How I Invest with David Weisburd
00:12:07 · Brijesh Jeevarathnam
[00:12:07] S0: I'll stay away from the names here, if you don't mind. I'll give you some archetypes perhaps. We back both franchise managers, well known names, but also we back a number of fund ones and twos. And these fun ones and twos, they're folks we've known for typically five, ten years. So it's kind of very much a relationship that is long term. So we know the folks. The archetypes of these kind of folks that we back, besides sticking all the basics, would be they had a, let's call it a not the best departure from a power venture firm for whatever reasons, of their own choosing, of the other firm's choosing, and or that firm has gone a direction in terms of scale or geography where they feel they cannot practice their craft the same way. And now the chip on the shoulder is, I guess to put it in human terms, I guess, I'll prove you wrong. I can do this without the shingle of great brand X or without the calling card of franchise Y. And that is one archetype. Another archetype would be folks who have been, let's say, operators before in a startup or maybe they had a startup that failed, etcetera. And they've had a tough time in the LP market fundraising. They have an interesting thesis. They, from our vantage point, have the right to win with entrepreneurs. They're raising usually a modest fund, but they've taken enough bruises in the LP fundraising journey, they are really motivated to kind of prove that they can belong with kind of a, let's call it a franchise set of venture managers. Now, we don't back many of these. We back some of these folks. What's great is if we can find them early and get into their fund one or two, that quality of relationship we can build with them is exceptional because they never forget, right? They might have allegiance to all LPs, but that first one or two Keystone LPs that kind of put them in business, quote unquote, that is another great archetype as well of venture firms we like to back early.
00:14:21 · David Weisburd
[00:14:21] S1: What is the second order effect of an LP having great relationship with a GP?
00:14:25 · Brijesh Jeevarathnam
[00:14:25] S0: The main thing I would say is venture is an information asymmetry business. Now that has shrunk with what's happening in the world, meaning there's much more information available out there, including about startups, right? But there is still, I would say compared to probably most other asset classes, massive information asymmetry in terms of both the venture partnerships themselves, but also about the portfolio companies. Our business as allocators of capital and direct investors and companies is to get access to as much of that information as possible, the inside baseball if you will, before we make a decision on a venture fund, a next LPV commitment or investing in a next round of a business. So what that access, that relationship gives us is a look inside the tent before we back that next manager. I'll give you a thing we talk about all the time. Our re up on a venture fund begins the day after we commit to the current one. So in other words, it's a three year process before they raise the next fund We're in continuous DD on the next fund. What do I mean by that? In the time we're talking to people in the network, we're talking to our close GPs, founders, we go to social events, we're picking up all this intel that I'd like to think we're a bit more privileged to get the extra kind of like 10%, 20%, 30% that helps us make better decisions on both the next venture fund we're investing in, but also the next venture investment directly into a company that we're considering.
00:16:14 · David Weisburd
[00:16:14] S1: In the venture investing game, oftentimes you make an investment and three months later you're like, oh man, I made a mistake. How long is the shortest time that takes to understand that you made a mistake on the GP side?
00:16:28 · Brijesh Jeevarathnam
[00:16:28] S0: That's a good question. This is a long feedback loop business. Unlike investing, let's take the public markets equities as the exact opposite, because you can know in days and suddenly in months and quarters that something is not going well or going well. This, in the venture LP part of the business, it takes, I would say realistically, four to five years before we have high confidence in the quality of the first decision. Now, if I take a step back, there are many early indicators of how it's going. Those indicators are right away, you look at the portfolio they're building and you get a sense of, are they executing to strategy? Are they getting the kinds of ownership percent in these companies that they were targeting? If they were looking for, and I'm making this example up, a portfolio they were going to build with say 25 companies, get about 15% average ownership, early stage companies, etcetera. But if they put kind of 10, 20 companies in the portfolio and they're getting little itty bitty parts of ownership in the company, two percent, 5%, then something is off. We need to have a conversation about why their playbook isn't working out the way they wanted it to. There are other indicators as well, the team itself, the team chemistry, and how they are working as one unit. We have a lot of network node points with the founder world and other GPs. We hear kind of, Oh, I saw this firm in the deal I was competing in and they beat out another firm. Right? And those indicators are the interim markers. But the reality is we don't know for a while until kind of year four and five. And as you can imagine, famously, have been examples where things look bleak for year four, five, six, etcetera. And then because it's an outlier business, it just takes one great investment to catapult that particular manager or fund back into the spotlight and into, let's say, top quartile returns.
00:18:46 · David Weisburd
[00:18:46] S1: This whole question about VC scale is my answer to this Peter Thiel question, which is what do you disagree with with other smart people in your industry? And I think a lot of VCs will even say, well, you don't know fourteen years in because you invest at the pre seed and then fourteen years it takes to go to IPO. I think it's absolute bananas that that people people look at that kind of time frame. I think, really, there's two different aspects to it. One is if you if you look at GPs kind of from these two different frames that we looked at before, which is somebody that could get access, that's a skill, and somebody that could be nonconsensus. Sure. On the nonconsensus thing, it could be like SpaceX. It took twenty four years. So maybe fourteen years may not even be enough to know that you're a good investor. But on the access part, I think you could know probably within two, three years, within the investment period, whether someone is truly great.