How I Invest with David Weisburd
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.
00:19:39 · Brijesh Jeevarathnam, David Weisburd
[00:19:39] S0: I agree with that second... With both the points you made. And that's one of the, as I said, the kind of early litmus test of is this venture firm moving in the right circles, I. E. Seeing the best deals and then winning. One of the challenges of that is in the very early stage, seed series A, these companies, it becomes a bit... It takes a while for them to truly become winner circle companies, quote unquote. And so just to even know if seed investment X made, let's say this year is a good one and they're the best founders in the category, it's going to take two, three years, right? So in the seed and early stage, this is still a challenge, I. The long feedback loop, but I fully agree with your point. There's many interim markers of, is this investment in FundX a good one or not? [00:20:41] S1: So I want to go back to this concept of the founder whisperer. How do you know early on whether a venture capitalist is a founder whisperer?
00:20:41 · David Weisburd, Brijesh Jeevarathnam
[00:20:41] S1: So I want to go back to this concept of the founder whisperer. How do you know early on whether a venture capitalist is a founder whisperer? [00:20:53] S0: That goes back to my point about tapping on network for references and speaking to a lot of participants in the market. We like reference lists. We love off the list references. And we have a big enough network now where we can talk to people, founders that is, and get a sense of venture firms' relevance and attractiveness to founders. A canonical example that people talk about might be Elad Gil. I mentioned him only because he wrote the Growth Handbook and he's very revered as a mentor and a company builder alongside the founder of the company. There are greatness like that, where these folks, they may not be the domain expert in said company's domain, but they have enough founder trust and confidence in company building chops from before to still end up early on the cap table. I really think it comes down to a resonance with the founders' worldview and empathy for what they're doing. It's hard to kind of say what kind of person, what archetype is best suited for that. What I mean is there are career VCs who are good at this, there are former operators who are good at this. And I think it comes down to a personality type and really making the effort to build the trusted relationships with the founder community.