How I Invest with David Weisburd - E26: Winter Mead of Coolwater on Building the YC for GPs

Episode Date: December 8, 2023

Winter Mead, Founder and CEO of Coolwater Capital sits down with David Weisburd to discuss the importance of emerging managers and how Coolwater Capital is building the YC for GPs. We’re proudly sponsored by Bidav Insurance Group, visit lux-str.com if you’re ready to level up your insurance plans.

the back and forth, the managing that process, the KYC, all of that, I think is a fundamental mistake that surprisingly a bunch of managers make. Another one they make is they don't really understand the market well enough. And again, maybe this falls under the fundraising strategy piece. But if you talk to a very savvy LP that invests into venture, that is one of their big mandates or like their only mandate. They really understand like the market context because like they've talked to 500 managers or they've talked to a thousand managers. Winter, it's a pleasure to have you on the podcast. You've had a prolific career. You've been at Hull Capital and then of course with Beezer Clarkson at Sapphire Ventures.

And we were introduced by a dear friend of mine, Ariana Thacker at Conscious. So welcome to the Limited Partner Podcast. David, thank you so much for having me. Great to be here. So let's jump right into it. So why did you create Coolwater Capital? Yeah, so there's this idea of helping like emerging managers. So that's talked about, I think, in a lot of different ways.

Like you have the haves and the have-nots. I think emerging managers kind of fit into this category for a while of like the have-nots. And so I started thinking about this for like a while back. And I got introduced by one of my late mentors, Kirk Dizon, when he was at Hall Capital. And so he was one of the two people who hired me. Jessica Rizzoff was the other person. And actually Pat Robertson, who's at Dragoneer now. Those are kind of the three people involved. I was pulled in there by a friend. I think she's at Centerview now, Amy Licickerit. So I was pulled

into that team on the private equity team pretty early on. But Kirk was the person really, I think, pounding the table for emerging managers. And this was, I think emerging managers had a different, they just had a different reputation in 2010 timeframe than they do today, almost getting close to 15 years later. And so it felt like back then you could count every emerging manager on three or four hands. And so I joined Beezer and Nino over at SAP Ventures at the time, now Sapphire Partners. The idea there was investing exclusively into venture. And I think we at Sapphire at the time were more focused on kind of that mid-stage, like that $100 to $400 million category. But you just saw this massive

change in the market going on, right? So 2010 to 2015, 2015 to 2020, then 2020, 2021, I feel like was its own category. And now we're kind of in a different market today. We just saw this massive proliferation of funds and the market wasn't responding how institutional investors, institutional LPs would address diligence. I ended up thinking about that long and hard and started iterating on this concept in 2016 of what would it mean to be the best coach for emerging managers? I wanted to support them and that's kind of the genesis of Coolwater. You started at Howl Capital. What did Howl Capital get right about the space? They got a lot of things right,

but I think two things that I can think of off the top of my head. One was they got the micro VC space right. Right? And so you were looking for exceptional teams that were local. I think that was the second thing was like the local piece. And so we also invested internationally.

And I think they did a good job of finding good venture managers internationally as well in other technology ecosystems. I heard Katie say this a bunch of times when I was there, you know, seed is local, like it's a local game. And so if you're going to invest and put seed managers into your portfolio, thinking about these different ecosystems, not only in the US, but all over the world of these seed managers that are very talented, maybe they worked in the Bay Area, and then they kind of go back to their respective ecosystems, respective countries,

and they've learned the trade and the craft of venture capital and what it means to build a big business, but you're still betting on that local team and local firms. So there were a few managers we partnered with internationally and you follow that talent, follow those teams to those different regions, areas, cities. What makes venture fundamentally different from other asset classes? Fundamentally, when you think about portfolio construction and what's going to drive returns, regions, areas, cities. What makes venture fundamentally different from other asset classes? Fundamentally, when you think about portfolio construction and what's going to drive returns, like power law is the big concept of what will drive returns at the fund level.

So you have to have a great network, you have to have great access, you have to have great picking ability as a manager. You're making a different bet than if you're underwriting an investment in private equity and structuring it differently. You might have protections around the debt. You're collateralized in a different way. So there's a lot of, I think, fundamentally different concepts you're agreeing to and abiding by if you're investing as a venture investor than a private equity investor. You broke it down 2010, 2015 to 2015 to 2020. How are those eras different? We started to emerge probably out of the great recession in 2011, 2012. I'd say things started to turn a corner. You started to have some bigger IPOs, more on the consumer side for venture.

If you think about where bigger ecosystems were, like back in 2010, Boston was still bigger than New York. And now people don't even bring up that comparison anymore. There's a lot of good cities now outside of Boston, New York and the Bay Area. New York and the Bay Area in particular are still, by the data, still the two biggest. But there's a lot of other ecosystems now that people talk about, but they weren't talking about it as much back then. You kind of had this metamorphosis going on in the 2011, 12, 13, 14, 15 timeframe when the different ecosystems hadn't fully sprouted yet. But I do think there were people working on venture infrastructure

and software that was bringing barriers to entry down. There was definitely more understanding of what venture was and more dollars because of the success, more dollars were being, and some macro factors like lower interest rates, more dollars were being put into venture. And so you just had this massive growth and then, you know, barriers to entry coming down for fund formation, you know, savvy investors looking for yield, more people understanding what venture was and like what the venture model was and like coming into the space. And that's what I mean by like the proliferation. So you just had really hundreds of managers kind

of saying like, Hey, I think, you know, this is a really interesting space. That was kind of the big change, right? Maybe the equivalent is like when venture deals came out, right. And, and like YC was created and there's just more. And like Paul Graham was kind of like, you know, mentioning a bunch of, um, putting out a bunch of his essays and like that part of the market, what like that time in the market was interesting because you had a lot of people, founders in particular of technology companies, really starting to understand like, okay, what is this? Can I wrap my head around what is venture? By the time that maybe it's that 2010 to 2015 timeframe, maybe when that was going on, venture was kind of better understood, definitely better understood, very much so.

But I still think the dynamics around fund formation, what it meant to be a VC, I think those were still less understood. We'll talk about, I think, hashtag OpenLP a little bit later, but like those concepts of like bringing more and what you're doing here on this amazing podcast, right? Like bringing those concepts of transparency to the LPGP world. Like I think those started to be talked about like 10 years ago and they're still playing out today. The software infrastructure of venture capital, it's a very broad term, but was a lot better at that point in time. And so people could just start funds a lot faster and take that risk of being a fund manager. And that compounded

pretty significantly from the 2014, 2015 to 2020, 2021 timeframe. I agree. There was a couple of compounding factors. One is people forget AWS was just starting to scale and the cost of starting a startup went significantly down, which led to a lot more startups. In many ways, emerging managers are required because you need boots on the ground. You need individual people helping companies early. When you have 30 companies, the mega funds could take all 30 companies and could help each companies. When you have 3000 companies out there, you need this emerging manager class. And of course, you have tools like AngelList, like Carta, and all the other

technolization of fund admins and other tools, I think, also played into that. Yeah, that's a really good point. You can't be a fund manager if there's no investment opportunities, right? So it's a perfect segue into Coolwater. So what is Coolwater and why does it exist? Yeah, so 2014, 2015, 2016, as I was mentioning, like that's when it started to change. And we've talked about this in the past,

but 2016 felt like the first year when I didn't meet every fund in the market, right? So I was seeing a couple of press releases and was surprised, just like, how did I not see that fund? And I think some people might just be like, oh, I didn't see that fund. I think that year I saw 504 funds, I believe. And that's a decently high number. We're seeing kind of two to three X of that now at Coolwater. But that's a decently high number of managers, especially if you think about what an institutional investor's pace of investing

is. At the time we were a little bit higher, but yeah, it's probably one to five new fund managers per year. So you want top of funnel, but another interesting piece there was just there's so many managers. How do you go deep on all of those investment opportunities? And I think one perspective is you don't need to. Another perspective is like, just tighten your filter. And we definitely did that when I was at Sapphire. We do like a strategic offsite every six months or so. And another perspective, and I think this is the Coolwater perspective more so, how do you build relationships with managers? And how have you been able to scale to so many managers at Coolwater? What's your secret sauce? So we run this, we run a couple of programs, like the core program is for fund managers. So I wrote this book in 2018 called How to Raise a Venture Capital Fund.

It seems to have helped a lot of managers kind of wrap their heads around that initial zero to one phase, let's call it, of building a fund. That's interesting, but it doesn't really give me the relationship or give Koolwater the relationship with someone. So I don't have a better perspective. It's definitely impactful and helpful, but it doesn't lead to a better relationship. So the idea there was, how do you lend help to someone? And if you know me, my personality is very much like, I kind of acknowledge what I don't know and try to know as much as possible to be as helpful as possible.

And so the idea there was, you know, after Sapphire, I consulted with, I think it was 15 different investment firms, all emerging managers, funds one through three, and helping them in a number of different functional capacities, but really more so on back and middle office than front office. Because at Sapphire Net Hall, it was very much more front office, buy side. You're underwriting the investments, you're an investor, but there's all these other things that are happening when you're launching and building an investment firm. So it's kind of that concept as well, which is like, okay, there's all these additional things you have to do as an emerging manager that aren't just investing, all these other functions you're responsible for.

It's the same thing where if you're building a startup and you're the CEO, right? You're like, yeah, I just want to like build this product and like solve this problem. But then you're like, wait, all of a sudden, like I'm running a business and I'm scaling a business. And so I think that you see that same pattern play out with emerging managers. It's like, okay, I'm doing this for two people. I could continue to do this for two people at a time for the next, you know, 40 years of my career. Right.

And that's like a good job. But, you know, if you apply growth mindset to that, it's like, okay, I'm doing it for two people. How do I do it to 20 teams at a time? Right. Or how do I do it to double that? Or two to 20 is an order of magnitude, 20 to 40 is doubling, but what if I could do this for 200 managers? If you get hired as a COO somewhere, how many times can you do that? You can do it maybe

once really effectively, maybe two or three times somewhat less effectively. And then all of a sudden it's like, oh, I'm going to be the COO for what? Like a hundred firms? Like you're not, right? Like just physically, that's impossible, right? You just physically run out of time and space. And so like, what do you need to do to change the model? I think I heard this as well when Andreessen was coming to market, right? They're like, oh, Andreessen, they're going to have this amazing market development team, right? They're built on this unique model to help managers, like to help founders, like the best founders don't need like help. That's probably like more true than less true. Like the more true part is like the best founders are probably like the ones that you're

not answering all the questions for, you know, seven days a week as a VC. But it's not true that they don't need help. And I think that's true with Coolwater as well, which is like, you have the best managers. Yes, they're just amazing at implementing and executing and building and doing all the right things, but they still need help. In terms of positively selected managers, not adversely selected, what is the value that you provide to them? Yeah. Positive selection. So I was having this conversation this morning, right? So there's a couple of concepts or a couple of archetypes, let's say, in venture managers, right? Like you can work at, and this is up for debate, but you can work at a tier one firm. So again, you can have positive selection, right?

Where from an institutional LP's perspective, positive selection would be like that archetype. You know, you've worked at a tier one firm and you're spinning out. Like that is a very tried and true archetype of like what we'll get institutionally back. But again, like where, where's the compliment? Like why is Coolwater interesting to a firm like that? That's the same reason why an amazing founder takes venture capital money in the first place because they can build something faster or they view the partnership as strategic, right? And so the positive selection aspect is these self-aware, you know, apprentice, like really

great high potential investors are kind of saying like, okay, hey, how do I do this faster? Today's episode is sponsored by Badaav Insurance Group. Badaav Insurance Group is run by my close friend Amit Badaav, who insures me both personally and at the corporate level. Most people are not aware of the inherent conflicts in insurance, where insurance agents are incentivized to send their clients to the most expensive option. Amit has always been an incredible partner to me and 10X Capital, driving down our fees considerably while providing a premium solution. I'm proud to personally endorse Amit and I ask that you consider using Badaw Insurance

Group for your next insurance need, whether it be DNO, cyber, or even personal car and home insurance. You could email Ahmet at ahmet at luxstr.com. That's A-H-M-E-T at L-U-X hyphen S-T-R dot com. Thank you. Is it sort of being a good investor versus being a good operator of an investment firm? Is that the main distinction? You might be Andreessen and know how to make investments, but you don't necessarily know how to manage a venture firm. Well, I think what we're looking for fundamentally is great investors, right? And I think if you're in LP, that's fundamentally what you're doing. What Coolwater looks for is great investors, great investment potential, because like they've already had some, some track record. And again, like, I think there's a difference, um, between like an emerging

manager track record and kind of a more institutional track record. You're looking for these people with high potential that are all that already demonstrated like high discretion as an investor. And that can come out in a few different ways. Is it analogous to a very smart CTO that might not know how to sell the product, but is very good at developing a product? Is that where you bring in alpha? That's the idea. If you're a CTO and you're going to become a CEO, or you're the CTO and you acknowledge that you're building a company, there's different parts that you have to build that's not just the product. There's different teams you have to manage that aren't just the engineering team, right? Or the product team. So yeah, there's definitely like an analogy

there. It requires a certain personality type as well. I think one of the paradoxes as a VC, I look for individuals that are almost uncoachable, maybe an eight or nine out of uncoachability, but have the wherewithal to actually be coached in the areas that are necessary. Beginner VCs oftentimes look for people that are highly coachable. Those, in my opinion, have not led to great successes. Is there a similar dynamic in emerging managers that you foresee? There's this ability to like swallow your own pride, right? If you're solution oriented enough, right? Or if you're impact oriented enough, right? Or if you're impact oriented enough,

right? Like the impact, not in this, like the typical sense of how I think a lot of people refer to like impact investing, but like if you're, if you're uncoachable, the reason you've left somewhere or you're focusing on this, even though the odds are against you is because you have some type of driven behavior, but there has to be like that inkling on top of like, in your words, like the uncoachability of like, yes, I want to do this and I'm willing to like sacrifice some of my own pride or ego to do it. Right. Like you don't just want someone that's so like, I can't work with anyone. I'm not going to build the company. Like you're so focused on the solution that you're kind of like, okay, these are the things I need to put in place to actually get

to the solution. I was having lunch with one, a 10X Capital partner who took Coinbase public while he was at Goldman. He said that Brian Armstrong was very focused on doing a tokenization offering of Coinbase when they were going public. And as soon as he saw that that was going to delay the offering, he immediately pivoted into pragmatism and he went public. And of course, in retrospect, it was a brilliant move given that Gensler was now becoming SEC chair and he might've delayed his IPO by many years. So there's this, there's this mission driven aspect with a pragmatism that, that is very rare in most leaders. Yeah. There might be also like an element of just like some creativity, right? Like you have this like focused, almost block headedness sometimes of people that are just like, you know, charging

through walls, but sometimes they realize that, yeah, it might actually be better to, you know, throw a hook on top of the wall and like climb up and over, right? So that, and like, but to your like marrying that with like the pragmatism, like sometimes you're like, oh, well, the wall's too high here. Maybe, maybe I should actually like walk down the wall a little bit and like, I'll find a door or something. So there, there's some of that going on, I think with managers too. Um, and that's not articulated in the right way. There's a creativity there. There's these traits that you're looking for that maybe are very akin to like a great technology company founder. Like I'm looking for, you know, with an emerging manager to kind of say like, yeah, if you do grow up, there's going to

be a lot more things here to manage. And like, a lot of times this is a lonely game, especially when it's early and you don't have like massive management fees to like, you know, scale out a huge organization. Like a lot of times it's like very lonely and no one's like telling you what to do or how to do it. And so there is some of this like creativity that goes on that leads to, you know, coupled with pragmatism that leads to, I think, the scaling and the growing up of you, you know, going from an emerging manager to an institutional firm. Seems like mental fortitude is an important thing in emerging managers specifically solo or two-person teams. What other psychological traits do you see in emerging managers that are predictive of success? The fortitude piece is definitely key. I think you have to have an exceptional insight into what makes a great investment. And that's probably the apprenticeship piece or why we look for existing investors in the first place. But that's a very big piece of it. I don't know if that's a

psychology trait, but it's someone that is infinitely curious and disciplined at the same time. They view investing as a craft and therefore they're willing to put in the time into the craft. Paranoia might be another one. Where you're like, yeah, I made that investment. Was that the right investment? I could have kept on going and I could have kept on doing diligence. you kind of get to this point where just like okay um i'm ready to like take on the risk now so like you have to have like this risk seeking appetite like again like i don't know if that's a psychological trait but then like you know so it's coupling that and then like they're just always hungry and iterating quickly the ability to kind of like see the big picture and kind of boil it down into like the absolute essentials and then like just like ruthlessly manage those essentials.

Reminds me of a poker analogy, playing tight aggressive, which means you play a few hands, but when you're ready to play the hand, you play it very aggressively. Yeah. And then everyone knows you're going to play that hand again. It's like in the next one. I had during COVID, I made two substantial investments, one in Robinhood and one in HoneyBook. I can't talk about returns, but they've done, they've done really well. And my thesis was very simple, which was people didn't know whether, you know, whether the world would end and whether everyone would die. My thesis was very simple. If the world doesn't end, then the return would do well. The numbers are good. The world does end, then the money will not be worth anything. Anyways, you might as well invest. Obviously,

we did all the diligence and we knew these companies, we knew the management teams, we knew the co-investors, but ultimately that was a simplistic thing and where others were paralyzed and not knowing what to do, kind of playing aggressive at that point, you know, led to some of the best investments at that market cycle. Yeah. That's like extreme pragmatism. Tell me about your cohorts. Tell me about how it works. How do people apply? And then let's say they're in Coolwater. What does the program look for the 20 or so emerging managers that are lucky enough to get in?

Yeah, so think of Coolwater as three pieces right now. You have the cohort, which another word for that would be like the academy. So it's very focused on knowledge, content how do you improve right and i think that's you know even if you disagree with like going to college or doing a vocational school like you have to agree that at some point you need to learn your craft right and the the bet there on like the cohort is how do you learn your craft faster? And then that's coupled with the club piece, which is more like the community piece.

So it's how do you learn your craft faster? That's great. But like, I think you can learn it even faster if you do it as a cohort within a community, right? You have the shared experience across like the different cohorts. And we have three cohorts right now. We have one that focuses on building your track record for very early people that are undecided whether or not they want to become a fund manager. That's called explore. You're exploring whether or not you want to be

a fund manager. We have build. So you've already explored. Now you're ready to like build something. It's kind of that launch phase. So that the build program is focused on fund managers explicitly. Like, yeah, I'm ready to like figure out what it means, understand all the different pieces, right? Like I need to know what it means to be a fund manager and all the different pieces of fund management. Maybe this has come up in the past, but like the existential piece is like the zero to one, like, which I think is a known concept now via, via Peter Thiel.

Like, um, this, this existential piece of like, I got to get the fund off the ground. And once you get the fund off the ground, wait, now I've got to raise another fund of like, I got to get the fund off the ground. And once you get the fund off the ground, wait, now I've got to raise another fund. Now I've got to invest this fund. Now I've got to build that infrastructure. So there's like the idea of like existential getting the fund off the ground to persistent, which is like, now I need to build even more. And so the build program, maybe we should have called it like existential, or maybe we should have called it like launch or something. But the build program really is like, hey, like I need to get my fund off the ground. What is everything I need to know to do that, right?

And how do I do that the best? And then once you do that, like the journey doesn't stop. And so as you think about like the cohort, right, the academy, it's kind of, we think about it as like, let cool water problem solve for emerging managers. Again, we think that's where our special skillset is and our ability to deliver the most amount of impact is for the early stage ecosystem and for the innovation ecosystem.

So that's it. The academy is like, hey, as an emerging manager, before you start, when you start, after you start and when you're scaling, you're going to have these problems or challenges or opportunities to overcome. How can Coolwater play a complimentary role there? And now it's turned into a community of, that's the club, that's the second piece of Coolwater. So it's like, okay, well, we don't just want to help people and then just let them go. So we manage this community as well.

The community now is like 5,000 companies, 300 founder VCs, people that have graduated and their portfolios, like the founder VCs who have graduated these programs. And we kind of manage that as its own thing. And so that's the events, that's the additional webinars, the continuous education, the continuous learning, whatever you want to call it. So between cohort and club, in the cohort, we run over 100 modules per year. And on the club side, we run over 75 events per year. You mentioned off camera, they have an 83 NPS score. That's exceptionally high. I think that's higher than Zappos

in its best times. What do emerging managers credit you with? So the three things to answer your question explicitly, fund management, like these concepts around like what it means to manage a fund, operations, right?

So people, again, like this is something people, emerging managers in particular, like think they know, but there's like these gaps there. And then fundraising strategy. This like encompasses like the ability to differentiate yourself, right? Think of the founder, that's the CTO that's really good at building product, but can't actually sell and articulate what they're actually building. Like they're just two in the weeds. And so you need someone to kind of like tease it out, pull it out. Like that fundraising strategy. It's helping people with the narrative, helping them understand where

they strategically are positioned in the ecosystem, helping people understand how to run this process, both strategically and tactically. So those are the three buckets. It's fund management, operations, fundraising strategy. I think people usually feel like they have some level of transformational experience. What are the main mistakes that emerging you know, operations, fundraising strategy. I think people like usually feel like they have some level of transformational experience. What are the main mistakes that emerging managers, specifically smart emerging managers make when going out to fundraise? They don't have all their ducks in a row. All your ducks in a row means like at least be ready to close the fund. Like if you're talking to people that you don't know, like you're talking to your best friend being like, Hey, I've had this really good idea. I've invested in 10 unicorns like accidentally

and like I'm pulling together this fund thesis. Like, what do you think of this fund thesis? And like, do you think I should be a fund manager? It's kind of a big decision. I'm going to do this for the next few decades of my life. Like if that's the conversation with your best friend, like fine, like you don't need to have ducks in a row. But if you start reaching out to people,

be like, hey, I'm fundraising, right? And they're like, whoa, that is so good. You've invested in 10 unicorns. That's amazing. Like I want to invest. Like, where do I sign? And you're just like, I haven't actually done any of that yet. So funnily enough, that happens more than you think. That is a process in and of itself. The actual, the back and forth, the managing that process, the KYC, all of that, I think is a fundamental mistake that surprisingly a bunch of managers make. Another one they make is they don't really understand the market well enough. And again,

maybe this falls under the fundraising strategy piece, but if you talk to a very savvy LP that invests into venture, that is one of their big mandates or their only mandate, they really understand the market context because they've talked to 500 managers or they've talked to a thousand managers. And so a lot of emerging managers, I don't know what they're doing, but they should talk to as many people as possible. Again, you should have 20 best friends and talk to them all and pitch them and process that feedback.

That's coming up with a narrative that is strategically positioned relative to the current market. That's a second mistake where people kind of like, they don't do enough diligence on that side, which may be a yellow flag for LPs because you're like, hey, look at how special I am. And a bunch of the LPs are like, well, actually you're not special, right? Like, cause 50 other people are doing that. And I've talked to all 50 of them. A third mistake is like, they talk to some of these conversations like too soon before they, again, this is ducks in the row, but on a, like, not just the fundraising piece, but it's like, now it's like, okay, I'm digging into your data room. Like you have to pitch me,

like, I need to understand like what you're doing. And so I do think a lot of people stub their toe on that. And some LPs are unforgiving. Coolwater has this unique type of culture as an LP, which is like, it's the safest space to talk about everything. And our personality is like, we just want to help you as much as possible. If you've already proven that you're a great investor coming to Coolwater, this is the safe space to talk about stuff. But I think a lot of LPs are rather unforgivinggiving where it's like you pitch them, they're like, okay, don't have your ducks in a row on like,

you know, this is a completely unblended up process. Your data room is deficient. Your narrative is indistinguished. And like you have pitched me on stuff and I've asked you these fundamental questions that every institutional fund manager should know. And you actually haven't been able to respond to me in a way that gives me confidence that if I give you $10 million, you're going to know exactly what to do with it. You mentioned ducks in a row and data room. I think you've made the entire audience very, very afraid of LPs being unforgiving. What is the minimum viable data room that you need to see from emerging managers? Wow. Tough question to ask on a pod. This is more like, can I share my screen type of question? The minimum data room can have an LPA and subdocs. That's period. So if I scared people on the last comment, like how easy is that? You don't even write your LPA and subdocs.

You just need to like pay someone to do that. So that's the minimum data room. So hopefully that's a redeeming answer. But if you're like most people, you're probably gonna have a few more things in a data room. Fundamentally pitch deck, this one's obvious. And there's the pitch deck, I'll just put a pitch deck in there, but there's like the pitch deck that tells the right story. And again, does these things that are more nuanced, like where do I sit in the ecosystem?

Is my strategy special? Have I, you know, checked off for an LP, like the right things in that pitch deck, right? So the pitch deck, yes, but right, there's another layer to developing a pitch deck and like including the right information. If you've invested before, right, which is most likely yes, if you're raising a fund, then I would include that track record, that investment track record.

And again, there's including the track record, which has a few amount of columns, and there's including a track record that has the information that LPs are actually seeking. So you start to see that every piece of the data room, there's a checking the box element of it. And then there's the actual, what are LPs actually looking for when they download that and play around with it? The track record case, most institutional LPs want it in Excel. Maybe that's true for most LPs, but I feel like if you're a merging manager, you get away with a lot of other media

in terms of how you're sharing your track record. Again, don't overcomplicate it. There's a lot more you could fit into your data room. If you're trying to raise more than $10 million, they'll probably pass if you don't have a portfolio construction model. They may pass if you don't have some compliance information. If they're a bigger check writer, they kind of want to see that you've set up the business already. Like, hey, I'm going to write a big check into this business that doesn't really exist. VCs probably do this diligence as well. Like, okay, I'm going to write you a seven-figure check. I want to see that this business actually exists and everything's set up and the bank accounts are all set up.

So again, you probably do yourself a service and put that type of stuff that proves the business is already in business in the data room so that people can be like, okay, yeah, it's filed, it's legit. You've got the bank accounts, the state has approved it. Just so that gives people, I think, more confidence. If you're a bigger team, include a separate folder for biographies. You might want an organizational chart. There's this idea of what does the organization do? If you're a little bit more complicated than I'm a solo GP that runs around and does enterprise software, maybe include that. That could be in your pitch deck, but maybe you want to break it out because some people like go into a data room looking for specific answers. Yeah. And then if you start to think about graduating into the big leagues,

like you might have an FAQ document and a DDQ and like these other things, the list goes on a little bit more than that. It's in my book. It's also something we talk about a lot, but data room shouldn't be scary. You don't want to overdo it. You want to make it as efficient as possible if you're an emerging manager. If you're five funds in, you should have an exceptionally robust data room. If someone's betting on your first fund, include the materials, you are hearing questions from the LPs, like, right? Like if you're, if you've all of a sudden decided, okay, I'm going to raise this fund. I've got my first few documents in there.

Then all of a sudden, like you start getting all these questions. LPs are like, hey, what about this? Do you have like, that might happen. So it's a very, like the data room can almost be like this bespoke development per GP. And if like you start to see that LPs are getting stuck on a certain thing, like, oh, I don't really understand, like, you know, you're investing into 200 companies or you're investing into 10 companies, or you've got this weird waterfall structure,

or, you know, you're investing into this new type of technology. Like, how does that work? Right, so you might have these additional pieces that get added to your data room. And think of it as like, my data room is there to like help LPs do their own work and give them confidence that I know what I'm talking about, that this is a good bet, that I've thought like, you know, very long and hard about the strategy.

You mentioned compliance. What kind of compliance are you looking for? It's like the big picture is operational due diligence, ODD. But there's certain institutions, most institutions I'd say, that if they start moving through the process, first they're going to want to bet on you and your track record and the strategy. But if they get past that initial phase, then they're going to move into legal due diligence and operational due diligence. And to the point of like, I want to show that I have legitimate operations and infrastructure. How do you do that? What are the things you need to put in your data room that show like you have a real business that's been

filed with the state, right? That you've hired your tax team to do your taxes. You've hired your audit team to do your audit. There's stuff like that. There's a very long list there, so I'm not going to go into it. I would think about this phase of operational due diligence and compliance falls under that and think about what are the policies that I would need to have in place that LPs are really going to care about. An example would be like, I'm a solo GP and I, you know, I am fully responsible for all the money and how it gets wired. I'm the only person in charge of that. That is potentially something that's dangerous. What if someone signs into your

account? There's a security risk there and then you're in charge of all of it. So creating dual permissions for wire transfers. And maybe you work with your fund admin on that and they give you that document and you put that in your data room, right? So there's little things like that. And like, again, like it's a laundry list of things when you, you know, get bigger and bigger.

But there's these things that you should just put in. And if you've already done them, again, you're doing yourself a disservice by not including, you know, that in the data room, showing LPs that, again, like are doing their own homework, right?

Like that you've thought of this and already done it. I have a new appreciation for our ops team. You mentioned portfolio construction. We've talked at Nauseam about portfolio construction, but there seems to be some disagreement on follow-on policy. What is the best in class follow-on policy for pre-seed and seed investor? I don't think there is.

We run multiple modules on portfolio construction for every build program. And yeah, big picture, taking a step back for the audience, you see 10X funds that have done 10 investments in the fund. You also see outperformance with managers that have done 150 investments. These are smaller funds, but you see 5x, 7x, 8x funds. I don't know if I've seen a 10x plus fund that's had more than 100 investments. You can get outperformance. Outperformance being defined as, let's say, greater than 3x over 10 years, but really 5x plus. But you can make money with different portfolio construction. I think where it feels like the conversation right now is some people did investments with no reserves in 2020 and 2021.

They're like the conversation right now is that was a mistake. You reserve to show LPs, especially for emerging managers that want to do this longer term, that you're good at picking follow-ons. That's a fundamental reason. You're writing kind of a smaller check, but you're doubling down. Maybe it's a two-to-one ratio. Maybe it's a three-to-one ratio. Maybe it's a six-to-one ratio, but you're doubling down in your winners. That demonstrates investment discretion. That's something that most LPs are looking for. And you lose an opportunity to demonstrate that if you don't have follow-ons. The reason you don't do follow-ons as emerging managers is very hard to really say, is it really better risk?

Is it really a better risk-adjusted bet if I'm pre-seed at the seed or if I'm seed at the A? Is it really better risk-adjusted or should I just put as much money and get as much ownership up front? Where people are struggling now is if the market goes sideways, then it's like, do you have the ability to invest into companies that might be restructured to defend your ownership and to continue to own part of that company? There's also this idea of maybe you do have better information, right? So best in class is kind of like a self-reflection exercise of saying, do I have the information rights?

Do I have the perspective on these companies or like how they're performing? And is there really a better risk adjusted bet at like the N plus one or the N plus two round to put those dollars to work into my best companies? And like the reason this I think has changed and become harder to answer since 2020 and 2021 is because like that market environment blew up graduation rates, right? Where 70% used to be a great graduation rate. But then all of a sudden, a lot of preceded seed managers, I felt like it got probably over to 90% plus, where just almost every single one of your companies, if they had any semblance of progress, they were raising capital in that timeframe. And so people were just

investing into their pro rata without the ability to the way reserves were traditionally used was to just do it in the best performing companies. So best practice is probably having a process when the follow on happens, where you have an explicit conversation to determine the updated status of the business and make a re-underwriting decision. Is this a better risk-adjusted bet? Is the company in a better state? Has the risk been reduced for this company being a successful outcome? Make that a process. It's an ongoing exercise from what I've seen and done. It's a very hard exercise to do. And it's always going to be hard because you can't predict the future, you can't predict graduation rates, you can't predict product success.

For early stage venture, it's very hard. If you trunch your capital and you're a different asset class, fine. But in venture, it's super hard. What if you have more failures? So now you have this extra money. Do you make additional extra bets, right? Like the, like, do you make additional extra bets? Like new bets and take your, like, I was going to do 30 companies. Now I have the money to do 40 because I have a higher, you know, loss ratio.

Or, you know, if more companies graduate, like, do you invest in all of them? Right. Or like, which ones do you like, you know, again, like who are your favorite children versus not? Like, how do you pick those? Do emerging managers, in your opinion, get heavily penalized for not doing their pro rata? How does that play out over many generations?

I think like the way it probably plays out is the best investors do their pro rata in the best companies and they like double down over time. If I'm an LP and I'm looking at your fund four and like I've seen you invest in fund one, fund two, and fund three, and your best companies are your 100K checks. Let's say your portfolio construction is like, I write a 100K check and then I double down five to one. So I

put a 500K check after the 100K check. If you're looking at fund four and I'm doing the underwriting, I'm looking back at your fund, then all of your best companies are 100K. What does that tell you? It probably tells you that you haven't actually picked your winners, you just got lucky. So there's something to be said like, hey, actually this person was playing in the right space, they had access, they put the 100K in the right company to start, but they've missed something on the portfolio management side where they didn't put the 500K after the right 100K ones. And I think if you get bigger, that could actually like lead to suppress returns. Like if you're putting, you know, you put a million, you put

5 million, like that's going to bring down your returns. And the LP might say like, well, okay, maybe they'll still make the bet and say like, hey, you're just like, you're in it, you're picking the right things. But in terms of portfolio management, like you're putting, you know, the good dollars after bad most of the time and you've proven that over three funds now. So at your fund four, that'll be a different evaluation. If it's a fund one to fund two, and I'm now at your fund two, it's so hard to tease out. Okay, great. You followed on your pro rata.

What does that tell you? It tells you that David has really good relationships with his founders and he's able to get that, he's got the information rights, he's able to get that next check in and defend his pro rata, especially if you're investing alongside the tier ones. And so that's what an LP is looking for. And they're like, wow, that's really cool that David was able to invest next to those five tier ones and defend his pro rata. That's really exceptional. And even buy up ownership because he had this five to one thing, that's really impressive. So that really impressive. Right. So they're looking, that's more like signal, which is why I think a lot of, is one of the reasons, not the reason, but why LP is a lot of time wait to get to fund three or fund four. Like there's a lot more like substance there. And the evaluation is like

fundamentally different. You could almost argue that in a GP that returns a good fund without doing significant follow on consistently has very good sourcing and a GP that has is very good at following on has good picking two different skill sets and a GP. Ideally, you have them in one. But I think both are both are important. We spent quite a bit of time talking about portfolio construction, and how you assemble your teams and how you assemble your cohorts. What would you like? What would you like the listeners to know about you, Winter, and about Coolwater? Yeah, I think there's an opportunity here, right?

So what is Coolwater trying to do? We're trying to help emerging managers make the journey easier. We're making it easier for everyone in the world to be a fund manager. The idea there is there's a commitment to founders, there's a commitment to early stage VC, there's a commitment to innovation, there's a commitment to technology development, and you've demonstrated a commitment to being a great investor and a great fund manager. Those are the people that Coolwater is looking to

intersect with. And I'd say, if I haven't found those people yet, please reach out. We're trying to build this academy and this community to support emerging managers that, again, are really committed to the craft and building, again, the right portfolio construction like we just discussed and doing this in a meaningful way with the right intention and treat the concept of being a fiduciary with the utmost amount of respect. Those are the people we're trying to track down and find and support. LPs and others, we're trying to organize this market and organize people that care about emerging managers. Most people listening to this pod are probably pretty tuned in to venture. There's a big part

of the world that isn't tuned in. Those LPs that are interested in a bigger way and the meaning of venture, getting them to come in and align with emerging managers and understanding emerging manager world, Coolwater does do that a lot. And so for our cohort, for example, like we bring in every cohort, 50 new LPs and experts. And I have a couple of follow-ups on, it's too interesting. One is you want to find committed GPs. How do you suss that out in your qualification process? We just ask them if they're active. And before we do that, ask them what they want. It turns out if you start the conversation that way, a lot of people actually want to,

they want to contribute in a way that even if they are an active LP and could invest into the fund, they want to contribute in other ways as well. I'm too intrigued when somebody mentions LP value add, it's like talking about unicorns and mythical creatures. Well, what is, what is LP Value Add? And specifically, what do GPs consider LP Value Add to be? LP Value Add comes in a few different categories. Like one is advisory, right? To qualify as a teacher, they've usually invested in 20 or more emerging managers, right? So they have a perspective, they've usually invested in 20 or more emerging managers. So they have a perspective, they've seen it play out. Ideally, they've sat on LPACs. It's like if you are giving advice to

a venture-backed company and you're trying to help them scale, do you want to hear that from someone that's made two angel investments or do you want to hear that from someone that's on 10 boards? So I think you're qualifying for that level of expertise. Those are the people that like should come in and offer advice. But I do think there's value out there. I do think there's like LP value add can be like the type of conversation that Coolwater tries to create, which is like, hey, this is a safe space. Like we're solution oriented. We're trying to get to a better place. Let's just like put everything on the table and like figure out like how do we get to that better place? So that can be LP value add, like LPs that actually serve as mentors to emerging managers, and there's not a lot that do that.

If you think about who the mentors are, the mentors are more like the GPs. It's kind of like your big brother or big sister on the GP side. It's not like your big brother, sister LP. So I think that could be another form of value add. It's about networking when you're kind of fundraising. So value add can be, yeah, let me introduce you to these people that I actually know care about life sciences. I don't do life science investments, but I know five people that do. Why don't you talk to them?

Because I've spent 30 to 120 minutes on your opportunity, and this is actually really interesting. And they care about life sciences. So that's LP value add. I think LP value add in the emerging manager world starts to get different than just the LP value add of the traditional VC world, meaning it can actually focus on syndication, co-investments, business partnerships. So you do see a lot of that. And that's been, I think, tried and true for a while. A lot of VCs, not only in the last 10 years, but before that, thought about bringing in their LPs strategically. And that isn't necessarily something you can command. Your fund one, you're not going to be like, sorry, I'm not going to take your money because you're not strategic

enough. Maybe some people will do that, but that's literally less than 1% of people do that. They're more like, well, you're going to invest in my fund. That's awesome. Okay, great. But there is something to be said around understanding what your LPs do and being able to sort them strategically and being able to leverage that. And there is more of that in the emerging manager world, high net worth, and they're tied to... Again, they can help with business partnerships or be early clients. I've seen this, especially in the deep tech and the industrial tech. Value add from an LP can also be keeping you honest and on track. If you set the intention, and this is what Coolwater is trying to do at scale, but for other LPs, if they're listening, to just keep them honest. You're not sending out the right reporting, or you shouldn't be doing an annual meeting,

or some of these things that I think are good for governance and good for building the business that a lot of LPs just wait until the next fund and then judge you on it, when I think they should just feel like there could be more of an open communication there and say, hey, it actually says in your LPA that you should be doing an annual meeting. You didn't do one last year. I forgive you, but you know, you think you should think about doing this because it's like a great way to, you know, strengthen our relationship. I think LPs can play a value added role. They should think about it selectively and strategically. Like they're not board members, but they can play this like role. And I would

almost argue that a lot of emerging managers are okay with that because they probably sit on the other side of the table, like not quivering in fear, but definitely like thinking, okay, what do my LPs think? Right. Like I haven't heard from them in six months. I'm reporting into this vacuum and they never like, you know, I spent 10 hours on my quarterly letter and they didn't even say like, thank you. Just kind of setting setting that expectation. I don't think the expectation in the market has changed enough. With what you're doing with hashtag open LP, with LP transparency, all this stuff, there's more people who are vocal on the LP side, but I still don't see the behavior changing where there's still a lot of fear from GPs. And it's like, I think Lyndall Eakman over at Foundry kind of like talks about it. It's like, you know, putting the partner and limited partner,

right? That concept of like, how does that manifest at the, at the market level? It's like GPs being okay to ask LPs. It's the same thing if you're a company and you ask like people on your cap table something, right? Are they not going to invest in your next round? Or you ask your board something like, are they going to fire you at the next round or something something like it's that type of fear that might exist where it's like okay trying to play my cards like perfectly right um but like trying to like you know on the partnership side like is there a time to ask lps i don't see this nearly enough to like ask all your lps like hey checking in like anything i could be doing better anything that you want like i really don't see that it's like the update like hey i these five investments, but there's not like, Hey, you know, you're really

smart. You've, you know, you put a check into our fund. Like, what do you want to see more of? You know, that trusted relationship is something that you earn, you know, as a VC that you have that when you're the first call before or after a board meeting. And when people come to you with vulnerability, it's a skill. It's also skill from from the CEO side as well as GP side to be able to be active with their LP base without being annoying. It's a very nuanced skill. It's a skill that a lot of great fundraisers have as well. Well, Winter, you mentioned OpenLP. You worked with Beezer at Sapphire.

You worked at Hall Capital with some of the greats and it's very evident in everything that you do for the community and the thoughtfulness that you bring to your position. Of course, thank you Ari for making the connection. Thank you so much for jumping on the podcast and I look forward to continuing the conversation in Salt Lake or New York very soon. Thank you for listening to this week's episode.

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