VC Fundamentals Part 4: Portfolio Construction & Management (with Jaclyn Hester & Lindel Eakman of Foundry Group)
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Welcome, Acquired Limited Partners, to part four of our VC Fundamentals series. As a review of what we've done to date, the first one was on sourcing. How do you find investments? The second was making initial investment decisions. How does a fund run a process to figure out what companies to invest in? And the third is company building, of actually doing the work afterwards with the founders and helping to add value and build great companies.

Today, we have a very important topic, portfolio construction and management. Of course, this is useful to venture capitalists to understand, but also to founders. In the first few episodes, David and I tackled these topics on our own. But for this one, we wanted to bring in the heavy hitters. Some...

Actual LPs. Indeed. And what better way to do this and have this important and complex conversation and do it justice than to have your very own investors for the conversation. So here are some intros.

We want to introduce you all to Jacqueline Hester and Lyndall Ekman. First of all, Jacqueline and Lyndall are investors of ours in our current and past lives. They are partners at Foundry Group, a top venture fund based in Boulder, Colorado that invests both directly in startups and as a fund of funds as an LP in many fantastic early stage venture firms. They are investors of mine at Pioneer Square Labs, both in our startup studio, and they are limited partners in our fund, PSL Ventures. They are also partners in our

They actively help my partners and I think through a lot of the topics that you're going to hear on this episode on a regular basis, and we are thrilled to open that conversation up to all of you too. So Jacqueline is Foundry Group's most recent partner. So congratulations, Jacqueline. Thank you. She joined Foundry Group in 2016 and works across their direct investments and their portfolio of venture funds. She helped launch the

partner fund strategy, and she works with emerging managers on fundraising, strategy, and firm building. Prior to Foundry Group, Jacqueline practiced corporate law at multiple firms, including sponsor and friend of the show, Perkins Coie. She also worked closely with her husband and his family on their SaaS startup, Fair Harbor, which was acquired by Booking.com from the very earliest stages through acquisition.

So, Lindahl is also a partner at Foundry Group and has been investing in venture-backed companies and venture firms for nearly two decades. Like Jacqueline, Lindahl works closely with partner fund managers while also leading new direct investments into startups.

David and I can speak from experience and say that he is a sought-after mentor to emerging managers, advising on strategy with fundraising, portfolio construction, firm building, and navigating the ups and downs of venture capital. Prior to Foundry, he managed the private investment program of the University of Texas Investment Management Company.

or many of you may know it as Utimco. And for folks who don't know, Utimco is a hugely respected LP in venture funds. And Lindell really built the endowments venture capital program. And I've heard his partner Brad recall that Lindell was one of their favorite LPs. They liked him so much that they recruited him to be a VC and LP with Foundry itself. So we truly have two of the very best and most respected LPs in the business with us today. Welcome, Jacqueline and Lindell.

Thanks, Ben. All right. Now, let's open with a little bit of exposition before we dive into the nitty gritty here. So we sort of set the playing field for why we're having this conversation and what the guardrails are to even sort of cast the umbrella. Linda, let's start with you. What do the returns look like of a good, and I put this in quotes, venture funds in terms of cash on cash multiple? What are people shooting for here?

You know, I think the thing that we always tell our LPs, we have success when we make a three times return.

for them. And so that's a net return. Many GPs tend to talk in gross terms, and we think that's just inappropriate. It's what is the cash to the LP? They're targeting a 3x, and there are many different ways to think about what good returns are. But from a multiple standpoint, that's it. But you also have to compare it to what they're doing in capital markets, on the public market side. And you have to think about private equity and other private options to think about where venture fits in the portfolio for LPs.

And by net, you mean net of fees and carry. So like the management fee that the fund manager is going to take for managing the money and then

More importantly, hopefully in impacting returns, the 20% or sometimes even greater percentage of the profits that they're going to take in the carry. So wash all that away. You want three times your money back that you put in as an LP. That's right. And I'm sure that we can point to several different posts that talk about the value of recycling.

and putting to work the total 100% of the fund. So it's not just easy to carve it out for listeners. There are whole methodologies. You forgot expenses of the fund itself that we have to repay. So understanding the difference between gross and net can be meaningful for LPs.

An important thing for GPs to remember is that institutional LPs get paid on IRR often. And so while we talk in multiples a lot of the time, it is important to keep a close watch on your IRR because LPs feel that directly. Yeah. So Jacqueline, what do you mean by that? And talk about the relationship between IRR and why this sort of 3x net has become the magical number that everyone seems to use as a bit of a proxy for a good IRR.

For IR in general, you introduce time into the calculus, which isn't done with just a multiple of cash on cash returns. Venture capital LPs are patient capital. That's part of the deal. You're looking at 10, 15, 20 year relationships. It takes probably...

you know, at least seven, eight, Lidl might have better data on that, years to start seeing distributions come back. But the time does matter. And so that's where you get into the IRR calculation. That's where it's reflected. We've sort of talked about this 3x number. What is the distribution of returns across funds? So if three is good, I mean, how many, what percentage do 5x, 10x, 20x funds? Yeah, that's actually a...

a blog post I've been needing to write. I saw that Shai Goldman had put out some thoughts on sort of returns and the number of people that are hitting those returns and how, and there's this ongoing idea that venture as a total asset class is actually a bad investment.

because there aren't enough funds that actually hit the threshold. So if you look at the median venture fund return, it's actually hardly competitive with private equity and it doesn't earn its place in an LP's portfolio. Whereas as you look at

the top half of those venture returns, there's a wide dispersion of outcomes. And to your point, my thinking is that over the course of several funds, because there will be volatility of outcomes, you do see a 3x net, two LPs as success. You are almost undoubtedly, if you're taking the right amount of risk, you're almost undoubtedly going to see funds that do very well and are above that 3x and funds that are below.

And so as a venture investor now, you know, almost 20 years in of doing this, I think you see firms sort of have a successful 5, 6, 7 plus X fund. They might also have a 2X fund in their portfolio. Yeah.

The better venture franchises, the better venture firms tend to compete even with their laggard funds with private equity, but they still give you the upside of venture-like returns. And if over the course of several funds, you can hit that three mark, you've been a great investor and a great return to the endowment for the foundations that you support.

Good firms, even in their poor performing funds, are sort of on par with private equity. But every few funds, or hopefully more often than not, you do see that venture upside. Well, I think it's also reflective of that part of the capital market cycle that you're in as well. And it tends to be that growth stocks perform in certain parts of the cycle. That's where you see those breakout returns. And that's why people talk about the quality or the value of vintages and investing across vintages.

Yeah, I mean, shoot, I remember back when we both, Ben and I, were at Madrona, the Madrona's Fund 2 was a 1999 fund. And it was, thanks to Isilon and a few other companies, one of the top performing funds in that vintage. And yet, compared to the cash on cash multiples for Madrona's later funds...

much lower. So it's just like, yeah, there's so much macro that goes into determining outcomes here. Before we move on to I want to really underscore one thing, Lindell, that you brought up there. If you think that

as an LP, you are investing into a median performing venture fund where you can get into sort of the median tier. You should not be investing in the asset class. You have to believe that you are much better than median or at least better than median in order to be adding venture as an asset class to your portfolio at all. Did I hear you right there? That's right. You don't earn your place in the portfolio, meaning you don't provide enough return for the relevant risk.

in those returns and for the relevant illiquidity that you're accepting. So when I look at those numbers of the overall asset class returns, I actually don't see that many firms that didn't return capital. Now there was a group in the '98, '99, 2000 vintages that did not return capital. That was a wholly different period in technology and technology cycles and capital markets.

Take that aside. When I look at returns, maybe we're lucky in that we sort of only see the top half. I think one of Jacqueline's problems when she first started with me was that everyone that came in for a meeting, they were in that top half. And it's hard to differentiate between managers if you're only seeing that sort of top half.

We had a running joke when Jack started. I'd ask her, do you want to invest with them? And the answer was always yes, because they were great. And so it just takes time to build context. You know, we're lucky in that, you know, whether I was at Utimco or here at Foundry, we're seen as sort of a bellwether LP. And I think we attract some of the better firms and managers here.

And so we just don't see that bottom half. And I think part of that is just like any venture firm, you're building...

You're building a franchise, you're building a reputation to attract talented investors, in this case, as venture managers. That's a great thing to point out. And a pattern that I think, for especially the founders out there listening, keep paying attention to the same dynamics or similar dynamics that exist between VCs and founders exist between LPs and VCs. And I think that's something that's often missed unless you spend a lot of time raising capital and getting to know what the sort of

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All right. Well, let's dive into the most obvious part of portfolio management, which is portfolio construction, how you decide to create the portfolio and allocate the funds capital across those portfolio companies. Jacqueline, let's start with you. At the highest level, what's the rationale of having a portfolio itself versus just loading up on a small number of companies that you feel really good about?

Well, a portfolio, I would say, or a portfolio approach is certainly something that we look for as a quote unquote institutional investor. And so I think that something that you're pointing to is really the difference between what angel investing might look like and having a portfolio approach, which is something that we expect of true VC funds and of GPs that we're looking to partner with.

to partner with. And I think the point of it is to understand that if you have sort of a set number, like a fund size, you need to return, as we talked about earlier, multiples on that fund size. And so each investment has to matter as far as being able to help you sort of get towards that goal of your 3x plus.

We'll talk a bit more about this, I'm sure. But some folks take the approach of each single investment should have the potential to return the entire fund at least one time over. Some have a different approach. But I think having an understanding that there needs to be a portfolio construction is a good step one.

Linda will joke that there's one of our GPs, they can guess who they are in the early days. And this is very much the emerging manager category. It wasn't even that they had the wrong answer to portfolio construction. They just didn't have one. Having a thoughtful approach around it is a must. Does it mean that there's one way to do it? No. And a lot of things depend on sort of stage and fund size and check size and where you're comfortable playing and your follow-on strategy and all these different things.

I like to talk about it as a bottoms-up approach. So think about what check size do you want to write? How early do you want to back a company? How do you want to work with the company? Do you want to really, really dig in with a small subset or have more options out there? How early are you as far as...

really developing the muscle to write checks that are of substantial size with other people's money. It's different than thinking about a portfolio you might back or have worked with companies in other ways. What kind of access do you have to be able to sort of speak for a large amount of the allocation and actually lead deals versus having written a lot of 10 to 25K checks and be more of either a party round investor or someone that people bring in?

And so all of those things should combine to get you the fun size answer as opposed to what I think a lot of

may do early on in their thought process, which is how much can I raise? And they start there and then they try to back into a portfolio construction. And I very much think it should be the other way around. That said, how much can I raise does matter, right? So you may back into a $100 million portfolio construction and realize that you don't really have access to that kind of capital. So it certainly matters on both sides, but I like the bottom line. I've got this killer strategy, but I do need $100 billion.

in order to properly execute on that strategy. And I'd like your help. Well, one of the things, one of the reasons we wanted to cover this with you guys particular is I really learned about this way of looking at the world from you all, which is an obvious, there's everything you just said, Jacqueline, that goes into how you determine portfolio construction. You would think, and I thought kind of,

before becoming a manager, like it's all about risk diversification and like, you know, minimizing risk. And that's why you have a portfolio and you don't know what the future is going to hold for these companies, et cetera. That's true. But there's, I think at least I'm curious what you guys will say since you taught it to me, a different way to look at it. That's more powerful at the early stage, which is it's about shots on goal. It's not about diversifying risk so much as it is. It's just like,

You don't know what's going to happen. You need to put yourself in the line of fire enough to be right and get one of these huge outlier outcomes that's going to drive your fund or hopefully maybe even a couple. But the more opportunities you have to get those outsized returns from a given company...

That's more powerful than diversifying risk away. So I think we have to talk about the role of agency bias at the different levels of investor. So as an LP, look, you know, David, put all your fun in one company, just get it right. Because I invest in, you know, in 32 different managers. And so I am going to have plenty of diversification in my fund to funds portfolio. So I don't need that many more shots on goal. I just need you to get it right.

Now, I don't want you to get it wrong and be upside down on your fund and not want to manage your vehicle anymore. And so I'm going to say to you, let's find the balance that feels just a little uncomfortable.

of number of positions because I don't need you to be more diversified. The way you're looking at it from the LP perspective is actually to put pressure on him to be more concentrated rather than more diverse. My friend Michael Kim is very vocal about that. When he invests, he wants more concentration because he thinks about it as his portfolio at that level.

I agree with that from a pure return standpoint. It's also the case, though, that as early investors and managers, as early supporters of emerging managers, we want to see them be successful in building their business. And we want to support them as they think about building enough shots on goal to use that idea. How many shots do you need to get a chance to be right?

Because we didn't really cover the distribution of outcomes, but in small seed funds, you're making your money at the buy. So your initial ownership is what you're going to get. You're never going to be big enough to buy up. So how many of those initial positions does it take for you to find enough outlier winners to return your given size of fund?

In your case, and certainly in fund one or fund twos, I usually tell people, you actually want a few more chances to be right, because that's going to enable you to have a better shot at raising a fund two or a fund three. That's not directly aligned with my own interests as an institutional LP that has plenty of diversification already. That's one of the reasons we like it when our managers invest together. We're completely happy when they all find the same company. But

And don't worry about that overlap at all. But for you, I think the answer we've been saying is sort of 25 to 40, depending on your strategy, depending on your fund size. And you have a little bit of an agency bias to do more. If you think about the ability to raise fund to and have the stories to tell that say that show that you got access to exciting companies, at least enough that can return that first fund.

I always thought about that as incentive misalignment, but more charitably framing it as sort of an agency bias and just recognizing that especially a very long-term oriented LP is going to look at this like, oh my gosh, I have access to this manager who now is going to continue to take my capital for the next 20, 30, 40 years, and I'm helping them build their business. It's an iterated game, not a single turn game for you. I mean, that's part of the reason Foundry got into the LP business is

is we wanted to support the next generation without trying to hire them all into Foundry Group. We wanted to build a broader network than that and support what is now a version of Foundry that Foundry was in 2007 when they spun out from Mobius.

So there are a bunch of things baked into that discussion. One of which is going to be irrelevant for everybody listening, including and perhaps especially founders, is the ownership percentage threshold. Of course, we all know, you know, anybody who knows Michael and Zendana knows they're all about ownership percentage and their managers and concentration thresholds.

For listeners, tell us about why is that important? You know, if I'm a founder and I'm negotiating with a few VCs and I'm hearing time and time again, hey, we have our ownership targets. We have our ownership threshold. We need whatever it is, 10%, 12%, 15%. It's going to be different by different firms. What's behind that?

So I think it's especially, and one thing I was going to add to what Lyndall was saying is like fund size and stage matters a lot to this thinking. And so we're often, because we generally focus on smaller and seed stage funds, and so we're often focused on that part of the market. I don't think that it matters quite as much for a $30 million seed fund to have

significant, like really significant ownership. The calculation that you need to make is that if you are, if you're playing the venture game and you're thinking that it's probably a third of your portfolio that gets you to those three X returns, right? So maybe a third goes to zero, a third sort of returns capital, or you get a little bit of money back. And then a third is really driving the returns.

Then each company, you have to have enough ownership that if that's the one that's in that top third, it has the potential from a returns perspective to move the needle on your fund, either return it one time over or be a significant cash flow back to the firm. Right. 1% of a billion dollar company is $10 million. If you're a $30 million fund trying to get to 3x net, that doesn't get you very far.

Yeah. But I mean, those can add up if you're good, but certainly it doesn't move the needle for a $100 million fund or a $500 million fund. And so I think that where the seed players are trying to buy up early in that first check to make sure that they get to where they need to go. And they're not, they're probably not like as a founder, if you're talking to a seed firm, if they're truly a seed firm, they're probably not, you know, going to need to buy another 10% of your company over time. Sure. They'd love to push it up. But,

Their model works if they own 10%, maybe get diluted down to 5% given how early they're coming in. But if you look at a much larger fund that's putting most of the capital to work in the Series A or later, and they want to lead your seed round to have the option, that's where you really need to start thinking about that is how much of my company do you need to own?

over time, not just today. And so how much will you sort of be pushing into my company over time and needing to get in as I want to bring new investors in over time? And so I always caution founders against, well, two things. One, don't sell too much of your company before you know what you really have. I think there's this glamour around raising a giant round early, early on pre-revenue, but you may have sold off something. You don't even know what it is yet.

The other thing is really understanding. I do a talk for tech stars on this. Understand the VC's business model and their fund size and how many positions are they going to take? How much do you matter to them? And what do they really need from you to get to that performance that they need for their LPs?

And just to take a little philosophical detour, we alluded a little bit to the power law distribution of returns within a venture fund. So, you know, you've got that one third that and this is sort of canonical wisdom or classic wisdom, the one third that go to zero. I think Fred Wilson's

done some blog posts on this that like, if you look at USV's funds, this actually is how it breaks out. Yeah, I think your partner Seth Lindell and Jacqueline also did some analysis on correlation ventures data showing it's even more skewed than this. But anyway, what one third go to zero, one third return capital, one third are responsible for the returns. And really, it's like the top one, two, three, four companies that really produce the lion's share. Like,

Let's dive into this a little philosophically. Why is that? Why isn't it possible to have a little bit of a shallower peak and a wider tail on that curve and do a venture investment portfolio where we have a bunch of 3 to 10 Xs rather than this thing where you hope for a 50 X and a 20 X and another 20 X and then you're okay with the long tail going to zero?

My take on it is that you can win multiple ways. The classic Silicon Valley version of this is to look for the 50-100x. In our experience, we think about returning a third of the fund. What can return a third of the fund? And in our experience in our 2010 or 2013 funds, we're looking at sort of 8 to 12 companies that are going to return a meaningful portion of the fund.

And that's an interesting observation. You don't have to believe that they all are billion, two billion, $10 billion exits. I will say though, that when I look at a lot of funds that underwrite,

They have this group of companies that are potentially going to be a billion dollar exit. That's the number that we all sort of frame around and we rest on. What actually tends to happen is that a number of those sell for $400 to $800 million. And those are great outcomes and they return a meaningful portion of the fund. And then one of them goes to $3 or $5 billion. And that's the one where you have the big... So it's sort of not believable that...

When you see a fund that's five, seven years old, that they even know which one that's going to be, that's going to go, they can identify the group. As I said, in our case, it's eight to 12 sort of companies. We can identify that group. And then it becomes a matter of holding period and how long you hold that growth before you have that exit. It's going to be a successful company.

It's just how long do you end up holding it before the right strategic acquirer comes or before these days the right SPAC comes and wants to overpay? I mean, that's a real thing that's happening in our portfolio and other portfolios. And my message to an LP last night was this fund, their fund is going to go from good to great depending on how far this group of companies runs. This is a little bit of a sidebar, but I want to push on it because it's super relevant right now.

How are you guys thinking about either within Foundry or for your partner funds? These days, with a lot of these companies, the end of the value creation journey does not stop when they go public. Like, I'm thinking like, you know, good friends of the show at Emergence Capital, you know, they had Zoom go public. Zoom went public at what, like a $16 billion market cap, something like that. Like, so there's been over 10x value creation in the public markets.

In a year, like, are you encouraging managers to hold? Like, you know, how as an LP, you want liquidity, you want distributions, but there's also still this upside potential. It sort of cuts both ways, actually. Zoom's a great example. I'm on a board with the guy that led that investment. And I mean...

It's just great. And it's so fun to smile and laugh with him. And he's very engaged still. And I think they still own some of it. That's all. But as an LP, you don't really want to pay venture fees for something that you could own yourself in the public markets. And at that point, your public managers likely own as well.

And so there is this natural pull for you to distribute that as a manager and to get that into the hands of your LPs where they can make whatever decision they want to make. And there are a lot of LPs that have held on to that stock and they've benefited from it without having to pay the 20% toll to the manager, to use your Zoom example. The other side is also true, which that's great. I love talking about this part most. But the other side is also true, which it's taken longer.

to get companies to be ready to go public. That longer holding period really hits managers and companies in two ways. So for managers, you're having to feed these companies more to maintain your position at exit, so you have to put more capital in. That's dilutive to all the founders out here that are listening. And they start to take dilution, hopefully at much higher valuations, but that's still dilution.

that you're taking. And it's dilution to early venture stakeholders too. It's actually my biggest concern for seed, small seed funds is they have no ability to defend their ownership with much longer holding periods, many dilutive financings before an exit. That's a challenge and it affects the thing that Jacqueline brought up, which is your IRR.

And so with, you know, over that longer holding period reduces the IRR that you're earning. Now it's compounding over a longer period of time. So LP should like that. But when they're, when they're comparing it to public markets that have gone up, nothing but up, it's a challenging comparison for VCs where a LP is looking for a 20, 30% type of IRR absolute basis versus

But you can't compare that to a longer holding period, and it naturally brings it down. So there's this challenge of longer hold periods. And then to your point, are they sticking around and are they benefiting from the pop that we've been seeing in the public markets? You get hurt both ways, right? You hold it longer and then you don't benefit from the pop.

Popping one level off the stack here, Lyndall, you said something earlier that I think is fairly contrary to classic VC wisdom. That is, rather than at a time of investment saying, could this company be a billion-dollar company or put a different way for the asset class that we're talking about, could this return our fund 1x, assuming that we get the ownership that we need in it? What I heard you say was not that you look at every investment at

could this return the fund once, but more, could this be a part of the group of companies that could return a third of our fund? And that's a little bit more of a spread mindset than I've heard in the past. Do you actively do that at Foundry? Do you actively look at your fund size, cut it to one third and say, could our position in this investment eventually be one third of our fund size? Yeah.

We really do that analysis more in the later years of a fund to understand where we should be putting our reserves to work and to think about what is the group of value drivers that we want to defend our ownership in. Remember, we're a much bigger fund and we're able to invest across multiple rounds than most of our partner funds that are seed and series A. They're making their money at the buy.

And so, you know, they have to invest early. They have to own as much as they can because they're never going to be able to buy up. They just their funds aren't big enough. And and having the conviction to have the right number of shots on goal against the right ownership is so important for them because they know they're going to suffer dilution even in the best winters because that holding periods are stretched out. Well, it's a great transition to start talking about follow on investment and reserves because

So in all these partner funds that come and present to you and say, hey, you know, this is our portfolio construction strategy. What is the range of different amounts that people reserve for follow on financing? I've heard everything from one third of my fund is for follow ons to two thirds is for follow ons. We just had Rahul Vora on the show and he was mentioning in his, you know, angel fund that he has nothing for reserves and that it's only for special purpose vehicles. So how do you think about that?

Now, he does have a rolling fund for Aratam, but yes. It's definitely a range. And I was going to mention that some funds do zero, but they're generally much smaller. I think you see a lot go one-to-one.

especially at the seed stage. And then I think you do see a bunch go two to one because they're seeing these large, highly valued rounds get done subsequent to their initial round. And they feel like they're always just strapped for reserves to follow on. The challenge is that at those stages, if you entered at seed, you don't have that much more data on a company

by series A. And so you're having to make really hard decisions with not that much more data. It's a big challenge. I often push managers to, you know, if you're conviction driven and you're good, then you should get as much as you can in at the seed.

So I sort of like a 70-30 or 60-40 where that first check is the larger one. And I always think about sort of another option for a shot on goal, especially for a fund one or two, where you just want to make sure that you're hitting. Just think about the delta in your ownership versus what you could do with that cost basis. Could you buy an entirely another position to have yet one more portfolio company?

The funny thing about reserves models or any models, they're always wrong and they're always going to be iterative, right? So you can say like we plan to have this kind of reserves, but it should move around and

You know, at the end of the day, when you see what your portfolio looks like, it shouldn't be equal across the board that you reserved and wrote the same check for at every follow on for every company. You have to make hard decisions. Concentrating the capital down into a subset of companies can sort of offset like, do I have too many positions? We do see a mix across the board.

Yeah, it's interesting that especially the phenomena you specifically refer to where not that much has happened intrinsically with the company between seed and series A, but its scarcity value and external perception has changed dramatically. So the cost basis to buy new shares goes up

way more than your sort of inside information would indicate about how much more progress that that company has achieved. And so there's this incredible internal turmoil. I can tell you, speaking as an early stage VC and all the listeners who have sat in this position know exactly that same thing. It's

hey, is this my opportunity to push more chips in? Or do I say, gosh, I think people might be over their skis a little bit on their excitement about this company. And I'm excited for them to get more capital and get more notoriety and get everything that comes with that big round. When managers call you and say, how should I think about this? Do you have any sort of litmus tests or ways to help there? Yeah.

Well, it's always based on what they know, right? Versus these perceptions. I always go back to that, like what's your delta in ownership versus the additional cost here? And like think about the ability to have just one more company. Would you want that? So that's one thing to think about. I think also there's this misconception. I was going to say this earlier when Lyndall was talking, like when you asked like why is it that we have to play that only a couple drive the returns and why does it come out that way? I think that –

There's this misconception that if you graduate to Series A, then you're set, right? And it's completely de-risked. And I think a lot of seed funds talk about their portfolios that way, certainly. They talk about these graduation rates. It's like graduation from preschool. Now that we are sort of more lifecycle investors. Yeah, we've seen companies all the way through. And it's amazing. All the successful ones almost die. And some do die. And some die after Series C. It's sort of wild. And a lot of the reason that they die is that they've

raised too much money or they've raised it too high evaluation and they can't exceed that. So they may have a nice business, but this business is, you know, venture business is driven by exits. That's like another hugely important thing to consider is that it's not just about getting to your 10 million in ARR. Like we, you know,

We need to actually exit and get liquidity. And so I think that that should also be something that you're thinking about is like, does this valuation make sense? Is this going to, is there a risk that this kills this company? Because I don't see how they're going to grow into this by the next round. So there's a lot of different dynamics to consider. It's not easy. Yeah.

Little, what about you? Any thoughts on that one? For the managers listening, I truly believe that you need to take as many shots on goal at that first investment and buy your ownership, especially for small funds. You've got to get that right number of positions and reserves after that are effectively playing defense because you're never going to be able to buy up. And if you're playing defense with reserves for your ownership, then

I mean, you then are aligned really with the founders in that you've bought your ownership and any more money that the company raises is also dilutive to you as someone that can't sort of defend your position, much like the founders. And Founder Collective is a great firm that talks about that, how they're aligned with the founders after the initial investment. I really respect that.

the way that they're transparent about that. And sure, I think they will participate in maybe one more round, sort of to give the signal to the next round of VCs. But as much as anything, they believe that they're making the right investment at that initial purchase.

And then they'd rather put the capital to work finding more shots on goal. Another initial investment is what they view as more valuable than investing at that marked up round. Jacqueline spoke about not having more data. That's exactly right. That's generally true for most seed funds is they should be buying another position rather than adding on at a much higher price. Now, if they have a separate vehicle, you refer to somebody that had a separate vehicle and

That's a whole different option pool and a whole different portfolio construction. As a manager, you have to be a fiduciary for each fund that you manage and make sure you're allocating the right opportunities to that. Many people miss. They don't get the initial portfolio construction right. And that puts them in a bind in that initial vehicle. Then they add a second vehicle and things get confusing and messy for LPs.

One thing to add that we didn't mention that's I think totally worth noting that we've seen several of our GPs do really well is doubling down before – and again, going back to seed investors – double down before that next round that it's probably going to have an outside –

We've got a couple of funds that do this really well. And I think it probably takes time and experience to develop the muscle to know what you're looking for. And I would say often managers can't really describe it. But, you know, you led the pre-seed or you led the seed and you're working closely with the company and you just see something different.

is really working. It's the product clicking. It's like early signs of product market fit, something about the team. And that's when you try to put more capital in as opposed to waiting for, and it's basically just going to the company and saying, do you want a little bit more runway to get to where we really want to be to raise the Series A or to raise whatever the next round is? And I think an ability to do that can be game changing for some of these funds. Yeah.

It's symbiotic with the companies too. I mean, our last LP episode, Rahul talked about this fundraising from the company side, you know, it's smart as a founder to do this, right? Like you raised your whatever last round at, I don't know, let's say 10 posts. You've made a bunch of progress.

You're not ready for a series A yet, but like if you could take some more capital at a 20 post, 25 post, well, now you're starting to step up and now it's not that big a leap to get to a 50 post on your series A. I'm making up numbers here because you already have your valuation set in this interstitial round as he called it at 25. Great for the manager too. If you're seeing that this is working, you're seeing conviction like, yes, you can build your ownership in a way here without having to...

fight with the big boys, so to speak, that are going to come in at the Series A. This is something that storied firms do and have done for decades, and I think is becoming more known among seed managers now. But I even reflect back on Foundry Group. I think you guys did this potentially, if my memory serves, with Rover, I think with Glowforge. For companies where it's going well, you can see it's going well, you say, hey, look, if

you don't want to go do the dog and pony show right now. You're not ready right now. You might be ready in three months. What if you didn't have to do it for 18 months? Wouldn't that be great? And it's sort of this win-win. David, we've even talked about it as round skipping before with, I think, Sequoia and Dropbox is a great example where I think Sequoia just kept putting money in and Dropbox didn't go out and raise another round for three and a half years after it took

took money. So my math could be a little off on that, but it's just such a good point that you don't have to wait until there's another term sheet that comes from someone else at a really high valuation. Then you can decide if you want to push in some of your reserves or not.

I would just caution for managers that that can work really well. And Dropbox, that's a good pick. But you don't want to be the only pockets around the table for too long and sort of continue to set this precedent that like, oh, we're just going to lead your next round because...

Those founders tend to get worse and worse at fundraising over time. And if they need to actually go and fundraise, it's been a really long time. So I do think it can be hugely beneficial. I think founders often love it because they just get to keep executing. And most founders will tell you that these processes are longer and all they want to do is just build their company and longer than they expected. But you can run the risk of being sort of the only big

firm around the table that can write another check and they get a bit too reliant on you. Yeah. So this dips into the territory. It's interesting. Lyndall, you earlier brought up the word defense around protecting your position. And that's defense in the sense that the value is going way up. There's an outside lead coming in and I need to maintain some of my ownership. There's another way to play defense that is this company is going okay, but not amazing. And this is where we start to get into the dangerous territory. Gosh, I can defend the

this investment, it won't go to zero. I can put some more money in and maybe it'll become a good company. That to me starts to sound like you're on really thin ice, but it has worked in cases in the past. And that's always the way that people sort of rationalize it is, I'm really close to this company. I can sort of see how this much capital will get them to that place they need to be, even though they're struggling now. You can even hear it in the tone of voice. So

What's your advice on that form of defense? So, I mean, I think we're actually talking about two or three different things here. One is high conviction, big fund ability to really push in and make their best companies go. For our partner funds, that's mostly not the case. It's not the case for smaller, you know, sub $100, sub $200 million funds.

That's something you get to play as you sort of earn that opportunity and you've earned the stripes to have the ability to have that conviction and help fund the company's growth.

And by the way, you still make mistakes even after you've been doing it for a long time and you put too much capital in. And Jacqueline's point is right. Those founders don't build the fundraising muscle and they don't build the network that they need. That if you do get hit a flat spot in the curve of a company, then you have a real problem. So that's sort of thing one. That's a different animal, it feels like to me. We talked about sort of the idea of a double down.

And I think that really works in the case where you have a company that's hot or a company that's going really well. Well, that Series A is going to happen. And Ben, maybe we should agree that David's been down in Silicon Valley too long using those 50 post numbers. Oh, that's low. Yeah, I couldn't help it. I made up numbers because it's too low. If you have a company that's going well, they are going to get...

a 10 million or a 12 million or 15 million round, almost skipping around to the old B round. That's a different thing. So doubling down before that happens, all the sense in the world. Here's the problem though. You have that company you think is doing pretty well. You double down and you're a small fund and you don't have actually that many more reserves. And it does most of what you thought it would do. So it's still pretty good.

But now all of a sudden with the Series A market, there's this bifurcation of haves and have-nots. If you're not in the haves category as a founder and as an early investor, you're in trouble at that point because you've already spent your reserves and you don't have enough capital to signal to your friends in the Series A world that this is the company you want to carry in your fund.

And so that's where you run into a really tough spot as a founder, as a venture manager. So most small funds can't play offense after their initial purchase. Which is why you said three times now that it's all about that first check for early stage funds. They just can't play offense. Now, you have to decide as a manager, and frankly, as a founder, whose money you want to take at that next financing stage.

Founders, I mean, they tend to glorify financings. But here's the deal. Yeah, you get money, but you end up with yet another VC on your board. And maybe that's not what you were hoping for. Or potentially even worse, another VC who doesn't join your board, but acts like it. Yeah, that could be worse. That's right. Because they have no governance, no control. Yet here they are, loud and forcing their way into the room.

Okay. So what about, Lyndall, what about this third situation or Jacqueline, where you've got a company, you see some potential, but like it's not going to be successful fundraising, but you see some reason to believe. And this gets into kind of as a firm, how do you make pro rata and follow on decisions, which we definitely want to cover with you since you see so many styles. Yeah.

What do you do in that case? I mean, gosh, I could name a bunch of examples of companies that have been in that situation, pulled out and become multi-billion dollar companies. Of course, there are also lots of companies that take more money and go right in down the chute. What do you do?

We certainly have had success with it and wear scars from it, I would say. I think the important thing to think about and to really ask yourself is like, why does more money make a difference here? Like think about the fundamentals of the business and really being specific around why this additional capital changes a bunch of things about the trajectory of this company. We talked to one of our best performing GPs recently.

a couple, like a month ago or so about, they sort of like did this reflection on the success that they had in sort of funds one, two, and three. And a big takeaway as they thought about it was like, why did companies that failed consistently fail? Like what are the common themes and the ones that did really well? And one thing they came away with was like, if the unit economics don't work at the beginning,

They're not going to work. And you can throw as much money as you want at a company. And they saw time and time again, that just didn't improve. Another example they came up with was like entirely creating new markets versus like we could bring, you know, a new customer base to this solution or there's adjacencies that we see or et cetera, et cetera. And time and again, they would take that bet. And ultimately looking back, it was like, it never worked. It's really important to be thoughtful about,

Why is it that you can save this with more capital versus other changes that you could make in the business? And if you truly see that it's just that nobody else gets this and they just need to do X, Y, and Z and they need this much time and money to do that, then I think you can make those decisions. But we've definitely – I don't know. I definitely think we wear some of those scars. Yeah. I'd say definitely more scars than successes. Yeah.

And our friends over at Techstars have done a nice job. They've now invested in 2,500 companies. They have a lot of data and a lot of rounds. And their conclusion is that you should never invest in a down round.

Further, you should maybe never invest in a flat round because it should be a down round if it's a flat round. And people aren't just willing to take the down round. That's the take the mark down. Yeah, they're not willing. The psychological basing is too strong. When you look at that data across a huge spectrum of companies with many successes in that portfolio, it makes it hard to say that

You, especially as a smaller manager, should put more capital into a company. I really like Jacqueline's point. It's not just what's the new money, though. If they can't understand why they wasted the initial capital they raised or the mistakes that they've made, getting specifically to Jacqueline's point about unit economics, there's no point in talking about new money. To the first point you made in the Techstars data, it's opportunity cost, right? Like you may pull some winners out of the hat with that.

But the opportunity cost is another shot on goal. Or if you're a bigger fund that does have the ability to play offense with your reserves, it's the opportunity cost of not pouring more money into Zoom or whatever, you know, into your big winners. So let's go back to portfolio construction. So each fund has a certain number of companies that you invest in.

and you are forced to pick the right ones to invest in. If you have a much more limited number, let's say you have 15 companies instead of 30, you may not have a great place to put that capital, those reserves, because maybe you didn't get it right in your 15 companies. But it's a finite number of options that you have to put that to work. That might change the math on the individual, the micro decision that you're making for that next investment in that company.

Well, you also, if you have too small a number of options, you're going to be incentivized to put more, like to do the exact thing that David, that you talked about is like, oh, well just nobody else gets this. Cause I need this one to work because I don't have that many options left. Some serious agency issues. Yeah. There's really a bad agency bias there. And then also I think, and it's an important thing for GPs to, to think about is as soon as you raise a successor fund and we're seeing these funds come back to market so quickly, you're,

you know, the pacing is just insane. I think we're going to see a bunch of funds where their vintage is like 70% 2020 because of the pace of what's gone on this year. To talk about Lin-Manuel's point is a vintage diversification. And so as soon as you start investing out of your next fund, that cuts off the ability to add a new shot on goal per se to this first fund. And if you want to recycle and all of that, then all of that money is only going in to follow on opportunities. And

If your companies are generally still at the seed phase, maybe some of them have gone on to A, when you activate that next fund, you've got to have enough opportunities there to put the rest of that capital to work. And so that's, I think, another reason where we would want to see you

you know, at least I think some funds will say, you know, we're gonna do 15 to 20 companies at seed. And to me, I like, I just like, it's a dagger. Like, I don't think that's enough because it's just, it's hard. So I feel like, you know, having that like closer to 25 number at least, or, you know, Lyndall said 25 to 40 earlier of opportunities to follow into. And again, you don't follow into all of them equally. So you're probably, you may end up being concentrated into a subset of 20,

but that certainly is a better place to be than having 10 that need to work. Yeah. Okay, this is great. So now I want to talk about correlation. So let's take PSL Ventures. We're investing in the Pacific Northwest. We're diversified a little bit in geography, you know, Seattle, Portland, Vancouver, the broader Pacific Northwest, but pretty concentrated in

in the Northwest. And that is an intentional strategy. That's where we have the relationships. That's where the things that we like investing in grow really well. So there's clearly correlation that's

good because that's literally our strategy is to invest in that region. It's also bad if Mount Rainier goes. Let's hope not. I didn't see that one coming. I didn't see it coming. I was trying to think of like the most facetious or aggressive example of your strategy biting you in the butt. I don't know. It's funny now that we're all remote because it doesn't matter as much. But anyway, how do you think about...

I invested in this manager because of the way that the assets they have access to are correlated versus, oh, shoot, everything in their portfolio could get wiped out by the same coronavirus. I'm way more diversified than you are. That's not my problem. But really, if you think about it from an LP perspective, as I said, you can put all in one company. It doesn't matter to me. It's really your business, your concern, your portfolio that I'm worried about.

You said the word correlation. That's a nice way for saying bias. You have a bias to your region and you have a bias to a certain type of company. We could talk about PSL and the type of company that I identify them investing in is a certain type of company. To me, that's accretive. So I think of that as accretive to my network, accretive to my portfolio. It's something different. So I don't have to worry about that as much from my perspective. For you, though, I

And by the way, we don't like regional funds per se because geography isn't diversification. That by itself isn't an edge. And in fact, you may be biased to those local companies when there's a company doing the same thing in Austin or a company doing the same thing in Atlanta that isn't getting the attention because you're based there or it's certainly not getting the Silicon Valley attention. So that creates more biases than correlation. I'd use a different word for that. But in your case...

Let's hope the mountain doesn't blow the top off. We don't have to worry about that though as an LP. As a direct investor, I do. Let's make this point. So as a company founder, you have one option and you're all in on that option. As a GP, the next level up, you end up with 10 or 15, even in a full portfolio that are really performing. So you've got 10 or 15, maybe you had 30 or 40 to start, but there's going to be a group of 10 or 15 that are released. As a fund to funds investor,

I'm really playing the correlation ventures game or the tech stars game of now I have 500 companies that can return for me. And so I get the benefit of all that upside, all that volatility. So that's why I think as a fund to funds investors, it's wiser to go earlier. You're seeking volatility actually as an LP and, and as a GP, you're trying to find the measured volatility. And as a founder, you're doing everything you can to make that one option pay off. Yeah.

I think also...

Like LPs don't typically back one venture fund. I think that's important to remember is that, and you really shouldn't if that's what you're going to do. Even backing five venture funds may not be enough. You know, sometimes you'll have an individual who knows a VC and so they actually just have one VC position for their personal investing. But typically there are several of them and they may want your geographic exposure because they don't feel like they have enough of it and their other firms. And so I wouldn't say that we were like anti a geographic exposure.

focus because we have backs. There's another fund called Matchstick that we've backed that's in our backyard here in Boulder and Denver, but they also, it's diversified because they call it like the North and the Rockies. So there's sort of enough that they cover.

And what we're really focused on is what's additive to our network and making sure we do have the exposure. We think that, you know, this has all changed as you talked about being remote. But for seed, like being there and sort of being at the center of a given market does matter. But I think also like we've spent a lot of time. We went out to L.A. and spent a bunch of time when we started investing in a couple of funds based there.

And it was important to us that there was that the market was mature enough that there were just going to be enough companies. And so I think that's the question to ask is just like, are there is there enough going on? Is it robust enough where like you're not just doing all the deals in your region, but you're actually picking out of a much larger set of companies?

Does this apply to sector too? Like in the same way that you're like, I don't love geography as a focus for a fund. If someone pitches you a fintech fund or, you know, God forbid, the 2000 Kleiner Perkins cleantech fund, how do you think about vertical specific funds or a hardware fund? There are hardware funds that have done well. Yeah, we think about it as are those themes actually horizontal?

And so we're unlikely to do something that truly is vertical, but I don't think of FinTech at this point as a vertical. I think of, you know, like there's horizontal aspect to FinTech. There's investing, there's payments, there's like all these things across the board. And you've got different layers. You've got infrastructure layers and application layers.

And so I think as long as, and same with hardware, like we're invested in a couple of funds that focus on hardware. And, but we see them as horizontal as they're not just like, they're not just doing industrial robots. Right.

And so if it was that, then I think that we wouldn't be interested. And so we are thematic and horizontal investors. And we generally look to invest directly alongside our partner funds. And so we're often looking for that kind of overlap. I think vertical can work. You'd have to sort of really build a portfolio around that. And we see things a little bit more horizontally, but we like focus. So we do have funds that focus on just B2B investments.

SaaS, but that's broad enough, right? Yeah. It's not like there's going to be one piece of legislation that wipes out all of FinTech at this point. I mean, that... One would hope. Let's put it all in Ether. Yeah. I suppose someone breaking RSA cryptography could be a big problem for all of online banking, but that hasn't happened yet. So it's unlikely someone has the opportunity. It's like Mount Rainier blowing. Then we have other problems than sort of our allocation to that category. So true. Yeah.

Let's transition from pure portfolio construction to a little bit of a broader concept here, portfolio management. And we're not just in this way thinking about the dollars, the LP dollars that have been allocated to your fund to manage, but also your non-capital resources, your time and your effort as a GP or as a fund manager. The first question is, should this allocation differ at all from the portfolio's capital allocation, or should it map one-to-one?

I don't think I've ever met a manager that mapped it one-to-one. I mean, Fred's written about this, but it's very true. The good companies tend to go, and they tend to go with or without your help. Usually that's the team that you've backed, the founders that you've backed. And you can help them at the margins, but off they go. And sometimes you spend the least amount of time on your winners.

And that's not fun because you'd rather spend all your time on the winners. It's that middle third, I think is the actual verbiage that Fred used, where you can make a difference and where you do try and bend the curve of the outcomes for that company. And you do that with time. You do that with capital. That to me is the trickiest, messiest part of being a venture manager. And now that I'm sort of on the inside and doing that myself, it is hard to allocate your time appropriately.

And let's not forget the last third of companies that just aren't working. And you earn your reputation by helping them to a soft landing. So there is value, future value, certainly, in spending more time, sadly, on the second and the last thirds of your portfolio. And that doesn't make sense.

rational sense except for that reputational piece that allows you to get into the next great company that's working. Sometimes, by the way, those founders are just in the wrong company and they spin out and they do something interesting and you back them again because you saw the quality of the person when they handled a struggle. That can give you confidence to back someone again. Just like venture managers only get about a third right, I've seen founders that one out of three will be an incredible return. You can't know going in which of the three is

It's going to be the incredible return. So you back that person with conviction each time. And if you have the quality of the person right, it tends to pay off if you keep backing them. It's such a good point. In the very same way that world-class VCs don't hit it every time, same with world-class founders. I mean, the last guest on the show was Dick Costolo.

Dick started FeedBurner and sold it to Google for $100 million when that was an absurd amount of money to sell a company for. He took Twitter and built a $2 billion revenue business out of it. Pretty damn good track record. And then he started a fitness company that I think they gave back money and said, actually, we're going to stop working on this because it's not working. And like, it just happens, even with the very best entrepreneurs. It's a great point to bring up, Lyndall. Thinking about the bottom third, the ones that just aren't working...

If you can catch those early enough while there's still capital in them, you can do a hard pivot into something else and just be like, hey, the fit isn't here. This isn't working for whatever reason. Let's go find something else to do. How do you guys feel about those situations?

My favorite story in that category, if you ever have Greg Bettinelli on from Upfront, ask him about Goat. Yeah, Goat's a perfect example of this. Because Goat started as like something food related, I think. And it was like, it just was, I think it was like,

I honestly don't know. It was something in the food space or like meeting up with people or something like that. And it just wasn't working. And so it was like, you guys are talented. Like, what else are you into? And they were like sneaker people and amazingly sort of shifted it. So I don't know how often that can work, but you have seen it where you just have a great team and they're just, you know, Twitter, Instagram, chasing the wrong problem. TikTok. We have, Lyndall, do you know of any, any foundry stories where we've had a real pivot? Yeah.

Trying to think of our own portfolio. I would tell you I have a negative bias on those, though, David. Well, because the flashy stories of the Instagrams, the TikToks, like for every one of those that works, there's ones that don't.

I was in Vegas. I had $100 left and I put it on black, right? I mean, that's what you're saying to me. And that's why that story sells. I don't know the numbers. My own bias would be that they have these similar success rates as the down rounds and the flat rounds that we talked about earlier. And often you get in a bind because...

The cap table is already a mess if you have something that's not working and that can challenge the pivot that could have worked. It's better if you recognize it early, I think, to return capital and reconstitute and do that with grace and form. The stories we love, though, are the ones that were counted out.

And they made the turn and it worked. So I think that's human psychology. It's certainly in our, in our world. What I heard you say was that you had a hundred dollars before you got on the flight to Vegas that you could have given back to me and you put it on black. Well, there's that famous FedEx story, right? The, the, the founder flying to Vegas and spent the last five grand of, to meet payroll, you know, for his company and it worked. And that's, then that's how FedEx got to keep going. Oh, we got to tell that on the show. Wow. Yeah.

It's a massive violation of fiduciary duty. Oh, yeah. Illegal, probably. But it worked. And much like venture returns, no one's mad at you when you break strategy and it works. They're only mad at you when you break strategy and it's a colossal failure. I tell managers, you can do that. It's a franchise deal now.

You know, often people will say, I'm going to go all in on this. I'm going to put 20% of my fund and I'm going to grab some money for my next fund. And we're going to cross fund invest. I want to go all in on this. I think, great, you can do that. It now becomes a franchise deal. You're risking the franchise with that.

It's like Santi said on it. We had, we had Santi on to do zoom with us a little over a year ago now. And, uh, he said he was like, cause it was the largest investment emergence had ever made at the time that the partners took him aside and they were like,

hey we can do this but like he wasn't a gp he wasn't a gp yet yeah but just so you know your risk you're betting your career on this there obviously it worked he's he's a gp now yeah he's a gp i think he's firmly ensconced as a gp at this point but but it's a good point like and to me what i took away from that story from santi and i think what he would say is like he's

I don't want to too much put words in his mouth, but what I, the lesson I took was be glad when people are honest with you about that. Like if you're a GP and your LPs are honest with you about that, I'd be like, okay, you have the least, but like, just so you know, like I'd rather not have you bullshit me and be like, oh yeah, yeah, it's all good. Like, you know, no problem to be like, Hey, you can do this, but like you're, you're, it's a franchise deal now.

Last question on this topic. Do the answers to any of these questions change with the amount of capital that you already have into the company? So let's say your normal check size is a million and a half bucks. But for whatever reason, you bet big the first time and you did a tweener round and now you're four million into the company and it's not going well. Should that change how you spend your time, how aggressively you try and find a soft landing, how much you're talking them up to downstream investors, any of those things? Sure.

It really shouldn't. You should make each investment decision based on what is the company today and not think about sunk costs. Psychologically, I think that's impossible for people. And that's where you see a lot of poor decisions being made. It very much depends on your portfolio construction going back to that point of if you have a $500 million fund...

then you probably should just call it on a $4 million investment and just say, like, we shouldn't put another dollar into this. We shouldn't spend more time on it. We should work with the founders to have the best outcome for them. But we're sort of done here. It's really hard to do because it does seem like a big check. But as long as this is, again, where if you don't have a lot of other options, then

You're probably going to make the bad decision there and continue to invest more and continue to spend a ton of time on it when you know the answer. And so I think it very much depends on the specific situation and sort of what your portfolio looks like. And that's a luxury that VCs have. The founder doesn't have that luxury. The founder's all in on that one thing. And so I think it just makes, like emotionally, it's really hard.

I like the question, especially in the context of David's comment about Santi not being a partner. So depending on that partnership, you have different dynamics of your ability to put more money in. What's the worst case scenario is when you have a non-functioning partnership and you're trying to hide that and cover it up with more capital.

And to put more capital into a company to give it a second chance. Because think about that. We're talking about funds. Funds have be it 20, 25, 30, 40 companies. An individual partner has a much smaller number of those or an individual principal has an even smaller number of those. Yeah. Just a very talk about shots on goal. If you're a principal, you maybe get a couple in a fund to prove yourself. So there's real agency bias there.

Right. And what I think where funds and firms and LPs get hurt is when there's not transparent, authentic communication about the prospects of a company inside the portfolio and people start using their sharp elbows and protecting theirs because they maybe they have more power in the partnership. That's where you have negative outcomes and funds is when you put, you know, good capital after bad because you're protecting your partnership interest and

And you have non-functioning partnerships that don't make the right decisions. That's where you see that lower half of lower than median returns is when people are making non-economic, irrational decisions because of their agency bias.

You also have just some baked in partnership dynamics that may drive how those decisions are being made. So you've got things like what's the voting structure? And is it, oh, well, I'm going to support you here because I know that I'm bringing this deal to the table next week and I want you to vote for me. And so if you have this sort of like if you have that dynamic, that can be super dangerous to decisions like this. If you have, I mean, there are some firms, there are large, very established firms that have deal by deal carry for partners. Right.

And so that's going to drive a lot of, you know, difficult and probably bad, sometimes bad, sometimes good decisions around follow-ons. I've talked to one firm that has a different team or a different person evaluate the follow-on as a completely separate investment.

And they like to talk about how great it is. And then I had someone back channeled to me that that person that has to make those follow on decisions wants to leave because it's so painful for them to try to go up against these things that, you know, that are sort of owned by the other partners. And so I don't think that there's a right way to do it. I don't think there's an easy way to do it. But I think to Lyndall's point, the transparency around it is what really matters. Yeah.

This talk isn't about that, but partnership dynamics is the one thing that we spend all of our time diligencing when we're investing in a fund. And I say that repeatedly throughout the years to all LPs. You're fine. The portfolio construction will sort itself out. And we can coach people on a lot of things at this point if they'll listen, if they're coachable.

But those partnership dynamics, you can't fix and you can't get them right. And so that's where you get hurt as an LP. And I think that's where the portfolio and the founders get hurt, too. So it's important for them to understand from their perspective how that partnership, how that firm works.

I just want to double click on that. For founders, understand the partnership dynamics. You will know one partner the best. That's the person that's leading for you. But you really ought to know what it looks like and who you're really partnering with because it's not just that individual person. Sometimes people leave. And you want to understand how the decisions are being made for what ends up happening with your company over time. Maybe especially through that lens for founders before we wrap.

How do you guys diligence this? Like you guys are pros. You spend most of your time on this. I'm a founder. I have no idea how to like, what's like a question I can ask. What's something I can do? What's a back channel? Like, is there anything which can get me, you know, maybe not 80% of the answer, but like somewhere, something more than 20% to help me make this decision.

From my perspective, it's talking to the existing founders in that portfolio. And I think they may not tell you the answer if they even know it, but it's watch out for the things that they're omitting in their answers.

What are the sort of blank spaces that they're leaving? And I think asking specifically about approval processes for their deal, specifically about follow-ons. Who could you tell in the partnership meeting had the most dynamic response?

input and who was pushing the most on those. Yeah, I was trying to avoid using that, but who had the juice in the partnership? And you can tell that in a meeting when two or three people are sitting together, you can start to see just like any set of animals who's pushing the other around. And humans aren't that hard to figure out once you put us in that lens.

And when you do see a person pushing another around, it doesn't mean it's not a good partnership to invest in, right? What are you looking for to determine if this is going to be a healthy partnership that returns capital for us or not? Is there space to be wrong? Is there trust? Is there space to be wrong? Is there authentic, transparent communication about the companies across the partnership? It's hard. It's a hard thing to diligence. It's a hard thing to do, to be a partner in.

You know, I used to joke my dad was an attorney and I would, you know, as a teenager, I helped him move his office on a Saturday twice because he couldn't stand his partners. So this isn't specific to venture capital. This isn't specific to our point in time. This is humans and humans are messy. And I think trying to understand the dynamics between a set of humans being a team of founders and

or a team of partners at a firm, or as you both well know, pitching LPs, who can get something done at an LP shop. It's a similar dynamic that you have to evaluate and understand.

It's all about trust. It's the number one. It's the only thing that matters at all levels amongst partnerships between investors and recipients of those funds. I think that's the one thing that matters. And I think for a founder, you can ask questions. I think founders don't realize they can ask questions about the VCs and about their partnerships and about their businesses. And I think VCs appreciate it, that you actually did the work. I think it makes you look good. And if that's a turnoff to a VC, then you don't want their money.

But understanding just the history of the partnership, I think that's a fair question to ask, right? Like as LPs, we want to know like how do you know each other? How long have you known each other? How do you balance each other? So I think you can ask some questions around the partnership. I think you can, to Lyndall's point, talk to other founders. And I think you can ask the very important question, which is one that we always ask is how do you make decisions?

And I think there's a lot in that. And I think that's a totally fair question for founders to ask. That's great. Well, as we drift toward wrapping up here, I think this is a great place to leave it. I just want to say thanks to both of you. I think this is super informative, not only for existing VCs, aspiring VCs, current founders, just such a great peek behind the curtain. Is there anything else that you want to leave listeners with today?

I'll say something my partner Brad always says, just take it as data. It's one point of view, one piece of data that you should incorporate in your own thinking. And there are a lot of ways to win, and we've certainly been wrong. But our experience points to these being some of the more successful ways to invest.

I was going to say the same thing, but I will add that it's important to know that there isn't one right way to do any of this. There's no one right way to build a company. There's no one right way to build or invest out of a venture firm. The most important thing is that it's authentic to who you are and your skills and your experiences and your goals and all of those things. And so I think that the sort of like GP –

style fit or whatever it is. That's the thing that like that your strategy should fit who you are. And that's, that's important across the board. And I think that's the one thing to take away. I love that. Well, Jacqueline, Lyndall, where can people find you on the internet? Where can people find Foundry Group? We're very public. You can find us on the web at foundrygroup.com. And all of our partners have a lot of fun on Twitter. It's easy to find us from there.

All right. Well, thank you so much, listeners. We'll see you next time. Thanks again to Lyndall and Jacqueline. Thanks, guys. Thanks for having us.