Investing Billions - E17: Tracy Fong, Albourne Partners $700B+ AUA, on How Endowments Access Emerging Managers

Starting point is 00:00:00 You can meet at least 5 to 10 percent of the funds in that specific category. It gives you enough of an understanding of the market, assuming that's high quality, that that's a good part of the market. So let's say branded, established VC firms, first generation, second generation VC firms. Let's say there are roughly 40 of those 30 in size. If you've met at least 6 to 10, maybe that that'd be a good size. On my end, I have met over 200 crypto VC funds that captures about a little over 40% of the market. And it's given me a lot of wide aperture for some of the more esoteric areas. Tracy Fong, you've had a storied career coming from Citigroup to the Harvard Endowment to now being a partner at Alborn Partners. Welcome to Limited Partner Podcast.

Starting point is 00:00:55 Thanks so much, David. Happy to be here. I'm very happy to have you on. Before we go into your background and career, can you please tell me what Alborn Partners is and what, when the world is an LP consultant? Sure thing. There are a wide variety of LP consultants, some generalists and specialists. Alborn is a specialist advisor around alternatives, and we advise 330 institutional LPs around the world. The vast majority of what we do is the same as the endowment model in investment selection, portfolio construction, and asset allocation advice. On my end, I'm a partner at the firm and I lead our venture capital investment due diligence.

Starting point is 00:01:32 Thank you for starting us off on the right path. We'll unpack it a little bit later, but let's first discuss your storied career spanning 19 years and how that affects your role today. I'm probably one of the few allocators that have had startup experience dating back to the 99 and 2000 and have seen so many cycles in that context as it relates to allocating, whether it's the technology boom and bust, the fixed income and interest rate cycle adjustments

Starting point is 00:01:57 in 04 to 07 through to the Lehman crisis in 09. And ultimately many learnings stemming out of the Harvard Management Company in 2009 and 2010, right off of the back of that global financial crisis. Many, many more beyond that. I mean, we could talk about the Thanksgiving event of 2014 and the energy crisis associated. Like I said, I worked at a couple of startups in 1999 and 2000. First was a benchmark in Sequoia-backed startup, webvan.com. And we know that that has

Starting point is 00:02:26 a storied history. And I think off the back of the Instacart IPO, that'll be an interesting topic, too. Yeah, let's talk a little bit about that. Mark Andreessen has said of companies like Webvan that they were before their time. What are your thoughts on that? And what are your thoughts on Instacart? Absolutely. I think that the dot-com excesses from that 99 bubble, 2000 bubble had driven obviously a significant tech crash and related downturn in the broader market. So at the time, a lot of these companies had a really ambitious rush to go public out of Silicon Valley. I think there were some significant pitfalls as it relates to scaling. One is I think they scaled a complex infrastructure with quite a

Starting point is 00:03:05 bit of capitalization relatively quickly. And two, their go-to-market was relatively off-base. And those are no different from complexities of startup issues today. Yeah, you had a chance to be around the Webvan team. Certainly, a company that raised so much money, it could not be incompetent. What were your views on the team? What were their strengths? What were their weaknesses? The strategic decision making really stood out and it was hard to navigate at the time. To start, one of the key components of that difficult or complex infrastructure model was the decision to build all of the infrastructure from scratch. So they ultimately enlisted a billion dollar contract with Bechtel to build 50 plus million dollar distribution centers around 26 plus cities around the United States.

Starting point is 00:03:51 If you compare that model and enabling technologies of today, it was a much more capital intensive structure. So if you think about that era lacking some of those enabling technologies for online e-commerce, lacking some of the technologies for robotic automation, lacking some of the technology for some of the server and underlying technology infrastructure in the technology stacks today. In contrast today, it's easy to kind of pick at and poke fun of in some cases, some of these early stage companies of that era. But today we have technology companies have the benefit of Amazon AWS and cloud infrastructure. They have the benefit of

Starting point is 00:04:31 other technology stack enabling technologies. They have the benefit of open source or no code or low code to accelerate technology build outs. And I think this was a really interesting model of expensive infrastructure build that was capital intensive. On the go-to-market side, it was targeting the wrong audience and segmentation and had kind of a lack of a real understanding of the pricing model. And I wouldn't pick up the company for that because, again, this was one of the first e-commerce companies in the world really breaking the mold for what e-commerce would really look like. And so they didn't have precedence to build off of. And I think that go-to-market strategy could have been improved meaningfully, as we can see today off the back of much more

Starting point is 00:05:15 effectively built companies like Instacart, founded in 2012, 10 years thereafter. Everybody talks about the rapid cost of starting a company going down exponentially. Same thing is happening in healthcare and biotech. But in regular tech, I think Webvan is kind of the opposite case of what it used to be like to do a startup. In many ways, it's a famous case and the most extreme example. Moving on to Instacart, what did they do right? And what do you think about their timing in terms of going public into this market? Great questions. I think that they did take a lot of the learnings about a web van, become a lot more efficient and not build out some of the underlying infrastructure. But namely, they really have the benefit of these capital market cycles that went on for a lot longer with less dependency on one singular company. So the fact that the bull market run or the post global financial crisis run ran for a decade long,

Starting point is 00:06:11 Instacart really had the benefit of cheaper capital for a longer period of time. So those mistakes are a lot less obvious or can be buried by cheaper capital. I think that's what's driven quite a bit of the success in a lot of cases for a longer period of time by startups that were not necessarily fundamentally the best built. Turns out cheap capital can help you survive for a little longer and take you a lot further. Instacart, even at the early stage, they were seen as they were going to get crushed by Amazon. It was a pretty contrarian bet. And I believe it was Sequoia that wrote a really large check to really bolster the company. I know several close friends of Apoorva, and it really

Starting point is 00:06:51 took that kind of level of visionary leader in order to build the great company. You had a stint at Yahoo roughly three years. This was not early days, but this was still early enough to be interesting. What did you learn while at Yahoo? There's some really interesting learnings there associated with long-term market adoption cycles. I remember competing against Facebook, for example, and calling Facebook advertisements remnant inventory, not necessarily the most attractive in nature. So over the course of the disruption by Google in the form of AdWords and AdSense and then the subsequent disruption by Facebook in the form of real social media advertising

Starting point is 00:07:31 and thereafter mobile advertising. So really interesting to understand how companies need to continue to evolve in an effort to stay relevant. The strategy that Yahoo took to evolve and stay relevant was we all know the context of how to build out an organization in this context. So Yahoo was one of the early innovators

Starting point is 00:07:53 in this buy, build, or partner model when I was there in 04 to 07. So we're very selective in terms of what we built because software engineers were not the largest pool of engineering talent at the time. If you remember off of the back of the tech bust, software engineering wasn't as prominent of a career path. So it was difficult to get a lot of that software engineering talent. That led to the acqui-hire movements many years later, but ultimately we decided not to build

Starting point is 00:08:23 in-house as actively. We did partner on some occasions, but the vast majority of what we did was we bought enabling innovations. So at the time that I was there, my team, the treasury and corporate finance team closed about 30 acquisitions in the three and a half years that I was there. Roughly speaking, $2 billion of transaction value. This is a public company, so this is publicly disclosed, of course, at the time. $2 billion of transaction value in 2005 US dollar terms, not in peak pricing 2021 terms, right? And in that capacity, as Yahoo was navigating around its strategic positioning

Starting point is 00:08:57 as to whether they wanted to be a portal or an entertainment company or the vast array of different types of company advertising, online advertising company, the vast array of options available to Yahoo, I think it didn't have strong footing specific to a specific area. So what happened with these acquisitions, ultimately, we probably could have integrated them a lot more effectively. To be fair to Yahoo at the time, we were one of the earliest corporate venture arms in the industry. And so, of course, strategic acquisitions and strategic integrations were still relatively novel. And there wasn't necessarily a playbook associated with strategic acquisitions and follow on integrations. back and think about some of the takeaways from that web van era through to the Yahoo era,

Starting point is 00:09:46 two different segments in time, two different sectors, two different capitalization models. Web van was private for the most part, going public. And then Yahoo was a slightly more mature public company. What I joined really is to stay adaptive as possible, to create as much productive revenue and gross margin as possible, and to ultimately allocate the capital as strategically as possible in the context of the broader external market environment. And I know this is meant to be kind of a capital allocator podcast, so we can go into some of that decision making, how that technology capital allocation feeds into how LPs should be making capital allocation decisions. This episode is sponsored by Tactic.

Starting point is 00:10:30 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. I think it's important to note, based on a level of sophistication, people look at startups in different ways. Some people, your aunt and your uncle, they think, oh, what a great idea. If only I had that great idea, I would have been

Starting point is 00:11:16 Mark Zuckerberg. The next level is kind of the execution, the hard work, and all that. Then the third level, the level that I think only really VCs think about is the market dynamics, the competitive analysis, macro trends, all these things that really affect that most of the time outside of the company's control. So I think very few people are able to see the same picture, which is why people overcorrect and they say, oh, web van failed. There's not going to be any grocery companies that ever works. I think some of the biggest opportunities in VC today are companies that were tried once or twice, but now there's either some new technologies or micro or micro trends that could help that company. But a mutual friend of ours asked me to ask you a question about your experience on the M&A team at Yahoo with the famous Facebook offer. I'll let you

Starting point is 00:12:01 speak more on it, but maybe you could tell me a little bit more about that. It is purported in the press that Yahoo offered a billion dollars to acquire Facebook. It's purported at the time that I worked at Yahoo. In that context, it was a really interesting set of competitors that we still considered competitively, not necessarily in the context of M&A, because this is all purported, of course. Competitively, there was increasingly more social media advertising inventory in the market, and it was an area that we felt we needed to pursue over time. Just as you said, market dynamics and how innovative market innovations need to be pursued by these underlying companies. So as Yahoo observed some of this opportunity set to continue to expand into this area, perhaps if a billion dollar were the price tag, it was underpriced relative to the total addressable market over time. So perhaps it underpriced the value of Facebook ads and social media ads as just remnant inventory at the time.

Starting point is 00:13:03 It didn't have the equivalent of multiple expansion or pricing power over time. It didn't take into account the opportunity for it to continue to grow in volume. So price is a first and value at first instance, and then volume as a second instance. And then perhaps it didn't take into account the global nature of the underlying consumer that

Starting point is 00:13:23 would move toward social media firsthand. And perhaps it didn't take into account the global nature of the underlying consumer that would move towards social media firsthand. And perhaps it didn't take into account the drive for what mobile might look like over time. To be fair, Facebook didn't perfect mobile going into its IPO offering. So a lot of those predictions needed to take place in an effort to appropriately price a bid on that. So what would the price have been to take Facebook off the table? I don't know. Do you have any guesses, David? I would guess probably about double that, or maybe some other structure. The way that I look at this rumored acquisition is that a offer and a calculation, a model is only as good as the assumptions implicit in that model.

Starting point is 00:14:02 A lot of MBAs, I'm an MBA, I'm a self-hating MBA, they'll focus on the model, but a human being made that model. So I think it's really important to think about from a first principle standpoint, what you put in that model. I think for something so esoteric or so ahead of its time, like Facebook, I think what went into that model was more important than the sensitivity analysis around that model. I had a very cool conversation. I got to meet Roger McNamee of Elevation Partners, who I believe now is retired roughly about a decade ago, 2012, 2013 time period. And I went into the office and he sat me down where he sat Mark Zuckerberg and where he convinced him not to sell Facebook and that whole debacle. That, of course, is publicly

Starting point is 00:14:41 known. Well, what's really neat about that is the adaptive and dynamic nature of the Valley, right? So right subsequent to that general era, Google acquired YouTube for $1.6 billion. Fast forward to the acquisition of WhatsApp for $19 billion and a landmark acquisition for Instagram as well. So I think many of these Silicon Valley firms learned how to more maybe appropriately price and size the market and price these acquisitions as a consequence to that. And they're obviously learnings too, as it relates to venture capital, in terms of pricing these long term total addressable markets and pricing, you know, ultimately what the M&A markets would be willing to pay, or just as you said, the IPO markets are willing to bear. There's a couple of different things that are very interesting there. First of all, Silicon Valley, there's a game theory aspect to it.

Starting point is 00:15:30 If you look at Mark Zuckerberg's bookshelf, which I have not, I bet it has innovators dilemma. Google famously had the team that tried to come up with ideas of how to kill it. I think it's important from an adaptive standpoint. Also, Silicon Valley is a dynamic history that is not yet written. One great example of it is the return of Microsoft, not only from the enterprise side, but also with its investment in open AI that many people believe will have far-ranging consequences for many years. Recently, I watched our sister podcast with Eric Tornberg and Sam Lesson. He talked about a contrarian thesis that the next decade, most of the big companies will remain large and there is the continued amalgamation of resources

Starting point is 00:16:11 among the FAANGs and the FAANG+. Let's move on to Harvard Management Company. You next moved on, after short stint at Lehman, you moved on to Harvard Management Company. How was that experience? That was a fantastic experience. As published in our annual reports, at the time the overall institution was managing $35 billion of endowment capital, as well as a small pool of additional capital. So let's call it a $35 billion plus portfolio.

Starting point is 00:16:39 It had been in alternatives for quite some time, both through its nexus of the, you know, some of the growth of the private equity landscape out of Boston, for example, as well as the early endowment activities in venture capital. It had invested in hedge funds and it was also well known, this is public, that it had a large natural resources portfolio. So Timberland in parts of Oceania, Brazil, through to parts of the United States and Eastern Europe. It was a fairly vast, mature, and sophisticated portfolio.

Starting point is 00:17:14 Tell me a little bit about that and how you guys compared and competed against Yale. I would suspect, and this is published too, that Yale invested in venture capital and continued to overinvest in venture capital relative to Harvard a little earlier in the market cycle. So when I wrapped up my tenure at Harvard in 2013, I suspect that Yale was just starting to build its exposure. So roughly speaking, Yale's exposure, I think, to venture capital ballooned to about 17% of its aggregate entity. And that drove a lot of its underlying performance over time. And maybe some of the learnings as it relates to that, because I advise 330 plus institutionals, something we talk about all of the time with our institutional clients, the long-term commitment cycles and ongoing

Starting point is 00:18:01 commitment budgets to asset classes where there is a commitment timeline, et cetera. Some of the academic research indicates that that continues to be really important. Some LPs do tactically allocate across vintage years, depending on the cyclical dynamic around it. But as we all know, within venture capital, innovation can be created at any point in the market cycles. I think Yale, from what I can tell, persisted in those ways. From what I understand, they invested in emerging managers relatively early,

Starting point is 00:18:31 continued to build access into access-constrained managers as appropriate, and got sizable positions into them as the market continued to grow. This is an important concept to me because we continue to advise our institutional LPs for that to be the case. And in fact, just in the last few weeks alone, we've discussed some of these concepts of access-constrained funds. You say access-constrained funds. Some of that

Starting point is 00:18:55 access constrainment has been challenged in the last couple of years. How do you define that? Historically, funds that have been oversubscribed at the point of fundraising launch in some cases. So some funds have six-week fundraise cycles, and those LPs are predetermined, and there's a long wait list of LPs to go. Just as you said, the market has shifted a little bit because of the denominator effect, because of some resistance because of the market pullback of the last two years. Venture hasn't performed as well as it had historically. Those two drivers, the denominator effect meaning less commitment budget available and some perception or weariness related to the market opportunity set, has led to a little more opening into venture capital funds today, which is an exciting

Starting point is 00:19:47 opportunity for LPs that have dry powder to invest in the space today and can get access to these funds that might go back to being access constrained again soon. Much has said about the VC reset and the resetting of the venture market. Little has been written about the LP reset and how this is a good opportunity. One analogous situation happened for myself and my own fund. We had a co-investor around Robinhood in the Sequoia round. And we went to a couple of family offices that, of course, the Holy Grail is investing alongside Sequoia.

Starting point is 00:20:19 And they had been asking me for half a decade. And they said, well, it's COVID. We're not ready to deploy right now. And that kind of logic, the fact that there's always an inverse relationship between hierarchy and opportunity is lost on a lot of LPs. And I think a lot of LPs would benefit from having the courage to act, to quote Warren Buffett, be fearful when others are greedy and greedy when others are fearful. Speaking of funds and a fund of funds, you spent about a year at SFG Asset Advisors. What did you learn at SFG? Maybe just to step back to characterize the range of my experiences and how that SFG single

Starting point is 00:20:57 family office fits. I've worked at corporate and allocating to a $5 to $6 billion fixed income portfolio, plain vanilla and investment grade, etc. But some really good learning fixed income portfolio, plain vanilla investment grade, et cetera. But some really good learnings there around the risk-free rate, et cetera. Worked at Lehman at the Emerging Markets desk in 2009. Worked at an Ivy League endowment, Harvard. And then subsequent to that, worked at SFG, the single family office. Maybe just to contextualize it further, worked at a VC fund of funds

Starting point is 00:21:24 and now works here as an advisor and investment consultant. So with all that context in mind, I think this is kind of revisionist history around what I have learned, I suppose. I did not know that I had learned these things at the time that I was there. And that's a lot of what paints the apprenticeship model of the LP ecosystem. I think you don't actually realize what you're learning in the moment. You could call it the this is water moment for LPs, if you will, David Foster's, Wallace's, this is water. You're in the mix of a vast set of market movements, a vast set of policy decisions. You're in the mix in terms of a vast set of underlying dynamics by underlying managers,

Starting point is 00:22:05 and you don't fully realize it until after the fact in some cases. Looking back, the learnings were substantial. Even though it was less than a year, having an understanding for the way that they had taken the approach of being a hybrid manager, So I think being a hybrid manager was different and new in this era of 2012, 13, et cetera, for which they had a fund to funds book, and then they had a direct set of investments that supported it in an interesting and strategic way. It's somewhat consistent with family office playbooks, but I think that the way that they had done it was different and unique. The other thing that I learned was how to support emerging managers.

Starting point is 00:22:48 The strategic capital and some of the early asks, while I was at Harvard, they had done a handful of GP spinouts, very well known in nature, and got GP stakes in some of those positions. I think the family office style of doing that was an interesting and novel approach to anchoring and seeding emerging managers. The third thing that I learned was effectively the same thing that we've been talking about, an ongoing theme in this market.

Starting point is 00:23:14 How do you size the total addressable market for opportunities as they grow? In this 2013 period, we explored biotech in size. So it was a downtrodden point in the market and not a lot of net new innovations were immediately available. But there were green shoots of new opportunities giving rise in the biotech market. So as that market was evolving, we were relatively early in reinvesting in biotech in an interesting way. And we've obviously seen the biotech boom and some of the bust stemming out of the last 10 years since 2013. So that learning in terms of identifying structural changes in markets such that they can grow over time is a really interesting

Starting point is 00:23:56 and important one as we are here in the venture capital space predicting market growth in a variety of areas. And then that intersects with how LPs should think about not just the cyclical considerations for investing but the structural considerations for investing and how markets can really grow and evolve into much more productive investable opportunities for investment. Looking at the market from a macro perspective and not just individual opportunity by opportunity kind of have a wider aperture or something that's very underestimated. And it makes for emotional based decisions versus rational

Starting point is 00:24:31 and macro themed decisions, anchoring emerging fund managers, what are the main mistakes family offices make when they do this? Lots of potential mistakes, many of which I'm sure I experienced too at the time, I think as a starting point, not having a wide enough aperture of the underlying market and segmentation and codifying each of those markets. After you've heard the 15th storyline from a similar GP, you start to realize how to distinguish and codify where each of the participants participate in the market. So having a wide aperture, that's a lot of the bottom-up approach

Starting point is 00:25:07 to how family offices do investments and select some of these GPs to participate in and ultimately seed. I think the second area of learning is to do very good thematic research. If I were to look back at that thematic research of 2013, I thought it was good, but it probably wasn't excellent. I know that I missed at least a handful of considerations with respect to capitalization of these portfolio companies, biotech portfolio companies, for

Starting point is 00:25:36 example. So doing very good thematic research plays a significant role in getting the market right. So to be fair of my 2013 self and that 2013 set of investment processes, the market has become a lot more social and scaled, and the LP ecosystem has become a lot more mature. So whereas perhaps we would have had 10 or 15 friendlies at the time that we could talk to directly, and five orlies at the time that we could talk to directly and five or six friendly LPs that we could talk to directly that had that context and consideration set, had looked at biotech in earnest. Now, with the vast array of LPs globally that have matured in their opportunity set and

Starting point is 00:26:20 investment composition, there's so many more people to vet ideas with, experts to vet ideas with, and a social platform to build off of. Call it the network effects of the LP ecosystem, if you will. You're mentioning several things that every LP should go for before making their first venture investment. First question, how many managers should somebody meet with before making their first venture investment? Oh, I mean, there's no rule of thumb necessarily. I think within your category of investments, meeting maybe percentage-wise is a good amount. And it really depends on the quality of that exposure too. So if you could, it's hard to know what the unknown unknowns are, right? What you're missing out on. But if you can meet at least 5% to 10% of the funds in that specific category,

Starting point is 00:27:08 it gives you enough of an understanding of the market, assuming that's high quality, that that's a good part of the market. So let's say branded, established VC firms, first generation, second generation VC firms. Let's say there are roughly 40 of those, 30 in size. If you've met at least six to 10, maybe that'd be a good size. On my end, I have met over 200 crypto VC funds. That captures about a little over 40% of the market. And it's given me a lot of wide aperture for some of the more esoteric areas. So maybe a consideration set would be meeting more of the managers, meeting more of the representative capital within that space

Starting point is 00:27:49 for difficult to understand spaces, meeting a wider percentage of those spaces. If you had met 200 biotech, 200 SaaS VCs, if there exists such a thing, what type of learnings would you hope to accomplish there? Great question. So lots of potential learnings, trying to elevate it to a meta level. As I've been saying as a theme throughout this conversation, what is the total addressable market for this opportunity set is a really important aspect of this market. What are the cyclical considerations that drive the market opportunity? And what are the structural shifts taking place? Structural shifts would include what are the regulatory considerations?

Starting point is 00:28:31 What are the enabling technologies? And in the context of enabling technologies, what are the infrastructure tools that need to take place? And what is the incumbent challenge with existing fintech payment and other players that take the place of crypto. One additional area as it relates to crypto, sometimes crypto by certain LPs are compared and contrast to commodities and the commodities markets, as you know. And in that context, there are really interesting meta approaches to evaluating these spaces. So, for example, what is the substitution effect of this underlying technology? And as a result, how can you convert and market something that's a

Starting point is 00:29:10 commodity use case to something that's much more wide and mainstream? So those were some really interesting learnings. What are the required structural and cyclical changes that are required to grow the market in size? then unpack that to decide what is required to then drive institutional capital to capitalize the space. As we know, as the market had grown to an excess of $3 trillion and then compressed to under a trillion dollars, a portion of that market was levered exposure, retail exposure, and levered retail exposure. And so understanding how to unpack those underlying drivers were really important components. Now let's maybe move on to your current role at Alborn. What is your day-to-day role and what is it exactly that you do?

Starting point is 00:29:57 Our corporate mission is to empower investors to be the best investors they can be. And it's been interesting because that jives really well with my own professional mission. My professional mission is to optimize capital flows around the world. Seth Klarman has this quote where he says, markets will never be efficient because they're run by humans. And so there are so many behavioral elements and lack of optimal understanding, lack of research, lack of opacity in markets that prevent some of that path toward optimal capital allocation. And what that translates to from the context of our business model

Starting point is 00:30:35 through to the day-to-day work is our business model is non-discretionary, a service model, retainer model to our LPs that access any of our asset class coverage areas. So I lead venture capital and the mandate is global. Although we have an Asia team that does good work in that capacity, the mandate by stage is early to late stage. We cross over to long short equity funds and mutual funds. In fact, Allborn is one of the largest hedge fund advisors, so we have really good information flow as to how crossover hedge funds, mutual funds, and other late-stage participants in the market

Starting point is 00:31:14 participate in venture capital. So we cover the generalist funds through to sector-focused funds. And the vast majority of our work is dictated by the LP ecosystem and LP interest. So imagine this massive matrix effect is what I like to describe it where across the horizontal axis, you have 330 institutional clients. And then the vertical axis is VC funds. So call it 4,000 plus VC funds that are tenable investment opportunities and sometimes untenable opportunities. One day I could be asked about a crypto VC fund token exposure.

Starting point is 00:31:51 Tomorrow I could be asked about a broad-based project across branded VC funds and how to access them within this market environment. Increasingly, operations of these VC funds come into real play. So imagine the SVB circumstance where SVB failed as a bank and banking partners of a vast range of VC funds. Well, I collaborated with our operations due diligence team in an effort to better understand what was the ultimate fallout of SVB and ultimately what were the circumstances for the cash at these portfolio companies as well as the VCs. You have 330 institutional clients, some of the most sophisticated investors in the world. What are some things that you constantly have to remind them about the venture market? As a starting point in terms of asset allocation, continuing to invest across the cycle is a critical point to employ within a portfolio. Just as we said earlier, innovation takes place in any given market environment and to keep a pulse and exposure

Starting point is 00:32:51 to some of that underlying innovation is important. There have been instances in my career, as I pointed out, where I benefited from being proactive in biotech, like I said, from the family office experience. And in other experiences, I think I was forced to pull out of certain markets as a result. There's several other LLP consultants, of course, the 800-pound gorilla, Cambridge Associates. Why do institutional investors go with you? And what differentiates you in the market? Allborn is non-discretionary in nature. We don't have our own assets under management. We don't have our own outsource CIO pool of capital.

Starting point is 00:33:29 We don't have our own assets under management model with discrete funds to offer to LPs, nor do we have a high net worth business where we're acquiring more assets. And in that capacity, I think we can be friendly, neutral Switzerland, if you will, in that context. And so that often distinguishes us from many of these other institutions. At which point and how should venture capital firms engage LP consultants like Alborne Partners? obviously operating in an ecosystem for which we can be a conduit or a liaison or some intermediary in between the investment decision by an LP and an underlying VC. I think some heuristics and rules of thumb for VCs are firstly, ask the consultant what is the size and scope of their client set and whether they have interest

Starting point is 00:34:26 in the area of investment that the VC is offering. So if it's a pre-seed fund, for example, that might be out of scope by stage. If it were an African VC fund, for example, that might be out of scope for a geographic interest by certain LPs. If it were crypto, for example, there's certain LP consultants that haven't expanded their work around crypto. So there are a lot of gating factors as to why an LP consultant may or may not engage. Size is a big one too. I'd say that generally speaking, slightly larger funds are more applicable to a wider set of LP consultants. I tend to talk to funds that are big enough in size, you know, 50 to 100 plus million dollars in size, depending on how busy I am, I'll tend to talk to funds in excess

Starting point is 00:35:12 of that size. If there were an area of client interest around it, in particular, I put a lot more emphasis on sustainability funds and DE&I funds, because I think there needs to be much more market research surrounding that. And I'd love to support the benefit of society on those dimensions. That's really critical. Obviously, we've spoken about DEI and sustainability in our previous conversations. In terms of these $50 to $100 million funds, presumably they're going out of pockets that are very specialized within institutional investors, these mythical emerging managers pockets. How big of a TAM and how many institutions these mythical emerging managers pockets. How big

Starting point is 00:35:45 of a TAM and how many institutions have these emerging managers pockets and how might emerging managers access those pockets? As you may have seen in some of the statistics, emerging managers are raising far less capital to the tune of a fifth to six or so of the capital year to date projected versus some of the last two, three years of the upmarket fundraising conditions. So it's a really challenged period for emerging managers. And I'd say in terms of the total addressable market, it's a little hard to say. I think that the interest and appetite is there by institutional LPs, but I think there are structural limitations as to why that can't necessarily be the case. There were some public articles published recently that talked a little

Starting point is 00:36:28 bit about how historically venture capital was the access class, meaning you couldn't even get access to some of the highest profile VC funds and fund of funds fulfilled some of that role. So if a fund of funds had long-standing relationships they could be the portal for an LP to access these access-constrained funds. Now, fast forward to today, one of the best use cases for a fund-to- funds is often to enable an LP institution to unlock that structural issue. The structural issue being most of these institutions can't write 10 checks of $2.5 million each or something along those lines to build out a diversified emerging manager portfolio. They can't physically write those checks.

Starting point is 00:37:12 They don't have the operational staff to support 10, 20 plus percentage of checks. I think the monitoring capabilities around these emerging managers is difficult by smaller pools of staff. And then ultimately, it requires an ongoing lens around these frontier areas of innovation and some of the earliest stages of funds, pre-seed and seed funds. So with all that said, one of the wrappers that I've seen evolve over time

Starting point is 00:37:39 is more fund-to-fund capabilities, enabling LPs to graduate from that structural issue. Is that an internal fund-to-funds or backing some of the top VC fund of funds? Good question. So we've seen a small subset of institutional LPs develop their own fund of funds programs. Off of the back of the super angel cycle of 2010 and a supersede cycle of 2010, we saw a handful of high profile LPs build out internal emerging manager fund of funds. I think we've probably reached a little bit of a cap on how many more LPs can do that internally. So as a result, I think the best structural solution for many LPs has been back to

Starting point is 00:38:20 the hearkening of a fund of funds. Let me stick my neck out there and be very contrarian. Fund of funds, according to the people in the know, is a dying industry. In venture capital, it is one of the best applications of the fund of fund models. Venture capital is so idiosyncratic and so access-based that I think for the average investor, the fund of funds makes a lot of sense.

Starting point is 00:38:41 So before we wrap things up, you mentioned DI and sustainability. Both of us are very passionate about this, not only by saying we're passionate about it, but we're putting our hard money as well as time into that space. Tell me a little bit about what you wish people would know more about the space. Absolutely. Just in the case of what we were describing with fund-to-funds, I think that there are some structural limitations around employing more capital around DE&I and sustainability. And I would invite what I'm calling the 2030 challenge around DE&I. I think we should put smart goals and metrics around what we want to accomplish into 2030, just like we're doing with the 2030 challenges within climate, this will be a really critical way to build intergenerational wealth

Starting point is 00:39:25 for those that have been marginalized, whether it's gender diversity or specific minority diversity. I think that could be really important if we can come together as an industry around 20, 30 smart goals and a challenge around that. That's one area that I've been working on pretty actively. And then with respect to sustainability, helping the industry understand the difference between impact drivers promoting positive attributes of a fund versus ESG risk mitigation and consideration sets around that. And having real tangible tools for that impact and ESG measurement and monitoring will create some really interesting outcomes for the future of venture capital, for the future of society, and the future of our LP ecosystem. John Doerr has been a really great thought leader on that space and has entire slides he takes out in person, PowerPoint in person that goes through that. That's really compelling and you could tell he really cares

Starting point is 00:40:19 and is a huge advocate. What would you like the audience, myself, and the ecosystem to know about Aldor and Partners? If you would like to come to us, even as a prospective client, even as just a friendly person in the ecosystem, don't hesitate to reach out as an LP because I'm sure we have some interesting insights to offer. Having that global mix of clients, you know, two-thirds North America,

Starting point is 00:40:43 balanced rest of the world, and having a lot of different mix of clients, you know, two-thirds North America, balanced rest of the world, and having a lot of different types of clients, family offices, endowments, foundations, through to insurance companies, pension funds, and sovereign wealth funds means that we have some real empathy for what each of the different institutional types are going. And that matrix effect, like I said, 330 clients by 4,000 VC funds. We've probably seen a permutation of your issue, your question, whether it's strategic, whether it's operational, et cetera. So I invite you to reach out if you're an institutional LP and be happy to help support your endeavors. Thank you, Tracy. And you've been a great friend to me over the last decade, going back to when I

Starting point is 00:41:23 lived in San Francisco, you've been one of my first advocates and believers in my professional life. So I really appreciate that. And I really appreciate you jumping on the podcast. Same to you, David, excited for what you've built here and look forward to the next decade. Thank you for listening to today's episode. We hope you enjoyed it. Eric and I have a special RFP to the community. Please intro 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 in the heart of the LP introduced. Please introduce the LP to David at 10xcapital10xcapital.com and do not

Starting point is 00:42:09 worry about having us double opt-in. We thank you for your support.

Investing Billions - E17: Tracy Fong, Albourne Partners $700B+ AUA, on How Endowments Access Emerging Managers

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