18 October 2023 | Link to podcast

Beezer is one of the few LPs who shares her thoughts publicly on social media. She continues in much the same vein here, sharing her perspectives in an entertaining chat with Harry Stebbings, on how LPs view the venture market post the end of the go-go years of ’20 and ’21. What I found interesting in Beezer’s comments: a) funds that returned 3x+ typically have a dragon (an investment that returned the fund) b) the historic maxim that you need to ride your winners all the way through, is getting a rethink, in light of the high multiples that are available to early stage investors when they sell to later stage investors c) the overwhelming preference amongst LPs for a fund in the $300-700m range, the Goldilocks sized fund d) interesting data points on breakages; the breakage between fund one and two is 50% (i.e., half dont raise a second fund), by fund four, it is 17% (that is, only one in six funds reach fund four) e) they typically except a seed fund to return 5x and a Series A fund to return 3x. Overall an interesting podcast, though a much more contextual, useful to understand the present state of the venture market and relationship between LPs and GPs podcast, than something more permanent and lasting. Useful for venture nerds and VCs; less useful for founders.


Harry: Beezer, I am so excited for this. Thank you so much for joining me today. I want to start now just baseline as blunt as I can be. Who are you and what do you do?

Beezer: Well, I am Beezer. I manage Sapphire Partners, which is the LP strategy of Sapphire and we invest in early stage venture funds, US, Europe and Israel and that’s what I do.

Why the Power Law matters in early stage venture fund outperformance

Harry: Okay, so you’ve been an LP for many, many years and you have the chance now to call yourself up the night before your first day as an LP. Knowing what you do now, what would you advise yourself?

Beezer: I would say really understand the importance of the power law, which I know sounds like a bit of a nitty gritty and I’d gotten this advice from other LPs, which is the difference of having a power law defining company in your portfolio and the experience of that for the GP along with the entrepreneur really changes the understanding of how venture works and you really just can’t onesie twosies at <incomprehensible> performance. It’s hard to walk that until you really feel it and then you see these activities, you see the companies taking off. You see the difference in what it looks like to have that kind of a power driver in your portfolio.

Harry: Got so many things to unpack from such a small segment – onesie twosie to <incomprehensible> outperformance? What do you mean by that?

Beezer: If you think of a growth stage portfolio, it’s not that one doesn’t want to have a power law company and have it return a) 100x and b) two to three times your fund. It’s just much harder when you have a large fund. So, a lot of those funds end up having a number of exits that end up adding up to driving performance. In an early stage fund, we’ve yet to see a fund that’s returned three or more X that does not have a company that’s returned at least one time the fund. And that’s what I mean by you can’t do the single and base hits like, oh, I got a two X on this deal, I got a three x in that deal. Those are all great to add to the portfolio, but if you don’t have a fund returner or a couple of half fund returners, we haven’t seen a fund that’s hit out performance.

LP portfolio construction

Harry: Speaking of the importance of power laws within portfolios there, I often think that actually LPs are too diversified given the breadth of venture portfolios at 30 to 50 companies, most often if you have 10 managers, you have 300 to 500 underlying portfolio companies. I mean that’s a lot of diversification. Do you think that LP portfolios are too diversified or do you actually think that they’re not diversified enough given the importance of having just one of that as power law?

Beezer: LPs are like snowflakes. No two are the same. So, some people do like diversification. I know some LPs that specifically look at the overlaps or the lack of overlaps between their managers and what they really are trying to do is they cover the seed market for exactly this point and they want to make sure if they catch something if it happens. And then what the LP does is sort of a look through on the math and says, well what if I’m putting X dollars into this fund and they’re putting Y dollars into this company? What needs to be true for those companies to be productive on my side? And I know other people that say, hey, I think this area is really interesting so I’m fine if I’ve got two or three managers that invest in the same area and even in the same company because if they hit one it’s going to be that much more productive And it really comes down to how the LP wants to build their portfolio.

Harry: Do you think about it in buckets? I see so many LPs that think about it through like, oh, I need early stage consumer, I need series A and B enterprise. Do you think about it through that bucket then?

Beezer: Well, we just do early stage, which in our definition that means we started out originally with Series A and we’ve now moved down into seed and pre-seed, so within that area we then look at what is the overall underlying distribution of companies that we have. We are proud venture geeks and we do publish some of our findings. So, last year we ran our consumer enterprise report and enterprise does tend to have more consistency of exits, but you get the big spikes in the consumer ones. So, if a Coinbase for example, you don’t get 10 of those at the same time historically, but you will get just more enterprise exits but lower typically exit size. Yes, but consumer can too. Again, if you do look at the returns, if you consider the facebooks, the coinbases, but they are fewer and farther between what we saw in 2020 to 2022. Again, you had the Coinbase, you had a couple more if you got out when Peloton stock was high, there were ways of making money but it’s not as consistent as the enterprise. So, we do want both in our portfolio but we’re conscious of the exit dynamics.

Harry: When you look at Warby Parker, when you look at Away, when you look at Allbirds, Sam Lessin said on the show that actually a lot of these companies show that early stage venture models that have been so prevalent don’t really make sense. Even your Robinhoods as well, which were supposed to be at 30 – 40 billion. Do you think Sam has grounding for that?

Beezer: I understand his point I think from a very specific LP – GP perspective, but it’s sort of defined on when you’d get out of the investment. We have managers that would have potentially sold into some of those later rounds because if they could sell, I’m making up the numbers but 10 or 25% of their ownership and return a fund or half a fund and still hold some for the upside and then potentially distribute the stock when it’s high. Again, you have to wait for a lockup and there’s all these parameters that might not make it possible, but you can make money on those deals. Absolutely.

Are LPs not making any new commitments?

Harry: I mean we’re going to get into lean in versus lean out. I want to start though from the top, because there is a a lot of negativity and doom and gloom, and no LPs are investing and this is the end. Is it true that no LPs are making new commitments? How do you think about that statement?

Beezer: That’s not true. I think LPs are being more selective and making new investments, but they’re absolutely making new investments. All the data’s not in yet, but it doesn’t look like the volume of dollars being invested this year into funds is anywhere near last year. Last year was a peak, so that’s not wildly surprising, but they’re still making investments.

Harry: It’s the question if no new managers are raising though really. I mean there’s a huge withdrawal in terms of net new manager raisings. Yes, there are still some, but the amount that have come back to market has changed significantly, which might correlate to the reduction in dollars. You think that’s fair?

Beezer: I think it’s kind of all tied together, right? If the entrepreneurs are slowing down their fundraising so they can produce the metrics necessary to convince a GP to invest, then the GP is going to call less capital and then deploy their funds slower and then LPs are going to be slower. We saw numbers about 12 to 18 months, which is historically atypical. Usually it’s three years, so if now they’re lengthening back out to three years, yes, there’s fewer funds being raised and I think there’s a lot of we can get into this or not of people trying to figure out what is the health of the underlying companies, what’s really going on? And there’s so many things going about why LPs are slowing down. A lot of LPs also pre-spent future budgets, if that makes any sense. If you were raising a fund every 18 months and I thought you were raising every three years, I had two choices. Either I pull from future year’s budgets or I reduce my cheque so that I stay consistent in my deployment, even if you’re raising faster or I end up spending money or committing money earlier than I anticipated, and then right now given what’s going on in the markets, a lot of LPs are feeling liquidity strains. I wouldn’t say a crunch, but there’s different demands on those dollars.

Harry: So, what you’re saying is that most actually just pulled forward dollars from the future. They didn’t reduce commitment size.

Beezer: People did both.

Harry: And now they’re feeding the pain.

Beezer: Correct. Because you also, what you have at the same time is not only is people that are say existing established venture investors know that it can take 10 years for an exit to happen, that’s not a surprise…but if you’ve built a portfolio and you’ve got public and privates and other areas, you can manage your liquidity by taking money from other places as it comes in. But if the exit markets are generally shut for everybody, you’re not getting your private equities necessarily distributing capital. So, you can’t use that to make your capital calls either, and, you don’t want to sell your stock when it’s down if that’s not part of your strategy. So, there’s just a lot of varying things going on. They’re hitting budgets and a lot of LPs that manage endowments or foundations have an annual budget that they have to spend money on for whatever their business is. So, they still need to figure out how to make those payments.

Harry: And like mandated outflows for scholarships, for university reimbursements or for educational grants or whatever.

LPs, liquidity and implications

Beezer: Correct. So, I’ve sat through multiple investment committee sessions with larger funds, larger LPs managing multiple funds who are looking at, well, how do you manage this? You also have liquidity profiles that you have to keep. You can’t be too illiquid because it violates their rules and just where are you going to clip your coupon so to speak?

Harry: I’ve met quite a few endowments who are 35% plus <incomprehensible>. Where do you think it’s going to reasonable?

Beezer: So, it’s hard to give a common answer. I do know when a lot of endowments start looking at the L model <not clear what L means here, Liquidity?> and being willing to go very long on that. They shifted to that and maybe some people are rethinking it. I do know there are some managers, some LPs, sorry, when I say managers, who are like, we’re just going to have to pause for a bit while it rebalances, which also has its own dangers. I mean there is a very long history of looking at venture returns, which says if you’re not in the market, you just don’t know how to call the exit. So, you have to be consistent about committing, but if you have a bunch of existing managers who are still putting money in the ground, you could probably skip a year and still have money going in, just not be re-upping or making new investments.

Harry: The hard thing is if you skip a year and you skip a year on the best managers, then they’re not going to take you back.

Beezer: Correct. That is one of the concerns.

Harry: So, what do you do then?

Beezer: Everybody has to decide. Some people just make it work with a smaller cheque or they take it from somewhere else. Some LPs will say, we believe we can get back in later, some LPs have to exit.

Harry: In terms of the liquidity problem, what do we think happens then? Because I take actually a longer view. I don’t think IPO windows will open for longer than people think. Jason..

Beezer: Jason thinks it’s back half of next year.

Harry: And he’s got a $100K bet with me on it being the back half of next year, one a week for the back half of next year. I thought my mother’s going to love this Chanel shopping, but….

Beezer: I love how much you love your mother.

Harry: Oh yeah, she loves Jason with that deal, trust me. But I think it’s going to be longer. You’ll see it in the update coming out this weekend, but it’s like Databricks, Stripe, it’s not going to be enough to actually crack open the IPO markets like we think it will be. I don’t think that’ll come out next year and so I think it’s going to be like H2 2025. So, what do we do then when liquidity is actually that far away?

Beezer: It’s going to be tough. I mean people will probably have to keep tightening their belts. I mean we’ve seen this before. It took a number of years post 2000, it did take about three years to correct and for venture to come back in and there was just a lot less money being committed to funds and so you’ll see a winnowing out, but you also as a fund manager, if you wanted to wait an extra two years before you raised, you can, but you can still manage your portfolio and wait until it develops and then come back.

Harry: Do we think we’ll see strip sales? Do we think we’ll see selling fund positions? I’m seeing fund positions now being at 80% discount. I mean it’s a great time to be a buyer.

Beezer: Yes, we are seeing that coming together in the market. I think the challenge is exactly what you said. Somebody wants an 80% discount and the person selling might not want to sell at an 80% discount. So, I think the market still hasn’t fully corrected. I think we’re seeing the tip of the iceberg and if the market doesn’t come back, there could be a lot more and that is when, to your point about when endowments and foundations and other LPs have to make some really hard choices about what they keep in their portfolio and what they don’t.

Harry: Do you think emerging managers who have maybe some really promising exciting early positions that they could sell but at a steep discount, should they sell them to get the DPI to raise the next funds or should they stay true hold them because they’re long-term winners, but then have TVPI not DPI?

Beezer: Well that is a tough question. Can we start with an easier one?

Harry: Let’s say you have an open AI in your portfolio or an absolute kind of a home run, but you need DPI and actually to get that next cohort of LPs you need to do the sale.

Beezer: I bet some will, but again, to the point of it, if you can sell 10 or 20%, let’s say you got in what was OpenAI’s first round, but it was not a hundred billion, no, so whatever was some smaller number and if you could then sell in the a hundred billion dollars round and 50 extra money, 20 extra money, that doesn’t sound any different from what we’ve said in the past, which is that people sell into these high rounds and make money. That’s not illogical. It’s like anything on Twitter, if people say hold onto your winners, there’s usually a sub-bullet that’s not making its way out on Twitter. So, I think originally when a lot of that language was stated, it was because people were selling dramatically earlier. I’m going to make up numbers, but let’s say 200 million or 400 million versus 10 billion or 5 billion or even a billion, but the idea of taking some money off the table, those two are not diametrically opposed. And I’ve heard LPs that used to say, hold on to all your winners all the time are now saying, well, I meant that, but in context there are times when it could be useful (to take some money off the table).

How and why LPs are picking Goldilocks GPs

Harry: You mentioned the tightening selection for LPs in terms of managers they back and who they’re invested with, what’s changed in terms of what they want and what they don’t want.

Beezer: I think if you went back to 2018, it wouldn’t be that wildly different. I think what we saw was that the whole world kind of got caught up in this idea of you have to play the game on the field in 2020 and 2021, and I think LPs can be just as susceptible as GPs are. I mean we are all at the end of the day human. I think today you want to see what you’ve always wanted to see in the past, but people have released a bit on the aperture around it, which is you want to see people that are going to be getting into great companies, good fiduciaries and managing their team. I don’t think it’s actually different. I just think back when it was sort of this big runup when we were in the bull market, it looked like there were a lot more nodes in areas that could be very productive and people went for it because there’s a lot of FOMO in LPs and GPs alike. And now on the other side of that, a lot of it looks like it was a lot of momentum and it may or may not convert and now people are reconsidering. Well, if in down markets do I want to reconsider how I’m doing this and the same three buckets, but maybe I need to be a bit more astute about what they mean to me.

Harry: Well, we see a lot of LPs not do fund twos of GPs. They got exuberant with in the boom times and not do the fund that they would’ve normally done.

Beezer: If you’re an institutional LP coming into a fund one, I’m going to caveat this and say most of the institutional LPs I know that do fund ones tend to do spinouts and then the LP base is usually more institutional than the fund one that’s coming up out of AngelList just to draw a comparison. So, I think those institutional fund ones from day one will have a much easier time raising fund two because most LPs have been in the venture business for a while, know that there is only so much you can show in two to three years of work. So, barring something going really awry, a change in strategy, a breakdown in team, whatever, something really falling apart, they will do fund two because you just will not have enough data to know until fund three. I think it’s different for the smaller newer funds.

Harry: Well, what’s insane is I was brought up on the three-year deployment cycles and fund three is your fund where you prove it or you’re out not true. When you are deploying 12 months and your fund three is actually three years in.

Beezer: Correct. So, you might see some more wobbles, but I would say even for some of those funds I’ve seen other LPs come in to fill it or they’re taking down their fund size, so there’s ways of managing, that is my point. I’m seeing more fund threes and fund fours where this is coming up as a conversation, because you do have a bit more data. I do try to think through the pacing of it.

Harry: Do you think we’ll see people reduce fund size?

Beezer: We already are. I’m just looking at the early stage, but the growth has been varied.

Harry: You’re seeing it in early?

Beezer: Correct.

Harry: From a 100 to 50 say.

Beezer: Not quite that dramatic, but maybe it’s not 250, maybe it’s 150 because the math kind of goes two ways, which is if the round sizes are getting a little bit more decreased or they can go earlier, they can find other ways. I think people are pulling it in.

Harry: I don’t think you can though. I mean seed pricing is higher or as high as it’s ever been.

Beezer: Depends on where you’re shopping and who you are. I don’t need to detail this. I mean all of the good journalists are out there detailing all the large growth funds and there are changes in sizes for us, so those are known and out there.

Harry: Yeah, I think we’re seeing this in your thoughts on this, a movement away from the billion dollar plus funds in the realisation of just how hard it’s to do good numbers on those and then also a movement away from the sub hundred million dollar where it’s like quite a lot of work to underwrite them. There’s not a huge amount of data. There’s definitely no DPI and there’s not the established brand. You could get fired if you recommit and it’s a dud, let’s just go in the middle. Let’s go for the $300 – 700m solid. We can get good numbers with good DPI with good teams, game on. That’s where I’m seeing the concentration of capital.

Beezer: Yes, I hear the same thing. I hear a lot from LPs. I would like to be able to write a $20-25 million cheque. I want to be able to grow it over time. I want somebody who’s up and coming so not too large and potentially whatever comes up with a large platform, too big of a fund size or maybe it’s too diffused or maybe it’s too many strategies for their taste, but I don’t want to take a ton of risk on not knowing if they can’t pick. That’s Goldilocks. I mean it’s lovely. We like that too, right? There’s all sorts of positive things there, but if you weren’t in them earlier, it’s hard sometimes to get in then because the existing LPs are thinking the same thing.

Harry: Totally.

Beezer: Right? So there’s a little bit of timing muddle on that and then there aren’t that many. A lot of the folks that were in that size have grown up into bigger funds and so unless to your point, unless they want to halve their fund size or whatever, 40% lower, I don’t know if they’d go back out and raise that because they also have people in their firm that want to build their careers and want to invest capital. So, if you could decrease your fund size that has material impact on what your investing team’s doing.

Harry: So, are we going to see a pull away from the large multi-billion-dollar funds?

Beezer: There is a class of LPs that need to write very large cheques. Those are vehicles that work for that fund size. We also have to understand, I mean I know you get this, but I think sometimes other folks forget that LPs are not in the same business of risk taking the way that GPs are. You’re trying to preserve capital at some level for all the various reasons. So, there is a logic to if you need to write a $100-150 million cheque and you want some alpha but you don’t want to risk losing it, why the larger vehicles can be a place to put your money.

Harry: And actually return rates comparative across macro industries, whereas it’s compared across real estate, it’s compared across credit, dah dah, 12 to 15%, actually not bad.

Beezer: Yes, the 7% interest rate market is playing with it a little bit, but we have a magic wand and take that out of the equation. There is that way of looking at it. If I’m an LP that has to write a hundred million dollars size cheque, unless you want to be a 100% of a fund, you can’t do it. It’s really hard.

Harry: We’ll see the death of micro funds. We saw so many five to $15 million AngelList funds, but everyone was doing a fund. I had one call where I was pitched a company and a fund by the founder in the same meeting.

Beezer: Oh, so we’ve done reference calls with CEOs that pitch us. They’re fundraising in the same meeting.

Harry: It’s just like…

Beezer: We haven’t seen it yet and I really don’t wish the death of the micro funds. We are big believers in the power of small vehicles and it can work. I think also what you have in the market today, the number of VCs who have built really replete LP programs, they’ve made investments in 50 plus VCs and granted these are deal sourcing strategies. They aren’t necessarily launching funds.

Harry: Do you guys buy that? If you are investing in a fund for a deal sourcing strategy as a VC, you should hang up your boots, that’s admitting defeat.

Beezer: I don’t know. I think it’s hard, right? I don’t know. We’ll have to wait and see how many deals come out of it that they find really useful. I mean back in the day, Sequoia’s scout program was very famous for them, but I do think one of the upsides to that, regardless of whether or not it’s working out for the VC doing that program, a lot more smaller funds have been able to be stood up because they have, I’ve seen decks where really all of the LP capital comes from other venture funds or other venture people as individuals or off the funds dollars and they’re now in business. We saw decks in the beginning, and it was notable though, one or two people be like, oh, look, Marc Andreesen is an LP and then you get your 30th deck that has Marc as an example, but there’s many others and it no longer is the same signal that it was before, but it’s still true point about the death of micro funds. There’s just a lot more ways of starting a fund now, which is great.

Capital signals

Harry: I agree with you there. And actually just on that thread you mentioned, oh, the signal that one derives from a certain investor. Investors do derive signal from other investors, which investors derive the most signal or give out the best signal? Is it endowments and foundations? Is it a certain type?

Beezer: I think I used to have a less nuanced view on that and you would think, yes, pick a wonderful endowment that is a great name and is a great portfolio and say if they invested, obviously it’s a great fund, but you have to understand why it works in their portfolio versus our portfolio and so it’s not necessarily playing the same role. And so you have to dig a little deeper and say, well, who are they and why are they doing this? Right?

Harry: You buy that? I love you, but I’m like, I know so many where it’s like, oh, Yale oh X are invested…

Beezer: Correct. No, no, it’s a thing. I’m not saying it’s not a thing. We just do our own work and want to have our own opinions. A lot of the other LPs are doing ventures, to the earlier conversation. against a myriad of things they’re doing and they don’t, with some exceptions have huge teams. So, people have to pick ways of making decisions and if they know, if they co-invest with whatever endowment or foundation frequently, they probably know them as people. There’s definitely folks that refer us deals that we co-invest with and you’re like, oh, I know how they process. I know how they think. That at least gives me some level of understanding versus somebody who when you call them and you say, why’d you invest in this fund? And they say, oh, I’m only here for the direct deals. I don’t care about the return as much. It’s not that it doesn’t matter. They’re not doing it for the fund return. They’re trying to write a $ 30 or 50 million direct cheque. We might like the same fund, but we’re liking it for different reasons.

Harry: What’s the separator between those that are able to make it from emerging manager fund one to blue chip institutions? Come on fund two, this is actually happening.

Beezer: So, there’s the whole myth or not myth of the persistency bias in venture. When you’re with 20VC, if you get these wonderful companies, other entrepreneurs can be like, oh, Harry’s a great investor. He’s got these wonderful other entrepreneurs that I know, these great companies that I know. And so they’ll bring you deal flow and then LPs see that and they say, oh, Harry has this great deal flow. It might not be proprietary deal flow, but it’s proprietary access. And then the LPs want to join the party and they come and then that gives you capital to keep going and running your business. And even though everyone always has a caveat of past performance does not guarantee future. There does seem to be, and there’s been a zillion people studying this, so I can’t quote them all, but trying to figure out is there a persistency bias in returns? Again, people have disputed it. People believe in it. You have to pick your side of the table, but enough people invest believing that once you get that flywheel going of the best entrepreneurs coming to you that they will persist. And that’s why the LPs then will also want to work with the same managers in that. So. you just need to figure out a way to get that going.

Harry: Yeah.

Beezer: And it takes a little bit of time. It’s not that it can’t, it’s just very hard to do in your first fund cycle because there’s just not enough time.

Harry: The biggest thing I see with that mindset on the cyclicality of success is, obviously we’ve worked very closely with Sequoia and Founder’s Fund before, and when I think about Brian Singerman and Pat Grady, they’re not worried at all about it going to zero, but they’re very worried about upside maximisation and I think you get that uncapped upside, lack of fear of downside, through immense success. When you don’t have that immense success, you’re much more worried about getting fired, so to speak.

Beezer: Well, you just talked about the attitude around power law much better than I did, and yes, I don’t disagree with you. I remember I used to work at DFJ many years ago and somebody had his perspective on Tim Draper. They just said he sees fear very differently than the average person.

Harry: He’s the risk master.

Beezer: But it was a really nice framing of your point about how do you take risk and what’s your appetite for risk and how do you think about it? And it’s yes, when you’re swinging for the fences, going back to what I said before, it is incredibly hard to be an early stage fund that has outperformance without a couple of fund returners. You have to shoot for outperformance. You can’t be like, oh, my TAM’s five and I’m going to get all of it. That might work in private equity, it might work at growth stage. It does not work if you’re trying to drive for outperformance in your fund.

Harry: Do you have to have ownership to have outperformance?

Beezer: Oh, it’s such a good topic. You can do it. You can certainly do it on a smaller fund. You have to then have very high hit rate, or I should say this way, the companies that exit have to exit even bigger vis-a-vis your fund size. So, a lot of those funds that have the small ownership…

Harry: When we say small fund size, we’re saying?

Beezer: $40-45m, we’ve yet to run the math and see a fund that’s gone over 50 million that doesn’t have to start having some tradeoff between ownership and AUM. I mean, again, you can get a Coinbase in your fund and then yeah, it moves the dial even if you have a hundred million dollars fund, right.

Harry: But it actually doesn’t, my point is it doesn’t, if you have a $50 billion, sure, if you have a $10 billion, which actually doesn’t, you’re locked up and actually you put a 100k cheque in. At a 20 mil pre like it is today, shit, you are 0.5% on entry, you’ll be 0.25% on exit.

Beezer: I don’t disagree. I know this sounds so boring. Investing in a fund is art and science and the science part cleans the deck, but the art is very hard on the people. That’s a people business and you have to go and spend time. But on the math of it, we just underwrite a Series A fund to a three x and Seed to a five x, and you just look at what the numbers line up at and you say, okay, so given the ownership and giving the AUM what needs to be true to return the fund one time, half a time. And then you say, okay, let’s say the number is $2 billion. How many 2 billion exits do you think you’re going to get in your fund and you can tell me what you think. And then again, history is not always the same, but you look at this and you say, okay, to your point, you go back and you look at some very strong performing funds and you say, how many did they have and what was the percentage of their companies? And you apply that math, and again, the future could be different, but you realise just how hard it is. It’s really hard.

LP-GP communication, and the TVPI-DPI disconnect

Harry: Should we be more honest with LPs about our performers and underperformers? I think often managers are a little bit like they’re finding their way.

Beezer: I think there are ways of saying it that LPs can understand. We have managers who are very good at showing us like, hey, here’s the ones that we have questions on. They could turn it around. You never know. Here’s the metrics. You just go through the metrics and you talk about it, what’s going on with the teams and where they’re at. Venture is a risk business. You don’t go into early stage and expect every company to work. And one of the weird things about the market for the last 2020 to 2022, we did not as an industry have the loss ratios even probably back earlier that one would expect in venture you just had all these companies getting funded so they could continue to try, and then it even became more relevant actually for the GPs to be able to talk about what was going on in the company. And now it’s clear if product market fit’s been hit or if companies have just a tonne of money and might spend time trying to find it.

Harry: Do you think Eric Paley is right to say that this will be the biggest chasm ever? Between TVPI and DPI?

Beezer: The only other time that would be equivalent would be about 99 – 2000 and I don’t know if there is the volume of funds in the market then. So, as an absolute number he’s probably right? It’s entirely possible.

Harry: So, the question then is how on earth do LPs value their book? I meet a lot of LPs and walk around Hyde Park and they all just at me, I just dunno what I’m sitting on. Harry, how would you advise me? I know what I say to them, but I’m intrigued to hear first what you say to them. How do you advise LPs on how do you value your books given the ambiguity?

Beezer: Well, I know a lot of LPs that will ask their managers and then go back home and take another 20 to 25% off the top because there’s things that nobody knows. Then sometimes we’re just all wrong and something turns around like AI happens and some companies become rocket ships because they’ve managed to do something with AI that works in the market and other companies not. The AI intelligence software has just so changed the market and what people are looking for that their companies now seem out of date and it was really strong, but the customers aren’t buying the same way because the product doesn’t compete as effectively.

Harry: Do you find that there’s a differing level of transparency around book value across managers?

Beezer: Well, everybody shares it, but if what you’re asking is do people value their companies differently? Yes. If you’re an LP that has a existing book of venture business and you’ve got over different times, you’ll a hundred percent see that people will value their companies differently.

Harry: Do you communicate that to the managers who are overvaluing their portfolios?

Beezer: Well, overvalue is a relative term. I mean, I think if they ask the question, I think one of the things that GPs forget is that they can ask the LPs what they think. You’ll learn incredibly interesting information like no, your colleague, they might not. I do know the auditors. I know, I know they might not, but I’m saying you could ask your LPs and say, are you seeing these companies being held differently? And I would like to think the LPs would answer.

Harry: If so, don’t tell me. Don’t tell me.

Beezer: Well, and then I heard stories, and this is a story, so put it under the rumor and hearsay bucket, but that last year, the end of 2022, when the auditors were getting involved, they were telling GPs to talk to each other to try to figure out how to value things because if you weren’t close enough to a public comp, you had to value it off of the last raise, which is a logical method. But if a company had raised three times in 2021 and was a hundred x multiple on revenue and the company hadn’t grown that much, it raises a lot of questions.

Harry: Listen, as you know, we get the track record from every GP before they come on the show. The disparity in numbers is enormous. We had one last week which was a $6 billion company in one book, and then it was sold for about 300 the next week.

Beezer: So let me ask you a question. Was it a seed manager or a series A manager that had the highest holding?

Harry: It was a series B manager.

Beezer: Oh, okay. That disputes my theory because a lot of times seed managers, they only might have information rights by the time a series B or C comes up, so they might not have all the information that someone in the boardroom has.

Harry: I know the series B manager I think was delaying the notification of that overpayment of price.

Beezer: Well, let me tell you another thing. LPs get paid on DPI, some get paid on TVPI, meaning that how they’re holding their portfolio is relevant to how they’re viewed not just for their personal pay cheque but how they might be measured by an external US news and world report and other things there’s a whole push-pull in the market.

Harry: Does that not completely skew the incentives?

Beezer: Yes.

Harry: Should that not change?

Beezer: Potentially, but I’m not sure what the magic wand will be that’ll change that.

Harry: That seems so ineffective to me as an official weighing mechanism. Why does it exist?

Beezer: Well, back in the old days of venture, TVPI didn’t rock it up in one year as quickly as it is now, so a lot of these systems were put in place when things were a little bit more prosaic and how they managed along, TVPI used to be a pretty decent signal, not perfect to see what DPI was coming; that I would think to Eric Paley’s point got a little broken recently. It was just very hard. If your company has raised three times in a year and is now worth 10 billion and you’re a 50 million seed fund, that’s a huge change and up and down and so there was a number of LPs that were telling their managers, just don’t mark it up or market up a little bit, be really conservative, but it’s hard to then argue to the auditors you can’t market to the last round if it was like two months ago because the auditors will say typically they’re like, use the most recent last round. It’s in the last six months.

Harry: Especially if it’s a very legitimate top tier firm.

Beezer: Totally. My most benevolent answer is, a lot of these things were probably put in place when TVPI and DPI were not so dissimilar and so these things made more sense and now the last few years made it look just a lot more confused.

Harry: And there are any other big misalignments that’s a really cool one.

Beezer:I think depending on who you are as an LP, the fund size can drive some misalignment to your point about much larger funds and what they’re trying to do and how they’re trying to create returns and financial stability. But that also comes with, and this has been discussed on Twitter ad nauseum. If it comes with a lot of management fee and if you are able to work in a fund and make millions of dollars per year in management fee, that’s very different from an LP who needs the money back to fund whatever it is they’re trying to fund with it.

Harry: Do you care about fees? Honestly, I hate the discussion on fees. It’s like I hate the discussion on GP commit. It’s respectfully, there’s many billionaire founders of funds, they can put in a lot more money than me. It doesn’t mean they’re more committed than I am. It’s ridiculous.

Beezer: I agree. I think there’s no one size fits all and I definitely think for emerging managers, the management fee and the GP commit need to be looked at in the business case, what are they using it for? We’ve had some funds in our program where I’m a little worried they can’t pay their rent because you’re like, there’s no way this management fee can pay for it. So, it doesn’t surprise me when smaller funds have a 2.5 management fee because you just have fewer dollars. What you typically as an LP like to see is as you layer the funds, the fees come down or you stop pulling fees on some vehicles. But again, it’s always in the context of what’s the fund trying to do. How many people are there? What are the cost structures and true point about GP commit? Yes, it has been an unnecessary barrier to entry for too many.

Fund sizing in today’s context

Harry: I think you and me have a different view of what fund size you need to do to be a seed fund today, but I think if you are leading seed rounds today, you can’t have less than a hundred million dollars.

Beezer: I agree. But then you need to be leading and getting What we are seeing is leading and getting low 9 – 11 – 12% ownership.

Harry: A thousand percent agree.

Beezer: But many people raise bigger funds and have 5% ownership. You end up with the like, well then now you need this very large exit, which I wish everyone gets. There’s no button, there’s no shortage of wishing this works, but it just historically you’re like, well, you’re going to have an incredible batting average, and again, we want that to be true. That would be lovely. History would argue that’s very unlikely.

Harry: Okay. A manager is getting ripped apart for the deployment timelines.

Beezer: I think there’s been many conversations with LPs suggesting GPs slow their role. If a fund came to you in the beginning and said, we’re going to do an annual raise, I know some funds who say this and the LPs understand it and they sign up for it, then they understand. They sign up for it.

Harry: That’s cool.

Beezer: Yeah, so I see that happening. I see a lot of other funds saying, you know what? This is going to be a two to four year raise. Or the LPs are like, hey, we’d like to see a bit more traction in your companies. Could you delay your fundraising or just slow it down and see what happens? Give it another six months. Getting through this market to our earlier conversation is not going to be necessarily easy and seeing how it rolls, I think those conversations are happening. You don’t get fired for buying IBM. I’m using Chris DeVos’s line, so I just want to give credit when I’m stealing. He talks about someone sort of investing the capital that they’re really a manager of or are you sort of an employee of a firm and you need to manage the business? So, it’s not saying they’re not making thoughtful decisions, but it’s a different viewpoint if you’re like, oh, I’m going to be here for three years. Do you know the average CIO is like a five-year tenure? I actually thought there were like 15 years, but no. A friend of mine was like, oh no, it’s three to five years. I’m not picking on those individuals, but I’m saying if you’re then in the stack and you’re working for a firm and you’re deploying capital as an LP, you might be taking a different risk appetite. Then if you’re someone who’s like, hey, listen, we’re going to go find the next amazing fund and we’re going to be with them for a long time, and this is a very different mentality.

Harry: Do you find it hard not doing a new manager’s new fund when you have to not do a new fund and you’ve been in prior funds?

Beezer: Oh, It’s very hard.

Harry: How do you have that discussion?

Beezer: It’s delicate. We should have good reasons to start with that is the first principles of it, and then you share your thinking. You say, here’s what needs to be true for us to be able to come back and we want to come back. We’ve shown people TVPI charts and say, we have to choose based on productivity, and it’s not that we don’t believe in you, it’s taking longer. Or some people graduate out of our program because they get launched, for example, so we’ll do emerging and established, but if you’re going to go on and raise a $1.5 billion fund or something that’s outside of our program, we think that’s great that they’ve grown up and done that, but that’s not in our program.


Harry: Final one, in terms of feedback to the GPs on distributions, whether to hold or to sell. I think we’ve been lied to for a generation where it’s like lean in, lean in and the best strategically leaned out over time. Is there retribution from LPs who are saying managers, you didn’t take anything off the table in the good times?

Beezer: I don’t know if they’re saying this to their GPs, but you hear a lot of people having concerns that they’re now going to ride the TVPI all the way back down. To your point, you can manufacture some distributions you can find if a company’s not working. I think managers are now, I’m having more conversations with more managers who are like, hey, we’re just going to try to find some soft landing for these companies. It’s just not going to work, which we’ve been expecting for years to my point about loss ratio, so that doesn’t wildly surprise us, but you’re not going to three x your fund that way. You’ll retain more than zero, but it kind of creates fodder on the bottom. You can’t force a company to go public.

Harry: But when you have a chance to sell secondaries, when you have a chance to distribute.

Beezer: I really do think these conversations are happening either with the GPs or amongst the LPs. I hear people talking about it and just sort of understanding why the manager did or didn’t and is there a cogent reason, whatever that reason is that makes sense. There’s definitely times when there are small floats and if you sell, it could be detrimental to the company. There are other times where it sort of gets at the, are you a fiduciary in the kind of way that I want to be associated and people will make choices and then there are always going to be some managers that have that kind of LP pull that people will just keep working with. I think that list is getting smaller and I think the names are switching around.

Harry: Which names are the hottest?

Beezer: Well, I’m going to give a shout out. Pitchbook just did a new ranking based on, I’m not sure what metrics they pulled. It was like capital calls versus distributions, and I don’t know how they knew this, but Union Square had the first and the third spot, so shout out to them.

Harry: I think Founders Fund having a moment in the sun and then just Index for consistency of DPI.

Beezer: Yes.

Quickfire round

Harry: Right. We’re going to do a quick fire round.

Beezer: Okay.

Harry: So, what do others not know that you know to be true?

Beezer: Okay, I’m going to take a sideways answer to this. It just grates me when people say something can’t be done. I hate being told something’s not possible and that you can’t do it. Just because someone hasn’t done it before doesn’t mean you can’t do it. It just means it’s harder. You are a case in point on this, right? I mean what you’ve been taking to the market with the intermix of media and venture hasn’t been done before. People have tried it in different respects but haven’t nailed it the way you have it. I’m sure millions of people told you it couldn’t be done. It just takes hard work.

Harry: What would you change about the world of LPs?

Beezer: I wish the LPA (LP Agreement) was better.  It’s so hard to read. It’s so complicated. It’s so not useful. It’s supposed to be a tool to understand how our relationship works and it’s just a big legal pile of documents, but I think some of these things just end up being logjams in the ecosystem and the point is that’s just not the point. If you get to that place, it’s a big mess. Anyways.

Harry: What would you guys change in the world of managers most?

Beezer: The great managers understand this, who they are as an investor and how they build their firm is so specific to them, and then you have to have that. I really do think there has to be that interplay of the two of them for it to become a great firm, and I think a lot of people don’t realise that and they think it’s just an easy business to pop up and it can be, but then that’s a smaller business and it’s not necessarily going to be become a long enduring firm.

Harry: You said pop-up that I just think everyone misunderstands just how long this is. Everyone says 10 years. It’s not 10 years. It’s like 15, 20.

Beezer: And that’s just one fund.

Harry: Yeah.

Beezer: Let’s be clear that’s one fund. I find it actually a bit mind boggling that people, I mean if you want to have a pop-up business, do something direct because even then it’s not sure. A job can be four or five years and you can try different things with the way compensation equity structures work, but becoming a GP, yeah, you assume you’re not doing off AngelList and it’s not a small endeavor if you’re trying to bring in other people and other LPs. It’s a very wide financial services business.

Harry: What’s the biggest manager, miss you’ve had?

Beezer: This kills me. So, I passed on the Initialised Fund one because we had just launched. Yes, I know it was bad….

Harry: 300x…..

Beezer: I know, I know. No, trust me. I know. But we were series A and we were looking for 75 to 200 million fund sizes and they were sub 10 and C, so it was outside of scope, but I

Harry: Get it.

Beezer: It was outside of scope.

Harry: Was way outside of scope.

Beezer: It was real early, so do a couple of things being super exceptions early on, but to the point of I’m going to quote Nikhil from your last podcast with him from Footwork, exceptions should be made for exceptional people and yes, to this day, that always sticks in my head.

Harry: What’s the strongest belief you had, which turned out to be wrong?

Beezer: We’ve definitely tested a bunch of hypotheses and different things, and I keep going back to this, but it’s so clear in early stage if you’re not taking a big swing for the fence, which doesn’t mean saying taking ridiculous….I haven’t thought about it risks, but you just have a lot of people that think that they can do smaller investments, like I call the growth equity mindset in the smaller earlier fund, which probably can work in some scenarios and it works for some LPs that want to do direct investments. I just don’t think that’s where you’re going to get the long-term performance.

Harry: If you invest a sub $50 million fund, what’s of good performance?

Beezer: If it’s seed, we’re going to try to underwrite to a five x.

Harry: Because people throw out big numbers you often hear that. I’m going to definitely be a 10x. You know how fricking hard it’s to get to a 10X.

Beezer: There’s so fewer of those. I appreciate because TVPI looked bonkers the last few years. People thought it looked different, but I think maybe this is the value of being old. I mean, I’ve been playing in venture in some form or another since 2000 and I was doing emerging markets in ‘94 for project finance and I can tell you it is hard.

Harry: Who are the most consistent DPI returners?

Beezer: Oh, you’d have to pull into so many different books, but I think the numbers will tell you if you ask different LPs, if you can get three or four funds in a row with strong DPI, that is world-class. Usually there’s a funder too, which has a tougher time. Like no surprise 2021 might be a tough vintage.

Harry: Someone once told me that LPs invest for a banger of a fund, and they’re aware that there’s going to be a dog fund.

Beezer: That’s not untrue. Sometimes things just miss, but if there’s consistency elsewhere, there’s consistency of theme, consistency of thinking, consistency of team. Just going back and asking different LPs in their portfolios. It’s very hard to have three or four funds in a row that’ll be called a three x.

Harry: Unless you really fuck up. Do you have three funds? Does that rule still hold true? Do you think people are much more fund by fund dependent?

Beezer: Oh, to our conversation before institutional LPs, this is why they don’t make a lot of new bets every year is because they’re looking for managers, they think they can be with over multiple fund cycles. But I can tell you, if you want me to digress and dig graduation rates, we’ve been looking at data going back to 1995. I was shocked at the breakage. The breakage between fund one and fund two is not every year, but averages out to be about 50%. Well again, because they’ve got the law of large numbers coming in at fund one, there’s so many smaller funds.

Harry: And the reason for that is because these small fund LPs often being individuals don’t scale into institutions.

Beezer: Yeah. Sometimes people don’t realise if I’m making a personal commitment every two or three years, that can be expensive and you might not understand that. It could be the GP themselves don’t really want to do it. What was also sort of heartbreaking was the fund one to fund four on average. Again, these are averages, some years are better, some years are worse. It’s 17%, so it’s not a slam dunk. But even if you get to….

Harry: That doesn’t surprise me as much.

Beezer: It doesn’t surprise me as much. What I think is also interesting is just if you play out fund one to fund eight, the numbers are terrible because you’ve got such large breakage in the early years. But even if you get to a fund four, there’s still pretty significant breakage going on to other years because then performance can be seen.

Harry: What’s the biggest reason for funds to not make it do you think from fund one to fund 14? Breakage and partnership breakdown or performance?

Beezer: Back in the day, if you had three years between funds, you’re talking about a decade of investing. So, I think performance would be able to be being seen and then tied into that is like strategy and all those things. And then I think team, it’s very, very hard to do this because no one documents it. But you could see we ran the numbers on funds that from every year, who was the one that has gone on to raise the most vehicles, core vehicles, not all the other layered, and if they went multi-strategy, we didn’t track all that. A) I was shocked the fund sizes didn’t balloon as much as I thought they would because the dollars were going into these other growth vehicles. But you would see these funds that got to fund 4, 5, 6 and then never raised another fund. It would have to be some combination of team and track record. Maybe you did so well, you didn’t want to keep going. There’s a positive side of that, which is it’s good.

Harry: Roger Ehrenburg (IA Ventures).

Beezer: I think we should celebrate more as an industry.

Harry: Amazing.

Beezer: It’s fantastic and it’s great. And I mean to a point about, it’s 15 years per fund. I mean this is a body of work for 30, 40 years. That is a long time to do one job. People should be allowed to stop.

Harry: Do LPs mind opportunity funds?

Beezer: I think you have to ask each ones. I’m always surprised at the different viewpoints around the room on any given opportunity fund. I know some people that do it try to get into the core fund, and segue in. There used to be, oh, the other thing we’re seeing in this market is people are unstapling their funds because a number of LPs felt dragged into it to the point of, I want to support you, but I’m not so excited about this other vehicle, but I want to support you so I’ll write a smaller cheque. But yes, I think it’s a combination of things and I think that’s also why fund four to seven has the same challenges and people also you have to bring up the next generation and people management. If you’re doing deals, who in the firm is also thinking about people management and people training and all these things come into play that is much more about managing a firm than just investing. But you need to do both, if you’re going to be that kind of long-term.

Harry: Will we see unstapling continue, do you think?

Beezer: I would suspect for at least the next 12 months to the extent that people feel pressure to raise, they’re going to try to be more LP aligned. And if folks don’t want to do it, there’s a couple in the market now. Susa Ventures very publicly tweeted about changing. It’s not an opportunity fund per se, but changing out their, I think they had two funds, and now they’re having three. They’re raising independently. So, folks are looking at it and talking about it.

Harry: Is this the new normal? Is this return to old?

Beezer: I think this feels a bit more traditional venture, which doesn’t feel terrible to me. I think the industry is still healthy. I think it’s going, the world’s going through a bit of a rough patch, so this is not a fun time. I think we’re bumping along the bottom. I think it should start coming up at some point. I don’t know if Jason’s right, it’s the back half of ‘24. At some point, it will come back up.

Harry: Listen, if Birkenstock’s getting public, maybe Jason’s right.

Beezer: I love my Berks. I do have to say they’re very comfortable.

Harry: There we go. Can you talk to me about the news with CalSTRS? We mentioned it before and it’s been discussed in obviously the media recently. What does that mean and what changes?

Beezer: Yes, so we were very excited. We announced this about two weeks ago that we’ve taken over the early-stage venture fund mandate for CalSTRS. So, for folks that aren’t familiar with CalSTRS, they’re the world’s largest educator pension fund in the world, which is pretty cool. And they’ve been to their credit running an emerging manager program now for decades. And back in the day when they started it, it was a mix of private equity, some healthcare, some venture, and going forward they’d now picked us to work with them on the early stage venture fund and they have pivoted to focus on specialised managers and we’re their venture specialist, which means we now are going to take their money, which we’re very grateful for them trusting us with and deploy it into US early stage venture funds emerging. So, that’s funds one through three, which then as additive to our existing programs. So, the answer is yes, we’re deploying more.

Harry: 10 years time for Beezer. What would you like then? You’ve obviously just launched CalSTRS new program as well.

Beezer: Doing this. No, I know it sounds…..

Harry: Love this more than ever.

Beezer: Yes.

Harry: Why?

Beezer: So, I started at Sapphire 12 years ago now and I always thought this is what I wanted to do. But then when you get into the doing of it, no, this is my life’s work. If you said me, what else do you want to do? I used to kind of think I wanted to be Secretary of State. That is so never ever, ever happening. We tossed that idea out when I was about 24.

Harry: Looked great in the movies.

Beezer: Looked great in the movies. I thought Madeline Oliver, whatever, edit out the names. I thought it was a fascinating position for the US government. But now, no, that was said. That was like when college and I was like, what could I be? And then I was like, no, this is definitely about the private world. I love it. I love being an LP. I love working with early stage managers. The emerging & the established.

Harry: I think what people dunno about us is we first had a call, in, I think it was 2016 and it was at 10:00 PM in London. And I remember I was still living at home with my family and Unity Call <not clear to me) was half an hour for an intro call and I remember their call ended at 1:15 and I was like, I really enjoyed that call. That was a great call. And we’ve been friends ever since, which is like eight years, seven years now.

Beezer: I Know. I love it.

Harry: I was young,

Beezer: You were younger.

Harry: I was much younger.

Beezer: We were all younger eight years ago.

Harry: Keep your friendship and I love doing this.

Beezer: Oh, thank you for your friendship and thank you for having me.