors want different things. So it's really understanding your base and being plugged into that throughout the whole cycle. We can say it maybe that you'd like the Sequoia fund and moving to that structure.

Whatever you think about that decision, whether that was a good economic decision and a good capital management decision in a vacuum across a broad set of LPs, some people might like it. Some people might really not like it, you know, for their own very specific reasons. Yes. And that's the thing. Different people want different things. So it's just who is making it their job to fully understand that and bring that to bear as we make decisions. And it all goes back to know your customer.

It's been really interesting to me, just as I learn more about this world, that everyone is definitely seeking returns. And in the upside scenario, sure, all that matters is, did you make the most money for me that you could possibly make, Mr. or Mrs. Manager? But in the downside scenario, what matters is,

were you investing in the things that you told me you were going to invest in? Did you do the amount of diligence that I expected of you? Did you do the amount of reporting that I expected of you? And a lot of this stuff is really around the, if this investment is not the greatest investment in the world, or this fund is not the best fund in the world,

Am I doing right by you on everything else that I said I was gonna do? It's almost like I was talking with a founder the other day and we were negotiating a term sheet and I was saying look you

You should think about all the downside stuff associated with the construction of this board, the rights and preferences of the investors, because everybody starts a relationship thinking this is never going to get contentious. But the reason why you have all of this stuff in place is when it gets contentious or when it gets thorny or when the outcome isn't good, do we have all the right sort of, in this case, protective provisions, but in what you're talking about, investment products,

being executed the way that you said you were going to execute them so you can continue to have a 20, 30, 40 year relationship between an owner of capital and a manager when everything's not rosy? Because we do go through cycles. Absolutely. And I think that when things go wrong, it all comes out in the wash. This is a very obvious statement. But when returns are great, no one's asking any questions. No one's asking, did that investment make sense? Was that in line with your strategy? No.

You know, did you do the diligence you needed to do? So what? You told me you were a low risk investor, but you ended up being an incredibly high risk sliver of my portfolio. You made me a lot of money. The DPI is there. You've wired the money out. Oops. Okay, you're fine. There's a lot of forgiveness in returns.

But that actually gets to the last piece of it. And my explanation of what capital formation is has been very long, but... No, this is great. Okay, good. It's relationship management. Okay, so there's the product management, which I think happens within the walls of your investment committee and your investment process. And then there's the relationship management. How are you managing and what are you providing to your investors on an ongoing basis beyond returns? Yeah.

And I think that is different things beyond returns, beyond what is required of you legally, right? It means different things to different people. Different people have different objectives. But it's so important. And I give Brad a lot of credit. He talks about this all the time. You know, our investors are with us because they want returns, but they also want transparency and

and insights. The returns are a given. The returns are just like the baseline expectation. There's so many options out there for people to deploy their capital. Chances are, if they're investing with you, they want something beyond that.

There's a trust factor. There's a transparency factor. There's the intelligence that exists within your organization. How do they get to leverage that? Knowledge sharing. Some of it is deal flow, co-investment. Right. That's a huge part of that. I mean, most of these sophisticated investors, especially as the dollar sizes of the funds go up,

Yes, there's co-investment. They also have public equities arms. There's more to the relationship. There is more returns for them to be had on their capital beyond just the returns that you as a firm are providing them. Absolutely. Absolutely. And with 10,000 firms in the market this year, chances are they're going to look for folks that can provide capital.

all of those things, whatever is important to them, they're looking at you across a number of different measures. And it's really, really important that you land the plane on those things that they expect. And often it's not totally clear and directly communicated on what the expectations are in the relationship. And so you need to understand it. And especially when returns are poor. I actually have this belief like,

relationships are made when the performance is poor and how you act and how you operate when everything isn't rosy. Some of that is like, you know, through alpha, right? That you actually outperformed when the market was bad. But, you know, if things went bad, how did you communicate or were you delivering more? I mean, that's what makes people stick with you.

over many, many cycles. And I think that not necessarily from my own experience, like put the firms that I've worked for aside, but you see many examples in the market where firms have had fairly mediocre returns, but have managed to continually raise... Oh, many examples of this. Yeah. Many examples of that. And I would argue it's because of the way they manage their relationships and that creates loyalty beyond. Because if it was just based on investment measure, many firms would be out of...

out of business. We've talked a lot here about the neutral to downside scenarios and why capital formation, relationship management, product management is so important there too. There is also

huge upside to it too, especially at a firm like TPT or Altimeter where you're in a growth mindset, you're adding products, you strategically want to do things on the investing front that require different types of capital than maybe you've had historically. Can you talk a little bit about that aspect of it too? Yes. It's a great addition to that part of the role and important to think about that because a lot of firms as they've grown have done that not just because they perpetually grow the size of their

base, but they've raised additional funds, right? Additional strategies, new strategies, other asset classes, you know, there's big multi-product firms are everywhere now, including with very small firms have done that, that we've got a core fund and now we're going to have an opportunistic fund. We've got, you know, almost everybody now has multiple vehicles unless you're just starting out that you're managing, right? If you were like 10 years into your evolution, you've got multiple products, I would bet. Yeah.

If you nail the product piece and the relationship management piece, that is what creates the opportunity to get strategic new capital when you want to do flexible things. An intimacy of relationship, trust, a deep knowledge of how you're operating, trust

Time and time again, that capital does not come from new investors. It almost never comes from some new prospect that you've developed a relationship. It almost always comes from your existing base. And at TPG, I think as we expanded asset classes, 80% of that capital came from existing investors in our platform.

Now, there's challenges as you grow to think about investor concentration and how are you bringing in new investors versus existing. But, you know, if you're managing well, and we have examples of this at Altimeter, that you've got deep relationships. You can be tactical. You can be strategic. You can seed new strategies and businesses in really exciting ways. And I think that that goes to show the benefit of that day-to-day approach.

nurturing that's necessary for firms that truly want to be institutional in scale and nature. Yeah. How do you deal with a situation where an allocator tells you, this is the type of investment product I'm looking for, either in duration or access to liquidity or risk reward trade-off, and

And you know that what you're offering is not quite that, but it's close enough that you can say, sure, let's do it. And that can land a big check for you, you know, $50 million, $100 million, if it's eyeballable. Have you ever seen that sort of go wrong? And how do you handle situations where you're like, gosh, we are so close to a fit, but like, it's not quite exactly what you're looking for in your portfolio? When there's a large check in play...

Depending on what the broader base looks for. I mean, chances are you're going to want to do that. No matter what size you are, someone's going to strike you a hundred million dollar check. Chances are you're going to want that capital in your base. I think that being flexible and strategic around how you're thinking about your products is

is really helpful. Sometimes people have blinders on, like we need to fit everybody in the box of this fund, especially right now where so many people are raising and they haven't finished raising. Like they just want to get everybody into this little box of the fund. And I always say like, where are the strategic angles? Maybe find someone who wants a piece of what you're doing.

and structure around that. Maybe find someone where you fit a need, or at least mostly fit a need. I think being flexible and considering that for large checks is helpful to a business. I think you get into trouble when what they're looking for doesn't actually tie to what you're doing or the opportunity set in hand, because the capital is not going to get deployed, or it's going to get half deployed, and it's not going to turn out well for anybody.

I would say be flexible in structuring product if it actually ties to what you're doing and the deal flow at hand. This makes me think about a firm back earlier in my venture career that I did a number of co-investments with. I won't say the name of the firm, a well-known firm that to my mind did this super well. And I was very impressed watching it. They were a very large, one of the largest capital under management venture firms out there.

Their LP base was a little different, though. They had a lot of sovereigns in the LP base, especially at that time 10 years ago. It was very different. And what I saw them do time and time again was bring those sovereign LPs in as direct co-investors into deals, which also was non-traditional at the time. And I wonder if this is maybe a good example of what you're talking about of like, hey, we got hundreds of millions of dollars into our funds out of these LPs.

Right.

Right. Like they are looking for weighted capital that's weighted toward a certain opportunity set. So can you do that through co-investment and maybe structure some sort of economics that make it worth your while, but also creates a blended exposure that makes sense for the program? I think the large mega funds have done that very well, particularly those that were more buyout driven and now are multi-products.

Building strategic partnerships for large pools of capital that are flexible, either through economics or through strategy to suit needs, has led to a lot of growth.

And that's where you have to have some sophistication around capital formation to say, you know, not only is this doable, does this match our deal flow, but will this upset other LPs? Are there conflicts of interest? Is this going to, you know, create issues if our existing LPs find out about this because you've got guaranteed co-invest or you've got some other special separate account?

And I think some of the things that have come to mind, like when we structured a lot of different creative things at TPG, we created new products. A lot of the new products were actually seeded with ideas that were solutions for things that investors wanted, but were also happened to be deal flow that we were seeing in the market. I think the way that you can accomplish it is through really, really good communication with your investors, thinking through, you

If you're creating a new product, right, you're doing something special. You've got some separate account from with a large state pension plan who specifically wants exposure to clean energy. I'm making this up. But clean energy is a portion of our strategy. You've got a large state pension plan that's looking to build that exposure in a thematic way. We have something that can suit their needs. How do we do that without pissing off our existing investors? You do that through marketing.

Going to your existing investors, creating reporting requirements around it, creating a cadence of sharing of information so that people understand that someone's not getting something that otherwise would have gone to a fund, that there's no conflicts. Like time and time again, I've seen these creative ideas.

structures come into being and be successful through great communication and transparency standards with your existing base that's not involved in those new accounts. Right. It's about finding the daylight. If some new LP or big check or big opportunity for the firm to grow comes in and says, I want something that's

And it first hits you and you're like, oh, that's something that's going to really bother our existing base. Because that sounds like some kind of more favorable deal than they all get. It's about finding that daylight of like, what is the middle ground between the thing that you want where you're still happy, but also through communication, through structure, through whatever, I can also keep all the other investors that we work with happy. Yes, I think that's exactly right.

And I think that leveraging relationship management, right, having a really good direct dialogue with decision makers and people that matter is important.

leveraging bodies like your advisory committee. I actually think in venture, I've heard time and time again, people make these comments about their advisory committee that they, oh, we have one, but we've never met with them. Or, oh, they insisted on being on our, they call them LPACs, LP Advisory Committee. They insist on being on our LPACs, but fine, that's a gift. If you're not leveraging your LPAC, you're doing something wrong.

Because those are your largest, most strategic investors that you can be engaging in the organization and strategy of your business, not in a way that you have to be defensive, not in a way that they have deep requirements, but in a way that you can learn and have deeper touch points. And when you want to do something new, they'll understand where it's coming from or why it will benefit your business. To your point, like in your lived experience, like...

80% of the capital for new initiatives, new funds, new strategies comes from your existing base.

You'd be really dumb not to be engaged with your LPAC. Every LPAC meeting is an opportunity to instill more confidence. That can be with bad news or good news. It's one of these things where people think VCs move slow because they take months to make a decision. LPs take years to make a decision. And so the opportunity to continue to add those positive data points over time with the most likely people to allocate more capital to you in the future is a no brainer.

It's a no-brainer. But people don't do it. It's amazing to me. I think Jim Coulter used to say... And who's Jim Coulter? Sorry, Jim Coulter, one of the founders of TPG, who is an incredible builder, but really relationship manager. I mean, Jim and David, if you really look at the founders of some of the big firms that ultimately became big public...

multi-product organizations like a TPG, like a Blackstone, like a KKR, or Carlyle. Those firms are led by great relationship management and brand builders that started as great investors, but they spend so much time

building relationships. And so I always put that back and why Brad and I really bonded is like he knew the investment quality at Altimeter was phenomenal. But when we were coming on, it's like we could be doing more to really nurture relationships, not because we need to be a big multi-product firm, but because that's how you become a great firm. Like you can't just do it with great investing. And I think that's what some of the greats from the 90s that built incredible firms really learned early. I

I say all that. Jim said to me once, we are at such an incredible privilege in doing what we do because we are one industry that has an opportunity to directly touch our customers every day if we wanted to.

Like our customers, like we can pick up the phone and call so-and-so at the state pension plan that's invested in us or the head of the Notre Dame endowment or, you know, you can pick up the phone and call from them and learn from them on a daily basis. How many products out there that can you really do that when you think about it? How many industries really allow you to do that? People would want to talk to you on a daily basis. Most of the time, of all the things that I'm a customer of, please don't call me, but

But if I've entrusted you with a big portion of my capital, please do call me. I'd love more real-time insights all the time. If Tim Coulter calls the CIO of Notre Dame, that person is for sure going to take that call. And Jim's going to learn from it.

And you're going to understand what's going on in the industry and what's important to them. And you're learning about competitive dynamics that you would otherwise not know because they're invested in lots of GPs. You're learning what makes great, what people believe makes great products. So I think it's a really unique and special element of our industry that not many people take advantage of. It's surprising to me to hear you say that the mega shops and the buyout industry are

had not yet professionalized and up-leveled to this point when you started in 2010. And now, obviously, they have. 30 plus years past Barbarian at the Gate. Yeah. But now they have.

Now, you know, when you joined Altimeter recently and coming into venture, Brad obviously gets this, but like the industry does not. But I would suspect that venture is not even anywhere near where buyout was in 2010 in terms of sophistication and professionalization around this. I would think they're probably in the same spot. Oh, OK. I'm like, I think venture right now is probably where buyout was in 2010. Yeah.

Where I would bet in 2010, I would bet 20% of the firms had dedicated people in fundraising capital formation roles, maybe 15. By 2015, 100% of the firms, middle market on up, dedicated people managing capital.

fundraising investor relations strategy, or they outsource it. And you mean senior people, not just like, you know, I think a lot of firms in venture day, they'll have like somebody who like, oh, yeah, you keep the CRM. They have IR. Lots of people have IR. But I'm talking about making a strategic senior role. 100% of buyout firms today that are 500 million above have someone senior, whether or not they're an investor that takes on that role 80% of their time, like someone is doing it.

And, you know, I think that's probably 10 or 15% of venture firms today, the largest, and probably the largest. And it might not look like someone like me, but it might be a senior principal or a partner that is really spending their time doing that. I think it's evolving really quickly. And you're seeing it happen in real time with the way that communication is working. There has been some high profile, you

bankruptcies, fallouts, fraud in the last couple of months, very recently where there's major portfolio issues. And the thing that I'm witnessing and observing is the quality of the communications, how rapid communications are coming out from

investment firms, quick response on webinars and letters, and we all see it. And I think those are signs of a rapid evolution in the appreciation for what you need to be providing your investors. And I think that that will make it happen really quickly because people will realize that

You need to have preparation for that, not you can't to scramble and get that information and turn those cogs when things go wrong is really hard and needs to happen fast. And so you need to have some sort of infrastructure around that and the nature of relationships that you can get to get to folks when you need to get to them.

It's interesting by not having this capability in-house, people have a sort of like shadow risk in the organization that they don't realize exists because if something goes dramatically wrong in the portfolio and they don't have the resources on the team to...

quickly, make all the calls, develop a response plan, communicate well, then that can take down a firm. That can be it. It's almost like wandering around in the streets with a big family with no life insurance. I completely agree. The number one rule for me in investor relations is no surprises. Do not let something hit the press before your investors. They cannot learn of it from the press.

get to them first or get to them at the same time. Whatever you need to do, the easiest way to piss off one of your investors is to have them read something, good or bad,

in the news and not have heard from you directly about that. Right. And of course, sometimes like you're finding out as a GP about something about one of your companies from the press, which is them failing to communicate with you as an investor. And there's nothing you can do, but you can sort of at least try to communicate with your investors and say, hey, I learned from this in the press too. Yes. Yes. And I'm working on it. People are understanding of that. Like it does...

Sometimes it needs to happen in real time. But if you just have the mindset of no surprises, good or bad, and if you're only achieving it with your top 10 investors, that's okay too. It's just the mindset of, you know, what investors need from you.

Seeing this evolve in different organizations, it's actually not just investors. There's an organization and strategy piece of institutionalized firms that you've got your companies, you've got your investors, and you've got your employees. And if you can manage communication well, those three parties have an infrastructure for communicating with those three parties.

groups, then I think that you're managing your institution very well. I've seen organizations send emails out to investors about changes in organizations and the employees have no idea. It happens more than you think. Or you're communicating with your companies about something that's going on, about a transition of

you know, a team member when your investors don't know yet. And that creates surprise, avoid surprise and, you know, try to communicate and keep those three sets of constituents in mind. I'm so glad you brought up companies too, as another critical constituent of a venture firm and investment organization. Thinking about it now, I don't see any way that the same trajectory doesn't happen in venture over the next couple of years that happened with buyouts because, you know,

So many as capitals flowed into the industry, firms have gotten bigger. Obviously, LPs need this now because they have so much larger commitments at stake. There's different types of capital. But companies too, firms, we talked about this with Brad a lot. So many venture firms are now lifecycle capital providers. If your main investor is XYZ, big venture firm, lifecycle capital provider, and you're a founder, you're a company, and then you see some bad news in the press and you're like,

oh, crap, is XYZ firm going to be here for my next round? These are really important perceptions and relationships. Very important. And it's going to continue to be an issue over the next couple of years as we work through the macroeconomic cycle, not just because of performance challenges that certain firms will have, but turnover, but team changes and turnover. Yeah.

I think is something that really has a tendency to create a ton of dissonance with LPs and founders. My board member just left. My board member just left or somebody I knew or I've seen this somewhere. Like this is a people business and there's something that the communication around team evolution is something that I've seen people get very wrong time and time again.

And you need to be super mindful of it. And everybody will face this because it's when the cycle turns that there's just a ton of

organizational, you know, young people make decisions about their career or people have, you know, make decisions around, I've done this for long enough, you know, people have a tendency to stick around when everything's up and to the right. Funny. So when we were first kicking things off, you mentioned there's two types of investors that are the primary investors in funds. And you talked a lot about institutional investors. What is the other type? The other type would be individuals.

So institutions, meaning you are investing on behalf of underlying constituents, like there's an underlying principle that is not you, that you're managing capital on behalf of someone else or something. The other piece is individuals, largely high net worth individuals and family offices. This is one of the biggest growth areas in the market because private markets allocations have been very small.

for high net worth individuals overall. Everyone talks about family offices. So we have this perception that they're a big piece of the overall pool. But if you actually look at the percent of

wealthy families that are allocated to private markets, venture and private equity, mostly, it's very small, or it represents a very, very small percentage of their overall portfolio. You know, some of their sophisticated family offices and the many billion dollar families that where that's not the case. But if you think about the potential allocation of

for wealthy families. It's massive. And I think I read a Hamilton-Lain stat, which was just a 1% move to private markets.

from the broad base of what is considered to be high net worth families would create a trillion dollar move in private markets. It's a massive opportunity. So you're seeing a lot of people, people meaning advisors, banks, and therefore sophisticated firms focus on how do I

tap into that part of the market. And that's because today the high net worth individuals and families primarily own public stocks, bonds, and real estate. Yes. Yes. Fascinating. It's interesting that like endowments and sovereigns have way more exposure to private companies than the high net worth individuals do. Yeah. I mean, I think Brad has talked about this, right? It's not just high net worth individuals, but it's also retail. Like, can you solve a retail product for private markets? Yeah.

No one's really done it successfully because of, you know, how do you manage liquidity and how do you trade it and secondary markets and things like that. But this broad group of individuals has missed all of the returns.

Of the last 20 years. They've missed the best returning asset classes for 20 years. Especially post Sarbanes-Oxley, as we were chatting a little bit about before we started recording and with Enron and all that. Yeah. The returns have aggregated to private markets over the last 20 years. Whether or not you believe that will continue to persist, which I think many people believe it will, how do you provide access to that and let individuals find a way to efficiently get capital deployed into private markets?

private market firms. And I think that this will fuel an incredible amount of growth, but also create unique challenges for liquidity, servicing a long tail of investors, aggregation vehicles, things that are necessary in order to facilitate that. It will be an interesting thing to watch. I would keep an eye on public

advisors. There are private market advisors like Hamilton Lane and Stepstone, as an example. They started as advisors to institutional investors as institutional investors grew allocations. And they're phenomenal and do an incredible job of advising and helping facilitate institutional investors, large and small allocations to private market firms. And now they're very focused on

on retail and high net worth. And I think that that's kind of a leading edge and something to watch of what kind of vehicles are created. If you think about your average big successful university endowment, your average big successful pension fund, your average big successful sovereign wealth fund, how do their allocations break down between public markets, PE, VC, that sort of thing? Just so people have some like vague notions of that. Yeah, that's a really good question. I would say...

Large endowment, I'm going to totally generalize. They've been investing in private markets since the 80s, since the beginning. Their allocation to alternatives or private markets is probably 40 plus percent, really high. And it's mature. They generally have a stable of managers that's probably anywhere between 50 and 75 funds.

Which has varied over time. They've done secondary sales. They've cleaned up. A lot of people have consolidated the number of managers they want to support. But importantly, they're up the J curve on the asset class, right? Because when you start in private markets, no matter who you invest in and how good those funds are, you're illiquid for a long time and you're just putting money in. But once you have a stable of long-term relationships, now you're putting money into new funds, but getting money out of old funds. Yes, exactly. Now there's challenges, right?

Because everyone's managing their allocation to private markets based on a model and expectations of capital going in over time and capital coming out. And now we're in a period of time where there's less liquidity coming out of the portfolio. In addition, your public market values have come way down. And so the combination of

public market values coming down and liquidity not coming out of your portfolio creates something that people know of as the denominator effect, which is now the overall portfolio value has come down. But because liquidity is not coming out of your private markets portfolio, your private markets portfolio value has not come down, or it's because private markets tends to get marked down on a slower pace. You are over allocated. You have too much exposure.

And that is very extreme for the endowment community today. So

I have a tendency to work with new funds. Just it's something that I love to do. Groups that have come to me and just asked me for advice as they're starting or as they're fundraising. It's my hobby. Sadly, I'm very boring person. Kids and fundraising is your hobby. You know, they say, oh, we're going to call the endowments. I'm like, don't like don't bother. Not now. I mean, there may be adding one or two managers a year and they're over allocated. Like it is a waste of time.

It's interesting that the numerator effect happens slowly where all the returns seem to be coming from early stage venture. So geez, we should be allocating more there because multiples in the public markets are really high. So it's hard to imagine that performing well. So every year we allocate up now we're up to 16%, 17%, 18% going to venture funds. But the denominator effect happens really,

really fast when the total portfolio value drops because there's the public market sort of drop overnight, even though private markets aren't changing their marks yet. Suddenly you're like, wait, I just went from 20% to 36% allocated to venture funds. What? Yes. And that becomes particularly problematic if you are an institution that has firm policies around permitted allocation ranges. Right.

Now, there were dynamics in 2008 where that became very extreme. There were a lot of organizations that had permitted guidelines and they had to do forced secondary sales of their private markets portfolios. A lot of that changed. So this cycle, you're not seeing that happen as much because people recognize this nature of

you know, the denominator effect and how that... Hey, we probably shouldn't fire sale these assets. Fire selling the assets right at the wrong time is not the solution. There's things that are... Policies have changed within institutional investors. And this is all the maturity of the... You know, how the asset class has matured over 20, 30 years. But to your point at the beginning of this, this is all in the institutional side. Yes.

retail and high net worth. None of this. None of this. And it's going to, it's challenging. And so I think we started with endowments and foundations. If you think about a pension fund that usually looks like somewhere around 10 to 15% would be private markets. And then there's a breakdown between that, between typically venture and buyout or venture growth and buyout. The endowments have a tendency to look for more ballast, have a higher venture allocation in

Insurance, you see a lot of large firms that have dedicated capital formation people building expertise in insurance because insurance, obviously huge capital base that is return seeking capital, their allocation to private markets tends to be very, very small. It could be 5%.

5% or less, but they're talking about very, very large dollars. That has the potential also to increase over time. Again, watch where people are adding fundraising professionals. That's where the growth is going to come from. So I'd say insurance is one to watch. And then on the high net worth side, very, very small in terms of percent allocations.

But challenges around, you know, how do you manage the dynamic, you know, when you're newer to the asset class. How do you aggregate? Yeah. There's less understanding and then also more challenges around liquidity. Do you think that the aggregation of retail and high net worth dollars into private markets is,

which I mean, gosh, to Fundrise, our presenting sponsor this season, like, you know, seems like this is happening. Do you think it'll come from firms building that capability in-house? Or do you think it'll come from intermediaries like advisors, like other aggregators, you know, whether Stepstone and Hamilton Lane move in this direction or a combination of both? I think it's a combination of both. I think that the very large firms will build expertise

in-house. The mega firms have 50 plus people doing this. That's largely those buyout driven firms that I mentioned before.

But it's increasingly venture firms. You know, I've seen a couple of very large multi-product venture firms recently have job postings that they're going to hire 30 fundraising-oriented professionals to be geographic and channel-focused. I mean, that's what happens. They're going to hire people that are exclusively focused on high net worth or insurance or other channels.

And then, you know, I think the advisory community is really important, right? Like there's the advisory community, whether it's what banks are doing internally, there's unique firms like an iCapital or there's other firms out there that are doing, that are building platforms so that RIAs and others allocate is one that's just been developed. Like they're in particular be developing products and ways to tap into this broad platform.

RIA community, your wealth advisor, so that you can have access. We didn't talk about consultants and fund to funds and the role that they play in this whole ecosystem. I think really important and a community that also similar to what I said about like LPACs. Last five years, people, VC firms don't like LPACs and they roll their eyes at consultants.

And the fund-to-funds. And the reason that they do that is because those groups ask for lots of information. They tend to be groups that, you know, they want access to your data. They want to do deep, deep diligence. They require, you know, a lot of ongoing servicing. Well, it turns out the reason that they do that is they are fiduciaries themselves and they have underlying investors that require information. Right.

This is one of those areas where you have to be flexible because you're saying, this could be a great partner for us. This could be a great capital to add to our platform under management. But man, it is going to add additional work for us as a team versus these five high net worth individuals who previously were our only investors and didn't care what we did. Now we're taking on someone's capital who also has fiduciary responsibility upstream. So they have requirements they've promised and therefore are going to enforce on us. Yes, absolutely.

And I think it's very short-sighted of organizations to take the road of easy, right, when it comes to capital, because you need to think in a more sophisticated way about what can provide you scalable capital as you seek to grow. What is the sophisticated capital? Because the sophisticated capital will be

stickier if you do well. It will be allocating throughout cycles. It will serve you well as you grow. And maybe it's because I grew up at Goldman in their fund of funds and advisory business. But certainly over time, I've seen the efficiency, not the strain that advisors and fund of funds can put on an organization because of the information that they require, but the efficiency of

of raising capital because they have, you know, they tend to be very sophisticated allocators. They have a broader group of clients that they're aggregating underneath. They can move in scale. They can move quickly. They can be great co-investment partners for deals that are more complicated because they are very well resourced themselves. So I'm a big fan of

understanding that landscape. In general, I think it's great practice if you're managing a fund, you want to have a diversified investor base. You want to have your customer base should not be concentrated and it should represent the broader ecosystem of allocators because each of those different types of allocators will face challenges at different times and you won't get strained if you've got a good practice of diversified allocators.

Would you put Cambridge Associates in this budget? Yeah. Yeah. Cambridge Associates. The amount of capital that they advise is...

Enormous. Enormous. And I think a mistake that I see people make. So Cambridge Associates, Axia, Hamilton Lane, Stepstone, Pathway, like Cliffwater, the list goes on. They are advising endowments and foundations, sovereign wealth plans, pension plans, as well as wealthy individuals and high net worth family offices and things like that. They are advising the broader universe.

And I think what people sometimes the mistake that people make and take for granted is they think that they could market to an endowment or they can call on a pension plan and that they will be able to get a commitment from them. And what people don't appreciate is that you also need to have their advisor on sides.

You need to have an ongoing relationship with the consultants and any advisors that they rely on the decision making so that everybody you're taking into account, everybody that's involved in decision making. It's so enterprise sales. Like it is like capital formation is enterprise sales. Like it's what VCs advise their enterprise companies on all the time. Yes. Should probably do it themselves. 100%.

100%. We've gotten a good primer on capital formation. I want to shift now. We're sitting here December 1st, 2022 recording this. Over the last few months, you've had some great sort of learnings you've made public on Twitter from conversations that you've had with LPs. I'm curious to dive into some of those.

Whether you've already tweeted it or not, what interesting conversations have you had with LPs recently where you've noticed sort of a pattern forming? You know, it's a really interesting time in LP land. It's great. I love these moments because it's when all the learnings happen and all the opportunity to upgrade your relationships because, you know, when things become turbulent, you

you have an opportunity at hand to get to know people better, understand what they need. They need very little, as I said earlier, when things are great. So trying to have a lot of conversations and Twitter has been an interesting exercise. But for me, it's really forced me to distill the nature of the conversations that I'm having with LPs starting about nine months ago. You know, starting about nine months ago,

You know, we're sitting here in December. You know, I guess it really started about a year ago. It was really before the market had cracked or the public markets had cracked. But you felt it happening on the LP side.

And you felt it. There was so much anxiousness around portfolio exposures, about risk in the portfolio, about the pace at which things were happening, about fundraising pacing. You know, the LPs are a great leading indicator of where bubbles and excess is in the market. And so a lot of the things I was hearing and what I was putting out on Twitter, you know, a year ago or nine months ago is around LPs.

The pace at which people were raising and deploying capital and the stress that that was putting on LPs because there's a limit to how much LPs can actually continue to invest. Like there is a limit to allocations. The pacing of which people were deploying and raising was well outpacing the capital actually coming back. And LPs were feeling that and very stressed about it. Then we moved into the new year and you move into 2021.

Ukraine, you move into inflation, you move into, you know, different cracks in the market. And that's where you start hearing of, we need to understand exposures. When things go wrong, the LP motion is I need to understand where I have exposure to this immediately. And what are the second derivative, not only like I want to first understand first derivative exposure, but then I will need to understand second derivative exposure. So the immediate motion is like, you know,

Ukraine, Russia, war happens. It's where is my exposure? And then the second thing I need to know is where are potential knock-on effects to that? It's happening in crypto right now. I think one thing that GPs take for granted is they think that LPs know what they own.

It happens all the time. Like GPs think LPs know, they know our portfolio. They know what companies we're invested in. They don't. They don't. Yeah. Especially not if you're not having LPAC meetings. Yeah. Yeah. If you're not having LPAC meetings, you're assuming LPs know the portfolio companies that you have and what those companies do. If you're an institutional LP with 75 GPs, you probably have 400 funds.

that are active in your portfolio, which is probably, you know, it's thousands of portfolio companies. It's really hard to know where you have exposure. And so funny. I even feel this. I mean, even, you know, before going full-time on acquired, I was a professional GP in venture. And, you know, now I'm an LP in many funds, including some of my former funds and like,

I see it on the, it's like, I have no idea what these firms are invested in. I used to work there. Like, you know, and that's just for a small number of funds that I'm an LP and like, I can't even imagine as a professional LP. Yes. It's so, it's so hard. So, you know, I think it's something to keep in mind when you're managing relationships is, you know, that people need to know what they own. Never take for granted that they understand where you're invested and where you have exposure, where there's risk.

You're hearing a lot of that stress and some of the things I was talking about on Twitter earlier in the year was about that, like how LPs need to understand where they have exposures. Today, it's a lot about the stress in fundraising, like the lack of capital, the lack of capital that LPs have for new opportunities today because of the impact of

the denominator effect because of the impact of a lack of liquidity and because they had just firms came back to market so fast. One thing that I tweeted was, you know, I think there's two things that got a lot of feedback. One, I got a lot of engagement. One thing that I tweeted was, you know, we're really upset. What is hardest for us is that firms raised four year capital and invested in two.

And so we didn't size things appropriately. Like we didn't size our commitments. We sized our commitments that you were going to draw it down over four years. You drew it down in two. Well, now I don't have money, more money to give you, even if you're great. The other comment that I had put out on Twitter that got a strong response one way or the other was if you were a firm that had

capital available, basically mature capital, relatively mature capital during what was the best exit environment of all time, call it 2018 to 2022. And you failed to return meaningful capital. It's a no go. It's a non starter. Hard no.

I put this out this summer, and I think it's, you know, it was the beginning of this conversation around DPI. DPI stands for distributions versus paid in capital. So the ratio of which you've distributed capital versus what you've actually called from people. And, you know, this recognition that in venture, a lot of returns have been created, paper returns, but what actually has gone back to investors, cash on the barrelhead has been very low.

And it's hard for people to accept, well, the returns have been great. You're clearly going to keep committing. But we're in a world where LPs are focused on, I don't believe your returns. I don't believe your returns right now. So the only thing I can hold on to is, did you actually return capital to me? And that's what's going to drive my commitments going forward. When do you think that the private market marks start to become...

believable that this all sort of shakes out where people's private portfolios, you know, venture firms, private portfolios are worth what they think they're worth. It's going to take a while, in my opinion. Why is that? I think there's a few dynamics. I think that one, companies are sitting on a lot of cash and don't need to raise a

rounds right now. There's no impetus to go have a mark happen. So many companies are sitting on cash. So there's no forcing function for a mark. And that has generally been the valuation policy of venture firms, which is you mark off of subsequent round. And you can argue to auditors that early stage capital, we've got plenty of cash. And

public comps aren't appropriate. Like it comes down to your valuation policy. And none of this is Altimeter specific. I'm just speaking about the generalities about the industry. But I think that dynamic is going to delay write downs because people don't necessarily mark off of public comps and subsequent rounds are delayed because companies are sitting on a lot of cash. Which just to like parrot why that's a reasonable thing. If an early stage company is doing 100k in revenue, and they have

zero earnings or negative earnings, well, there's no way to apply a PE multiple off the sector that they're in of public companies. But even if you apply to revenue multiple, you know, and you throw what used to be a 35x on and now you're throwing a 15x on, like,

That company you invested in is probably not worth $1.5 million. So it's a silly, they have more cash than that in the bank. That would be a silly thing to say anyway. So there is like definitely legitimacy to you can't value early stage companies like public companies. It's a very challenging thing to, you know, this valuation practices are challenging at early stage, which is why, you know, you've had this practice of, okay, we'll just value off of the subsequent round and what people are willing to pay and, and,

And every firm has audited financials at the year end. But there is psychology for certain firms around timing of marks relative to being in the market and sensitivity to take significant markdowns while they're raising capital. There's reasons to justify why you wouldn't mark it down.

I would argue that there's a lot of psychology around how your marks look at a given time when you are raising capital in the market. For sure. Of course there is. Right? Like GPs are not incentivized to just take all the pain now. And LPs understand why you're not. So all the more reason that I think these things... That they're not going to believe the marks. Yeah. And so you have this very difficult period of time when...

There is going to be a bottoms-up approach to fundraising that happens for all LPs in that we're not just going to accept your high-level benchmarking and your high-level performance. When you come to market, we need to understand the operating dynamics of each of your portfolio companies and try to build up what we think that is worth today.

And every GP has to be prepared for that. In conversations with LPs, you've heard, we want the financial statements of all your companies so we can build our own valuation model of your portfolio. No, no, no. It's not that they're asking for their direct financials. It's a help me understand revenue, growth rates. Walk me through your portfolio company. Walk me through your portfolio. Yeah.

company by company, or at least value drivers, right? And help me understand why it's worth what you say it's worth, right? And then also help me understand what this may be worth in the future. Like, what are the prospects for this? As an LP, I'm trying to model out

what your returns, your unrealized returns, what could be expected from that to get a sense of whether what you've been investing more recently would actually translate to 3x plus returns or top quartile returns in venture. And to the beginning of our conversation here, you know, if currently only

call it 15% of the venture industry has professional caliber, capital formation and LP relationship capabilities, whether that's in house or on the GP team or, or external. If you don't have that, you're gonna have a really tough time having these conversations if you're trying to raise capital going forward. So this is going to be a forcing function for professionalization here.

It will be. And this is exactly what happened in buyout. There became a standardization post GFC of what LPs required when they were underwriting new funds. You know, buyout, it looks a little bit different. It's, you know, it's entry multiple, it's leverage, like there's like basic stats that you need.

for your portfolio companies existing and then an understanding of your strategy and where you're focused. And I think for most buyout funds, you can build a very standard data room that will cover 95% of what LPs need based on how LPs came, like post-GFC, realized they needed to understand and underwrite buyout firms. I think that's happening in venture today, that LPs will now, there will be a standard...

set of information that is required by LPs that is much more in-depth than what venture firms provided in the past about their portfolio. And they would use the excuse of the confidentiality around portfolio, and they'd use the excuse. A lot of it was like, oh, it's confidential. But the reality is a lot of venture firms don't have the data. They don't track the data. Yeah.

And by the way, the buyout funds didn't either. Like there weren't the systems. Systems have been created. Now there's software. Like this is all coming together. Look, if you talk to one of the great consultants out there, they'll tell you what it is. Like they'll tell you what the data room looks like. You could figure that out today if you wanted to. And I would encourage every VC firm out there to start preparing now to really understand the set of data and the set of statistics that LPs are going to want, institutional investors.

will want, whether or not you're going to raise from institutional investors, you should be prepared to provide institutional quality due diligence if you're a best-in-class firm.

And so understand what it looks like. Understand what the DDQ looks like. Prepare for it now because it will be standardized in a world where firms are going away, performance suffers, and there will be people that emerge from the pack because of the transparency they'll give. Well, that is a great, great note to leave us on. Megan, thank you so much for joining us. This was such a pleasure. I hope that we can continue the conversation.

I hope that the audience got some value out of this session. For sure. Where can people find you on the internet? Great question. I'm Twitter at Megan K. Reynolds. Megan with an H. Megan with an H. Great. Listeners, we will put a link to that in the show notes. Listeners, we'll see you next time. Thanks, guys.