Investing Billions - E16: Beezer Clarkson on her new $1.4B Emerging Manager Fund with CalSTRS

Episode Date: October 31, 2023

Elizabeth "Beezer" Clarkson, Partner at Sapphire Partners, discusses how their new partnership with CalSTRS will allow them to expand their ability to support the next generation of VC managers – all while continuing to focus on investing in the established. We’re proudly sponsored by Tactyc, visit tactyc.io if you’re ready to level up your venture fund. RECOMMENDED PODCAST:  Every week investor and writer of the popular newsletter The Diff, Byrne Hobart, and co-host Erik Torenberg discuss today’s major inflection points in technology, business, and markets – and help listeners build a diversified portfolio of trends and ideas for the future. Subscribe to “The Riff” with Byrne Hobart and Erik Torenberg: https://link.chtbl.com/theriff The Limited Partner podcast is part of the Turpentine podcast network. Learn more: turpentine.co -- X / Twitter: @Beezer232 (Beezer) @dweisburd (David) -- LINKS: Sapphire Partners: https://contact.sapphireventures.com/sapphire-partners  -- SPONSOR: Tactyc The Limited Partner Podcast is proudly sponsored by Tactyc. Tactyc is the first forecasting and planning platform for venture capital funds. The platform is rapidly increasing efficiency and data-driven workflows and already works with over 300 funds.  It's time that managers build and maintain dynamic portfolio models to guide data-driven decisions without being burdened by spreadsheets. The solution enables portfolio construction in minutes and enables managers to share their construction plans with potential LP investors.  Tactyc also enables managers to analyze probabilistic scenario outcomes on their portfolio companies and advanced reserve optimization techniques.  Check them out at tactyc.io -- Questions or topics you want us to discuss on The Limited Partner podcast? Email us at [e-mail] -- TIMESTAMPS (00:00) Episode Preview (00:57) The Importance of LP Voices and Sapphire’s Partnership with CalSTRS (02:15) Why Investing in Emerging Managers Have Such a Unique Dynamic (04:09) The Role Emerging Managers Play in the Construction of a Compelling Portfolio (06:16) Thousands of Emerging Managers vs Forty Established Funds (07:30) Does Excess Capacity Translate to Adverse Selection? (08:17) “LPs are like Snowflakes and They’re all Different.” (10:49) Common Reasons Why LPs Don’t Re-up (13:48) What Makes for a Great Manager? (16:27) Episode Sponsor: Tactyc (17:34) What Sapphire Looks for When Evaluating a New Manager (19:00) Who Wins: Generalist v. Specialist (21:57) Will Solo GPs be able to Survive in this Market? (24:38) Beezer’s Predictions on Spinouts (26:34) The Bias and Rationale Behind Institutional LPs Desire to Re-up in Existing Managers (28:14) The New CalSTRS Program’s Investment Rubric on Checksize, Fund Size, Return Profile and Audit Requirements (30:37) How LPs Can Bring Value to a Fund (34:31) Why LPs are All Examining Their Portfolios (36:42) Should GPs Focus on DPI or TVPI? (39:01) Why Venture Needs More Innovation (40:19) How LPs Diligence Managers (44:15) The Importance of Transparency within the LP Ecosystem (51:57) What Sapphire Invests In (53:26) Lessons Learned from Previous Downturns

If you're an emerging manager and you launch with Fund 1, historically speaking, going back to 1995 and looking forward, about a 17% graduation rate from a Fund 1 to a Fund 4. But if you take that same data set and say how many Fund 4s have been matriculated onto a Fund 8, you only get slightly higher. You get like 22%. It's been a little while. For those living under a rock or new to the LP world, Beezer is a partner for Sapphire Partners, which is the LP arm of Sapphire. Beezer is also an advisor to investment committee

of Wesleyan University's endowment, a board of director for the NVCA, and the co-founder of the OpenLP movement, which the podcast is a big supporter of. And most importantly, congrats on the new $1.4 billion Emerging Managers Investment Program with CalSTRS. Let's start there. What can you tell us about the program? Sure. Well, first, thank you for having me on and for doing the work that you're doing. As I'm sure we'll get into, there's not as many LP voices out there as I think the world is interested in hearing.

So thank you for bringing them forward. And yes, on the CalSTRS, we're really excited to be able to announce this back in mid-September. Well, the history of the program is that decades ago, CalSTRS started investing in emerging managers. So huge credit to them for being that innovative and forward thinking. And then what we've done is we've taken over the last five vehicles that they've been working with, which amounts to $1.4 billion.

And these are emerging managers of private equity, as well as along with that, is that on the go forward, we'll be focusing with them, and they are the sole LP of this program, on emerging managers and early stage venture capital in the US. So I'm just trying to clarify the differences that historically this program that CalSTRS was running was both private equity and venture, but go forward, we'll just be managing the venture part and other managers they have will be focusing on the private equity and other components. Is emerging managers essentially a different asset class from merge managers? Why or why not? I'm going to call it a different asset class.

That's an interesting question. There's a lot of debate. Venture capital in of itself is its own asset class. But certainly within venture emerging managers, which we use the common definition, which is funds one through three, these are where funds start. And so there can be a much wider array of types of vehicles, types of funds, types of managers. And then we define established starting with vintage four and on. And that's, again, just the common definition. We follow Cambridge on this just to

make life easier. So I wouldn't call it a separate asset class, but it's certainly a different dynamic within venture. What makes it different? For many people, this is their first time. Their fund one can be their first time managing capital that's not theirs, not for everybody, but for many people it is. So that has its own attributes to it. And then what you see is also LPs approach emerging managers differently. And I would say it's very hard to quantify and say what percentage as much as I would like to be able to quantify it. If you all decided to individually invest in a fund, you suddenly become an LP and I

can't capture you dynamically in the denominator. But that said, most of the LPs we work with, they prefer fund fours and on when they're established because people have track records, they have teams that have had a couple vintage cycles to gel, they have experience managing other people's money, and typically the fund sizes have increased. And so for most LPs managing institutional capital, I do think the trend is to wait until funds get to that level before they engage versus coming in earlier. That said, at Sapphire, and this predates this program with CalSTRS, but it's part of why there was such a great serendipity with us, is that we've always believed in the importance of having emerging

managers in your portfolio. So when we launched Sapphire Partners over a decade ago, we looked at the world of venture and said, what are the different components of it, right? And what makes for a compelling portfolio? And we fully believe that emerging managers have a role in it. And you can see it for three main reasons. One is, and I'm quoting Cambridge data here, they perform, right? Past performance, no guarantee of future. Have to caveat this for everybody. But what you see historically is that I think the Cambridge data, let me just peek at it, from 2004 to 2016 said that they had an outperformance in their emerging managers, which is great data to have. And if you just stop to think about it, all of the storied names that we know today, the

funds that like the Sequoias, the indexes, the union squares, they were all originally a first time fund at some point. Right. And so it's not hard to then extend that out to say there had to have been performance in these underlying early vehicles to then become these long standing industry veterans that they are and all that performance. We also think, and this is part of what becomes compelling in their work, is that they bring and all that performance. We also think, and this is part of what becomes compelling in their work, is that they bring a diversity of thought. They can be more recent to the industry. So if there's new technologies being used, new forms of software, they can be coming out of it. They can be coming out of new networks that are just emergent. They could have new ways of thinking. Back in the day, YC was the new kid on the block. I mean, I know it doesn't feel that way now,

but back in the day they were, and that brought a whole new way of approaching the market that people hadn't seen before. So you see all those compelling things. And then from an LP perspective, it's not impossible to obviously to invest in funds, four, five, six, seven, and eight, as if you're an LP that wants to make a new investment

to those vehicles. But it can be a lot harder. Because let's just take an example. If there's a compelling emerging manager, and they've had three vintages in there behind them, it means they have an existing LP base. And if they haven't grown their fund sizes significantly, how does a new LP get in? And if there is room, why would their existings not want to take it? And so you're just playing the odds of trying to get into a much, it could be a much more capital constrained situation. And if you can have patience with a little bit of data on this, there's hundreds of emerging managers, funds one through three that close every year, which means there's thousands in total. But the number of funds,

four, five, six that get closed and raised every year is much smaller. So when we look at the counts in our database, generally speaking, directionally accurate in this 30 to 40 fund, four or five, sixes get raised every year. So your pool of folks that you can then as an LP invest in is much smaller, which on one hand makes the workload more manageable. You only have to meet with 30 managers hypothetically or 50 in a year, which doesn't seem impossible versus trying to meet with hundreds, which is why some people focus on that. But it does mean you've narrowed your selection and so you might not be able to get in. One of the things you're highlighting is that the adverse selection and available fund force. You highlighted two different things. One is you essentially alluded that the only fund force that

really have a lot of space are those that significantly increase the scale or the scope of their strategy, which a lot of times, you know, it could be a yellow or red flag. And the second one you said is that the internal, anytime insiders don't want to take the additional allocation, those funds, probably not a good sign. I would not say if a fund for has tapped out their existing, that's adverse selection. There can be very good reasons why an LP will max out their check and say, there's this common wisdom, that for venture capitalists, your fund size is your strategy. It's also true for LPs, right?

So whatever capital the LPs have to deploy also impacts, could define their strategy in some ways. So it could be an LP can only write a $10 to $15 million check. And that's the full love that you're going to get from that LP. And if you're raising a $500 million fund and previously it was 400, that LP might not be able to size up and that can create room for new LPs. What are the best practices in LP portfolio construction? I'm going to caveat this and say it depends on what the objectives of an LP is. For some it's, and for many it's capital preservation, right? They really don't want to lose capital. Think about it. If you're an endowment of a hospital or a school, losing

your capital is painful, right, to say the least. Not that other LPs want to lose their money, but it can be more of a preservation versus a, let me see if I can take the highest possible risk because they're trying to do something with the capital that shouldn't be too risky. So you can find folks solving for different reasons. I know some family offices, as an example, that care about the fund level return, but also really care about the ability to do directs alongside their managers. And that becomes part of the math that they do on calculating what the return overall of their dollars is. I know some large pension funds that work exactly the same way. And so when they consider what the best overall of their dollars is. I know some large pension funds that work exactly the same way.

And so when they consider what the best return for their portfolio is, it will include the direct opportunity sets as well as the fund level returns. And I'm giving these examples because what you see is that, and I'm quoting one of your past guests here, Chris Duvose, LPs are like snowflakes and they're all different.

And so with the best practice for one just might not be the same for another. And it's not a good or bad. It's just different. And I actually think this is a positive for VCs because part of the journey is to figure out who the best fit for you. These would be the VC and the LP is. And as they mature, there can be different fits. Just going back to your other question, we also see very naturally in the ecosystem as a venture fund matures in the progression from emerging to established, you can see a bit of a development of their LP base. And it might start out with high net worths, friends and families, let's say they're on angel list and raising that way. And then as they mature

as a investor, they can then bring on different types of LPs that need more institutional funds. So you can see rotations or development, depending on the right word, or build out of an LP base as the VC grows up as well. You invest in fund fours, correct? Correct. So our program is established to do both emerging and established. So we embrace all venture. What we do is we look at early stage venture. So there are boundaries in what we invest in,

but we don't say we only do one or the other kind between emerging or established. We do both. So what are some red flags or what are some reasons why you wouldn't re-up from an emerging managers into emerged managers? And on the other side, what are some good and best practices

that more or less make an emerging manager likely to become an emerged manager? There are times when an LP does not follow on because the strategy has evolved, which doesn't make it a bad thing. It just might mean it's outside the scope of the mandate. We've had managers decide for reasons that work for their strategy, they want to get a lot bigger, right? We don't tend to do the billion dollar plus funds. But if an emerging manager becomes established and that's the right fund size for them, that could be great for them. That might just not work for our program.

And you see this, or they might decide to go down a different trend line and invest in an area which they think is productive and they can fundraise around it. But it might not be an area we're looking to add more to our program. One thing I think VCs can think about a bit more, I think it's a little bit not always as transparent as it could be, is that when you're approaching an LP with an established portfolio, it means they have exposure to a whole bunch of kinds of venture and technologies. And it could be they want to add a lot more of some kind. It could be they don't. And so if a manager is going down a path

that is no longer additive to somebody's portfolio or too much of something, that could be reasons why LPs will rotate in or out. There can also be team changes. During the journey of emerging to establish, you see teams coming together and really gelling around who's part of the team. But on the journey of established continuing on, you can see folks retiring, creating succession, bringing new folks on. And it's very hard to bring the data around this, but I do think part of the reason why funds become established, then don't matriculate up the stack, you know, from four to fund to eight or nine or 10 is because of internal team dynamics. I think it's very significant as to why many funds don't, It's just hard to collect the data. What we see in the data is that, here's two quick numbers for you. Between your emerging

manager and your launch with Fund 1, historically speaking, going back to 1995 and looking forward, about a 17% graduation rate from a Fund 1 to a Fund 4. But if you take that same data set and say how many Fund 4s have been matriculated onto a fund eight, you only get slightly higher. You get like 22%. And I'm pulling all of these are all pitch book fund numbers that we've pulled and added to our database. So the point of this is saying it's no guarantee once you hit a certain number of vintages and say, okay, now we're good. Like forever in perpetuity, we can be a fund manager. It means that, you know, LPs are still going to be reassessing. And you yourself as a venture manager are reassessing. We don't talk a lot about in the industry, but there's definitely folks that retire and say, I'm passing the torch. And sometimes that

means funds close down. Back in the day, very famously, lowercase, Chris Saka stepped out and said, I'm done. And then came back with lower carbon. But there's those things that go on, and it's much harder to collect that data for better or for worse. When you look at new managers, you're presumably looking for alpha in managers. What have you found to be sustainable sources of alpha in both emerged and emerging managers? So I'm going to translate this in my head to sort of what makes a great manager. I'm going to define great because again, to my point, LPs can define great in different ways,

same way VCs can. Being someone who is going to have better than average odds of getting multiple overperformance funds, like call it 3X net repeatable fund, which yes, is rare. Let's just say this, like this is not common. I think people think it is, and it's just not. It's very hard to do that fund over fund. But the ones that we have seen do that, I would say they first have sort of extraordinary strategy manager fit, which means the strategy they're investing against is a really

good fit with who they are as individuals and as a collective. And that is harder than it sounds. They're able to then, because of this fit, really understand the market they're playing in and attract the best entrepreneurs for their strategy. They will call this being contrarian and right. I sort of think of this as more around being able to see around corners or being able to read the data point somewhat differently. And it's because of their point of view, their ability to get to market. There can be a number of different ways that folks actualize this. Clearly, they have to pick well, you know, sort of like table stakes. And then they also tend to have a really good sense of who they are as a firm and what they're good at and to lean into that fund over fund, which doesn't mean to say it can't change

and grow and morph a bit, but they're very clear about that. I see those as hallmarks. They also, and this is a bit of the LP side speaking, they understand the business of venture and it's picking is very important, but given your fund size, given this check size you're trying to write, given the valuations, understanding all those moving pieces and putting it together, we've seen some managers do extraordinarily great work

with their entrepreneurs and helping to find new homes for them if they aren't gonna be an outperforming company. But venture fund manager has to understand the exit dynamics. It's very hard to manufacture exits, but when they're available, how they think about that and what they do is compelling because ultimately LPs will look at multitudes of metrics

to assess a manager, but cash returned does ultimately come into play. It can come into play at different times for LPs, but that's one of the things that we see great fund managers able to do is think through exits and when to return capital. And then there's firm management, right? As I said before, team is a really big component to this. And I think a lot of people think on the external, but the internal is also really important. How do you bring up the next generation? How do you transition? How do people step back? When do people stay engaged? These are all really key things to keeping a firm functioning well. This episode is sponsored by Tactic. Every day, over 300 venture capital funds utilize Tactic for portfolio modeling in order to make up-to-the-minute

portfolio construction decisions. Tactic is used for both internal decision-making as well as fundraising, allowing both emerging and established managers to share portfolio data with prospective limited partners. I'm a happy customer of Tactic.io, and I recommend Tactic for both emerging and established managers. Check them out at Tactic.io. T-A-C-T-Y-C.io. Peter, I'm curious if you can comment on what you look for in emerging managers and how prescriptive you are. So Michael Kim is fairly prescriptive in that he has sort of a philosophy on what he thinks is the ideal portfolio construction, maybe the ideal fund

size range. I'm curious if you have similar sort of prescription as to those topics or even just the generalist versus specialist, or what are the kind of the different parameters for which you evaluate emerging managers and what you look to support? So we evaluate all managers the same, emerging and established. And this also goes to the managers that'll be new for the CalSTRS program. We use a simple, but I think I've come to really believe powerful rubric, which is what does it take if you're mostly deploying at Series A to be a 3x net fund? And if you're at seed or pre-seed at 5x net, and it sounds really simple, but it allows you to dive very deeply into all these various attributes that you're picking out. What is the fund size?

What is the check? What is the go-to-market? Who are the people? What is the manager-entrepreneur fit? What is their go-to-market fit with how they're trying to do this? We aren't prescriptive on that you have to be concentrated, you have to not be concentrated. But as you turn one side of the dial, the other side needs to go with it. And it's, you know, what market are you going after? Is it highly competitive? Is it not? What geography are you in? All those components come into play. And so we start with a simple sentence, but it really becomes nuanced underneath. And say more about how you think about sort of specialists versus generalists in terms of, you know, their, you know, notation, of course, specializes in sort of New York geography.

Some specialize on sector. Some specialize on sort of age, you know, perhaps backing younger founders, et cetera. What are the types of specialization you get excited about? And where are you on kind of the generalists? You know, I've been thinking a lot about this. I think it was, was it Carta? It was Carta that came out recently with some return data around this. I think it was, was it Carta? It was Carta that came out recently with some return data around this. I mean, we can stick it in the speaker notes.

I think if you go back historically, people perceived most of the funds to be generalist. And this is, I'm gonna keep biotech out because I think that it's its own specialization. I'm thinking generally of funds. Like when Sequoia first launched or Benchmark first launched, they were thinking of certain kinds of software applications. And as they grew, I would say people probably thought of them as generalists. But if you fast forward to today

and the last few years, given the number of funds in the market, I think you see two dynamics. One, the quote unquote generalist funds have become much larger as a team. And so within that, they have folks that maybe paint a very broad And so within that, they have folks that maybe paint a very broad brush, but I bet they have folks who dive pretty deep into certain verticals. So what is that, a specialist within a generalist? I mean, you see this, right? And then for the seed funds we've seen, or smaller early stage funds, we've seen folks going after target areas. What we have found to be compelling is I'll call it more a point of view than a specialization. And so you talked about notation, right? Nick and back in the day,

Alex with them too, had a very specific view on looking for the next generation of technology leading thinkers coming out of other companies and starting the next generation of firms in the New York region, which sounds highly specialized, but it paints a pretty broad brush. And we could look at other managers like that, anyone you consider sort of sector focused. It allows you to go deep but wide. I think one of the challenges you see historically, and I believe it's still true today, if you pick too tight a sector or too tight a specialization, it doesn't give you as much room to run. I mean, I joke around. Now we think of mobile as everywhere. It used to be wireless, right? And these terms

evolve over time. And AI, we have a lot of AI in our portfolio. It just wasn't called AI as a specialization before. It was just enterprise software being expressed in a certain way with data. So I really think that's what sort of lights us up is understanding what someone's doing and their perspective on it, not saying, oh, we want more people picking folks in green shirts or whatever some very narrow definition is. I remember Nick structuring his pitch and he said, hey, do you think that there will be massive companies coming out of New York over the next decade? If you say yes, OK, do you think that we will be best positioned to find them? If you say yes, then you have to back our fund. So it was a compelling set of axioms.

On that note, over the last five years, we've seen the rise of the solo GP phenomenon where solo GPs, maybe Elad Gil is the best of them and has continued to crush it, but not everyone has. They've raised a lot of money. And I've heard from some LPs that maybe that's over or maybe that's curtailed significantly sort of this solo GP model, taking all the fees for themselves

and raising a lot of money. What are your thoughts there? I think in general, the ecosystem right now, LPs are taking a pause to look at what's gone on and what's been productive and what needs to be true going forward in this market. And I think that impacts all venture funds, not just solo GPs. But I appreciate solo GPs might be getting additional questions.

I would say in my head, I think more about bandwidth, right? Because it's one of the reasons why people add people to their team is because as you build a portfolio, there's companies to manage and there's LPs to talk to and there's new entrepreneurs to find. And then we only get 24 hours in our day. So how do people do that? Regardless if you're solo or not, I think is a question folks are asking, especially in a market like today where existing portfolio companies are looking for help and engagement. So, but from your question, I don't think the solo GP era is over. I think everybody is going back to be looking at how venture worked. I think you're right. I think it was five years ago, the world just felt like up, up and up and a lot of activity,

potentially some bad lessons were learned as far as the world and how it works. This feels to me sort of like venture, traditional venture is back. And I think traditional venture used to be, LPs were much more concerned about solo GPs back in the day for some reasons that I think have just been proven untrue. You know, people talk about concentration risk in one person and it's not untrue. You're obviously concentrating your risk if you're backing a solo GP, But it's also true when you've got a team of folks in another fund, it's not always true that they're all created equal either from a sense of they don't always have the same track records. They don't always contribute the same. There's funds and firms that we work with where you'll have a couple of folks who really seem to be the tip of the spear when it comes to doing all the big deals. But other folks might

not have the quote unquote track record, but they're integral to the operating of the firm. Maybe they're the ones that make all the great hires. Maybe they're the ones that work with the boards and it's important to have all of them in that firm to make the magic happen. So there's also a concentration of risk there too, used as an LPD to spend time with the team to understand it. Is your prediction that there will be significant less spin outs over the next five years than we saw over the past five years, whether it was a solo or a team of a strong firm just realized, hey, we can raise 100 or 50 on our own. Is it more likely that those people will just stay at their firms and we'll have much

more sort of consolidation concentration like maybe we had in the previous era? I have so many thoughts on this. Let me see if I can organize them cohesively. We are seeing a current trend right now of folks spinning out. So I would say it's not done. I think for many reasons it could continue, which is a lot of firms got very large over the last few years, and that might make it tough to feed all the mouths. People have slowed down some of the deals.

That would mean folks on the team might feel that it's easier to start their own firm or join somebody else to get some more time making deals, for lack of a better way or more delicate way of saying it. At the same time, I'm hearing of folks that would like to leave, but their track record hasn't sort of fully gestated. So they're feeling a little uncertain about whether or not they could fundraise. I think we're seeing a push pull. I would say, historically speaking,

a lot of LPs, when I talk to them that say they want to do emerging managers, they really want someone who has eight to 10 years of track record. And you're smiling and nodding because I feel the same way. It is emerging because if someone leaves to do their own fund, there's a whole bunch of learnings around managing your own fund that

they may not have had to do if they were on a team when someone else was doing all of the internal administration and the fundraising. But at the same time, it's not the same list profile as someone who is an angel who's suddenly deciding to do institutional fundraising. But that said, you do see LPs preferencing the spin outs, especially if it's someone they've known and they've worked with. And even if the track record hasn't come through to fruition

and there haven't been exits because there just haven't been that many exits in the last 18 months. So everyone's sitting in that same challenge, but they at least know the quality of the investment decision-making, how they've worked with portfolio companies, and they will work with those managers and underwrite them as a new manager.

We talked offline, you said you want to be with a fund manager from fund one to fund two, fund three, fund four, fund seven. And of course, that's a great thing. But on the other hand, if you do have a GP that has a great track record or a great run of one, two, three funds, I think that's also positive. Why is it that there's such a bias for institutional LPs to be with a manager for a long time? Is that not a bias?

Is there rationale there? There is rationale. There could also be bias. I think you're very astute. So at a high level, when an LP makes a commitment to a manager, the belief or the underwriting is we'll be with them for a long

time. This is true for Sapphire. This is true for the LPs we talk and work with. It's much less likely to be a one and done situation because LPs don't tend to add net new managers to their portfolio frequently. That's one of the things that's different amongst LPs than it is for VCs is when you guys raise a new fund, you're looking for a whole new cast of characters every time. When an LP raises a new fund as a fund of funds, many times they're assuming they're going to go back and re-underwrite a lot of their existing. And that could take up the majority of the new capital. And if you are an LP that has more of an indefinite horizon, more of the endowment foundation type world, you again assume you're going to keep working with the same managers.

So there's not that much room to add new. So when you add someone new, it's a very high bar. And you essentially have to believe they're going to perform as well, if not better than your existings. The other component that comes into play is the teams of the LPs. If you want to go out and meet with hundreds of new managers

and sort of go through the whole emerging manager pool, that's a time intensive, team intensive experience. And a lot of LPs are just not set up that way. If you're an LP that's managing a pool of assets that covers privates, publics, real estate, you know, the whole kit and caboodle bonds, and you have 10 people, like just do the math, that's hard to do. And so you get some just human dynamics involved in this as well. Our listeners will kill me if we don't ask more about the 1.4 billion. So tell me about that strategy. Tell me about the genesis, anything you could share. Well, the genesis came about,

as I said, CalSTRS have been doing emerging managers. We've always believed and had conviction in the power of emerging managers in a portfolio. So when the opportunity came to work with them, it was a very synergistic conversation. So we were very grateful that that worked. And we're planning on, we're using the same rubric we use for everything else. So it's the same thinking of we're going to underwrite series A to a 3X

and C to a 5X. Nothing's changed on that. We are, as I said, planning on deploying, it's hard to be exact on numbers, but we're anticipating 80 to 100 million per year as a sort of run rate. You'd mentioned Michael Kim and other managers, other LPs in your program talk about the consistency of staying in market. And we have constructed our program to try to be consistently in market. The other aspect of the CalSTRS program, and I throw this out there because I just, emerging managers, I think sometimes are still understanding the business.

So I try to be transparent. When we commit to a fund, we will have to have audited financials and quarterly statements and some of this administrative, but it's true. And for many small funds, doing an audit and doing some of this work is just very expensive. And then it might just not be the time to take institutional capital. We probably anticipate somewhere around eight to 12 commitments per year if you're looking at 80 to 100 million. So check sizes ranging from five to 10. I offer that because it also means there are certain fund sizes that work with that, right? I know Michael talked about how they're willing to be 50 to 60% of a fund or 30%, like they go in as a very concentrated basis. We take more of a 10 to 20%. This is not a hard and

fast number, but it does create a bit of a floor or minimum fund size. So I think it's unlikely we'd do a fund under 30 million for the CalSTRS program. Again, never say never. But when you look at those fund sizes, that seems to be the check size that works. And one of the things we like to do with our managers in those early days, much like how some of your other LPs have talked about, is trying to bring other LPs into the mix because we think having multiple LPs on your cap table can be a very healthy thing. So that's part of how we think about sizing our check. It needs to work for the CalSTRS program, but it also needs to work for the GP. What are some other value adds outside of bringing in LPs? What are some other value adds that you've seen in your career that LPs could bring to the table?

We're big believers. And I want to give a shout out to Aydin at Felicis. He, back in the day, said this and it just stuck in my head, which is he thinks everything his firm does should have strategic value, including his LPs. And it doesn't mean to say you have to talk to your LPs every day. In fact, I bet most VCs would prefer not to talk to their LPs every day. But we do believe we should show up with value and to do things like we spend a bunch of time understanding the venture world. How does recycling impact funds? How does secondaries impact funds? What are the dynamics at play in the industry? Where are the LPs heads at? We want to be the person that you can call, regardless if you're an emerging or an established manager, and say, hey, what's going on in the

market? What are you seeing? How are we doing? What do our numbers say? Should we be thinking about more or less reserves? We've done a bunch of work on this kind of things for our managers. Sometimes it's nice to have a third party take a look. We've gone back to some of our managers and said, hey, listen, we looked at your numbers. Do you know your power alley is over here? Like you talk about doing this range of activities, but where you've been most productive is really when you write these kind of checks into this type of company. So we really try to be that sort of added counsel on the side that can work with you and sort of think through how do you become and stay the best manager as possible? And I would say the benefit of being

in this industry for a while is that you can see over the decades of what's worked and what's not worked and bring that kind of wisdom to bear for folks. As one of my managers said to me, like, I need someone who helps me see the forest and the trees. And if you're out there doing that, it means I don't have to do that because I'm trying to find a nice entrepreneur. And when you say, great, bring it on, right? And if you're an established manager, we've also spent time talking to them about what's going on in the ecosystem that can be challenging for them, right? Because the world is always evolving.

And if you're a larger firm with a lot going on, you might not have time to spend time looking at who are the challengers coming up and what's evolving in the ecosystem and how to think about it. And we don't pretend to have all the answers. We're here to be a partner and to ask questions and to say, who are you trying to be as an investor? And how do we help make you the best investor you can be? You've been in tens of funds over decades, and you have kind of a wider aperture than any single one GP, just mathematically. What is the systematic bias that's not talked about that a lot of GPs commit? Oh, what a good question. I think it is hard to manage the dynamic in the industry when there is both the good and the bad, when there's a lot of money to be had or in the money fields to be drying up. And how do you keep your head and stay steady? And just having someone to talk to you about that and ask these exact questions. I think it can vary based on managers, right? It's hard to say here's the one answer, but sometimes it's, we all have blind spots and having someone look, sit down with you and say, here's what I'm trying to do. What are my blind spots can be a very helpful conversation.

I do think, I would say when we all sort of thought we all were going to live on Zoom, that felt unlikely to be a truth. To be honest, I was always a believer that we'd come back into real life. Probably because I'm biased towards wanting to be around truth, to be honest. I was always a believer that we'd come back into real life, probably because I'm biased towards wanting to be around people and to understand how dynamics work. But we're seeing that in spades in the industry right now, and that a lot of folks who thought potentially the world was virtual for forever are now coming back and having a similar sort of lean into being in person. And they're seeing that in their portfolio companies being expressed in new and innovative ways. It doesn't mean to say we're all locked into like going to the office every day for 15 hours, but it has come back around pretty significantly.

When you get together with your LP peers, we mentioned a few of them, you know, Michael Kim, Chris DuBose, but others more broadly, what are the biggest debates that you think you and your peers are having right now? Or the biggest things that you're trying to figure out or wrestle with or that different people have strong views on? Sure. And I would say this is common to my conversations with LPs across the board is really understanding what's going on in their portfolios. And I think venture is particularly challenging when you talk to folks that invest in public or private equity. You know, you might in a private equity portfolio have 10 companies, right? So I work with some LPs

who say, oh yes, after every deal, we talk to the GP and they explain the deal. And I'm like, oh, that is not a venture conversation. Can you imagine? But if you do one major private equity investment per year, that is not a ridiculous ask. But regardless, you're hearing a lot of LPs wanting to understand what's in their portfolio because both it's a question of what's going to come out the other side during this tough period that we're in. Will the companies hold up? This is not just a valuation question. This is a will their products still be relevant in the market? Was it ever relevant? Did they just have enough capital to make it look like it was relevant? Will their portfolios take more hits? And then how do they re-underwrite their managers again? Because a lot of the re-underwriting goes back and says,

oh, well, here's, I'm throwing out some things. Oh, they have this great TVPI, but oh, it turns out it's one company. And it turns out that one company raised five years worth of capital. This is like the doomsday scenario, right? Raised five years of capital in advance and now their product isn't really fitting in the market. But do you really think that value driver is going to perform? And again, that's the doomsday. We hope it's not true. But this question is across the board. There's not a single LP I've talked to in the last six months that isn't having this conversation. It's interesting. You mentioned earlier that LPs are interested in emerging managers who've had some track record. I'm curious, how important is it actually to have exits? Is it binary? You

either have exits or you don't. And for managers who come in and say, it's sort of multiple, but it's on paper, it's hard to trust these paper valuations. And thus, should managers, when they have the opportunity to take money off the table to prove to their, when to give value to distribution of SLPs, but also to prove that, hey, that they have a real track record,

should they be really taking advantage of it? How should they be thinking about that? Oh, such a multifaceted question and answer. Yes, I would say what you see is if you've taken money, when you can, right, to the point that it's not impossible, but it's extremely challenging to manufacture exits. And when they're manufactured, if they're first, you know, companies that aren't really landing it, and you can find them a home, that's one much simpler equation, not simple to do, but simpler equation versus do you take money off the table when you a home, that's one much simpler equation, not simple to do,

but simpler equation versus do you take money off the table when you have a company that's running? It's always within context, right? If you can take 10 or 20% off the table, especially if you're a seed manager or early stage in a smaller vehicle and not distort what the net result for the company will be and put some DPI back in your fund. That can be a very powerful thing to do because DPI doesn't change, right? We're going to see TDPI go up and down significantly. We've already seen it significantly change in the last year, and there could be more significant changes. Who knows, maybe up and to the right, maybe further down, but the DPI just creates a base and says, no, it's landed. I would say one of the

things that we've seen, I always want to caveat the definition, great, but when we look through funds that have had strong performance, they have been smart about how they have exited their investments, not always 100%, but some of it. And what and how to distribute stock is another important part of that conversation. And one that LPs and GPs can have quite actively. But you do see people having that conversation. And I do see LPs asking the question, well, could you and did you? And then interpreting the answer to see what they're comfortable with. And I'm hesitant to say this is always right and this is always wrong because each situation has its own nuance. But I am hearing LPs asking that question. And quite candidly, I'm hearing some LPs that always sort of stood in the corner of ride the winners,

never sell, coming back around and saying, well, maybe there was time to take some of it off. Again, because we're seeing such a value crunch, right, in the public markets, and then wondering what does that mean in the privates? You mentioned we're going back to traditional venture. I'm curious what you think the openness is to sort of alternative models, things like startup studios, more things like accelerators, or things that are somewhat adjacent or off the beaten path of, you know, sort of very traditional venture. I wish there was more appetite. I'm not seeing a ton of it, to be honest. I don't like being negative. I think the venture industry could handle a lot more innovation. In many ways,

it hasn't changed at all, right? If you think about even in a studio or an accelerator, it's still dollars going into a company, dollars coming back to a GP, going back to an LP. That cycle hasn't really changed and probably shouldn't. But I do think some of these innovations, even just looking at how funds get started today, right, with rolling funds, with AngelList, the SPVs, with SPACs, you're seeing a lot of different ways that folks can get in and out of the industry, and that's helpful. So I support all of those activities. But no, I don't see LPs jumping up and down to do it. I think it's just a tough market right now. I think people are worried about what's going on in the companies.

And that just makes, at the end of the day, LPs are humans and they're conservative. I would say, generally speaking, again, because of the preservation of capital. And you can take some bets, but it's risky to bet too much. You see that behavior. When LPs are evaluating emerging manager, or at least you, and you think, hey, there's track record, there's sort of strategy, manager fit, there's references from founders and VCs in the ecosystem, which of those or maybe something else I missed you think is the most important? I love this question because we asked other LPs this and the answer ranges. So apparently there's no one best, which I guess is a good thing. So we like to take in multiple signals, but we at Sapphire are our

own individual thinkers and we'll make our own bets based on how we interpret the signals. But there's certainly LPs that will look at the network someone plays in and says, well, if you have access to this network and be a proprietary or not, if you're given entrance to this and I want exposure to this sector of the world, that can be extraordinarily compelling. I know some LPs that call five GPs, and if those five GPs say good things, they're in. It's certainly true that LPs will talk to other LPs. Some do more, some do less. So I think those are the different signals. Track record does speak highly or loudly. I do think LPs that are sophisticated will also dig into the track record and say, who was it that did this deal? And are they still with the firm? And even if they're not with the firm, are they still investing? GPs that I've seen be consistent

in their performance are also really good at taking this track record and sort of owning it firm wide, if that makes sense. So it's not siloed activity, but how do you take this success and build on it? Is it about working with the entrepreneurs? Is it about lessons learned? Is it about keep whatever it is, different people have different magic sauces for doing it. The best way of saying it's sort of like continued advantage in the market because being a multi fund succeeding fund, right? Multiple 3X nets. It means you have to keep learning and digesting and doing better the next time, which is extraordinarily hard. One of the reference hacks that I like to do is I actually reach out to the underlying portfolio founder and CEO and ask him or her about the story,

the genesis of how you got to know the firm. Oftentimes when you ask within a firm, it's a political process, but when you go directly to the underlying investment, you get to the truth quicker. One question I have on the references, it's well known around VCs that some of the best references in retrospect are former founders that were unruly employees that didn't follow the rules that took risks. Is there a similar dynamic with GPs or do you want the really nice guys and girls that, you know, listen to directions and do, you know, where's the perfect balance there? The perfect balance.

Oh, yeah, it does seem to be a combination, I would say. If I think about the folks that I've seen, I think being an original thinker can sometimes mean you clash with the norm. Otherwise, you wouldn't be original. I think definition of folks that I've seen, I think being an original thinker can sometimes mean you clash with the norm. Otherwise, you wouldn't be original. I think the definition of the word says itself. I do think LPs appreciate what they call VCs who listen. You'll hear LPs saying this, like, oh, they listen. I've had a manager say this to me, and they're doing, I think, a personally great job.

They've had multiple successful funds. They say they ask their LPs questions all the time, and they take the answers that they, a personally great job. They've had multiple successful funds. They say they ask their LPs questions all the time and they take the answers that they think works best for them. Because you will get, if you ask five LPs, probably five different answers. And so I do think it's incumbent upon the GP to then figure out what works for them. The LP is the LP and the GP is the GP, right? Like it's a blindfolded capital the LP commits to. But I guess I'm just saying that you do hear LPs use this as a reference, like, oh, they listen. Again, because it's a partnership. And I'm sure it's the same way if a VC is talking to an entrepreneur and feels like

there's no listening, it feels different. They might be brilliant and do it all great anyway, but you like to at least feel like someone's listening. On that note, I want to segue a little bit to transparency in the LP ecosystem. You've sort of been working on the open LP effort to bring more transparency. And we've seen among venture capitalists that there's been a ton more transparency over the past decade plus. What transparency exactly do you think needs to be brought into the the ecosystem? Because it is a different group of people than VCs with different kinds of incentives and perhaps they tended to be a bit more private because of it. So what do you want to occur and what do you

think might occur? Well, when we started OpenLP, it's so funny to think back. I think it's close to a decade ago now. There were just so few LP voices, right? Like shout out to Chris and his super LP blog that he was doing back in the day. And there was a handful of other folks. But when you went to conferences, there was no LP panel. There was no real discussion. And so when we looked around and we thought, well, this, it just felt so obvious that some LPs would want to engage, but needed a platform and a way of doing it that they felt was sensitive to their needs. Because some are RIA, some have other internal checklists. Let's say you're doing the endowment for a hospital. The focus is on the hospital. The focus is not necessarily on who the person is in the endowment doing this work. And so there's different interests of the organization to have the LP voices heard. And we were sensitive to all that. But at the same time, VCs have a lot of questions. Even in very established venture funds,

it doesn't mean to say every person in the venture fund, pick whatever name brand fund you want to think of, knows who their LPs are and has worked with them. They might see them at the annual meeting once or twice a year, but that doesn't mean to say they know about it because it's just not part of their day-to-day life. So we thought bringing that forward would be very helpful. I find it just amazing now that there are all these different

ways of LPs to engage, which is great. I think it's great. I think there's endless questions. I find myself asking questions of LPs all the time. How do they manage their publics versus privates? What is the role of venture in these portfolios? How much liquidity risk can they really take? How are they looking at markets like this? It's just an evolving answer. The answer they give today is probably going to be very different in some respects than 20 years ago. I was part of some activities where a number of LPs that have endowments and other very longstanding institutions were looking over the track record of venture and saying, what does the return profile look like?

And a lot of it was what you hear talked about, but you have to be consistently in the market because what new David at Vencap, who's on your podcast, you did such an excellent job talking about these power laws. I heard this from multiple LPs because some people backed out right in 2000, 2001, two, because they were tough, tough years. But then they weren't in the market. They didn't have money at work when the next

upside came. And if you were not in the market, 2020, 2022, when all those exits happened, that was detrimental to many people's portfolios. I guess the simple way of saying is the discussion evolves. So I think there's always more to be done. And new LPs come to the table and want to have different conversations. This is something interesting that I've observed interviewing some of the top LPs in the space. A lot of them are not what I would call non-zero-sum thinkers. Another way of saying there's a lot of zero-sum thinking in the space. You, Beezer, are probably on the other spectrum. You have given us introductions and made all these, had been super helpful, reposted us before you even jumped on as a host.

So my question to you, is that a feature or is that a bug? I think it's a positive. Pick whichever now you want to add to it. I think there's no shortage of innovation in this world. And I think there is no cap on the number of companies that can be excellent and wonderful and people that can be involved in them. There's obviously those structural challenges in getting all the dollars into funds and

into companies. So I look at the world like there can be more. And so why not embrace that and try to bring new voices in and celebrate the voices that are there? And I do think a lot of the, especially for folks who want to run, newer folks who want to run firms. And again, I'm sensitive to the spin outs as well as the just sort of angel investor coming out. We think of it in the same breadth. There's no reason why they should know how the fundraising arm works if they weren't responsible for fundraising. I was in a venture

fund in the day. And if you asked me to name the LPs, I would have been like, yeah, they're friends with these people. I had no idea. Right. And so if you want to start your own venture fund, I don't care if you're coming out of Sequoia or somewhere else, you might just not know. And so this information is just helpful. And I'll also say, and maybe this is contrarian, I just don't think if the only competitive advantage of VC has is they know how to do a data room. That's just not the compelling advantage you want to have, right? You want to have them being great pickers and great thinkers of what's happening

in the technology stack. So I think a whole bunch of this information should just be table stakes. It's hard enough to find a company and to manage it and to be part of their journey. The other stuff should just be present. I'm not sure we'll put this on the podcast, but just want to get perspective on it.

Two reputation- Are you going to edit me out if the answers are bad? Maybe if the question is too much or if you don't want to say it publicly, not if it's bad, but basically two reputation ideas I've thought about are one is almost like a rate my investor where founders can talk about their VCs. They used to be VC guide, but that was founders who didn't take the VC money. I'd be curious for founders who did take the VC money. And then also, I wonder if there's something for VCs about LPs that could say, hey, these people don't deploy

and they take up too much of your time, or these people are amazing, you should definitely work with them, or even just sharing LP sort of knowledge, because often people don't know where to start because they're not as public. What do you think about those two ideas? Are they helpful or not helpful?

I think VCs do that, right? Doesn't YC have some great internal something? I'm not sure what technology they use that talks about GPs. And I know a number of our managers, this is not like a negative list. It's a positive list. Like, oh, this is what Eric likes.

This is what David likes and sort of help do this. Because again, for the entrepreneur, I appreciate there is a world of VCs out there. And how do you know who's deploying right now and what check size and it evolves, right? Whatever happened two years ago might not be true today. So I think, I know many of managers we work with keep some sort of, I don't know, body of work around this as a way of saying it. I've seen various activities around LPs in this way. Usually it's around who's actively deploying to emerging managers because I think just the need there feels more critical from a VC LP standpoint. I don't know if there's one ultimate list. I think it's a lot of work to keep it up. It can change so quickly. There used to be some lists that folks could self-identify on,

which I think is always useful. But again, it's just hard to remember and to do, and things can change in a 24-hour basis. Jamie Rode went on the podcast and mentioned that she'd like to have a streamlined, essentially safe-like agreement for emerging managers to minimize the costs of deploying into an emerging manager space. What do you think about that? So ILPA tried to do this back in the day. I'm not sure if it was just for emerging managers.

I think the idea was to do a streamlined LPA in general. And I don't think it got picked up. And I think you'd have to ask the law firms as to why. But I agree with Jamie's point of view, which is the cost of the legal work can be very hard for an emerging manager to handle. And reading the document can feel very opaque and unclear. And a lot of times we'll go back to a GP and say, do you know this is what's in your document? And they'll say no. And I'm like, well, a lawyer translated it for me.

But is this really what you mean? Even as simple as the carry calculation, it's not really clear. Is this net or is this gross? And that's a pretty big difference. So yes, I think having simpler language would be a big plus. As my mentor taught me, never outsource your legal to your lawyers. Always know what your docs say, at least at a higher level. Well, Beezer, you've been an amazing guest and you've been a friend, as I mentioned,

before you even came on the podcast. What would you like people to know about Sapphire? Oh, well, that's a great question. So Sapphire has been the business of investing in early stage venture funds now for a while. And we love it. We are big fans. We are focused on venture. We like to consider ourselves venture experts.

We invest in US, Europe, and Israel. I'd say one of the things that I'm really proud of is that we've assembled a team that cares deeply about the industry and pulls from different sections of the LP world and the GP world. So we have on our team experience in direct investing, secondaries, as well as folks coming from foundations, endowments, and fund to funds.

And we purpose built that because we do want to be that advisor to our GPs and being able to listen and think with multiple ears and eyes we think is important. I also want to say, I know this is a tough portion of time in the industry and tough times are just not fun. So I'm not going to try to pretend like it's fun. It just isn't, but there are really important lessons to be learned. And this is my third downturn. My first downturn was in 2000 and it sucked. I'm not sure I can swear on this podcast, but it sucked. I lost my job. A lot of people I know lost their jobs, funds closed. It was bad, but you understood what the downside of the market looked like,

as well as the up. And it makes, I truly do believe it makes you a better investor. So for everyone who makes it through this time and decides they want to continue doing it on the VC and the LP side, I do think the learnings are incredibly important. What did you learn from 2001, 2008? Well, perseverance, sometimes just showing up every day and doing the hard work in and of itself can be a large determinant of performance and strategy. And that sounds like a low bar, but turns out it is a higher bar than people think. There is a lot of understanding about portfolio. It sounds like it's in the weeds but how you invest your money and how you take money off the chips as well as on was where it was a lesson

I learned very early and it stands in good stead and when the times are good and you can increase your fund size and take on new strategies what does that look like and feel like and what are times when it feels like you can grow a lot but but then how do you manage growth? We don't have time in this podcast, but managing growth internally at funds is very hard. It is a lot harder than it looks on the outside. And going through the ups and the downs teaches you a lot about that. And what is the right fund size for your strategy will also help determine how many people you have on your team. And all those things will go round and round. Well, thanks again. I know Eric and I have been texting.

This has been one of our favorite episodes. Really appreciate you taking the time to jump on the Limited Partner Podcast. Thank you for the invitation. I'm happy to send you names to invite for other people. We would love that. Thank you, Beezer. Thank you.

Thank you for listening to today's episode. We hope you enjoyed it. Eric and I have a special RFP to the community. Please enter us to any family offices, endowments, or foundations that are currently investing into emerging managers. All introductions which result in a podcast will receive a $500 Amazon gift card, as well as a special shout out on the episode. Not to mention, you'll forever hold a special place

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