Investing Billions - E20: James Heath, dara5 on How Family Offices Access Top Venture Funds

Episode Date: November 14, 2023

James Heath, Investment Principal at dara5, sits down with David Weisburd to discuss early stage venture. We’re proudly sponsored by Bidav Insurance Group, visit lux-str.com if you’re ready to level up your insurance plans. 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: @dweisburd (David) -- LinkedIn: James: https://www.linkedin.com/in/jamesheathaca/ David: https://www.linkedin.com/in/dweisburd/  -- LINKS: dara5: https://www.dara5.com/ -- SPONSOR: Bidav Insurance Group The Limited Partner Podcast is proudly sponsored by Bidav Insurace Group. Today's episode is sponsored by Bidav Insurance Group. Bidav Insurance Group is run by my close friend, Amit Bidav, who insures me both personally and at the corporate level. Most people are not aware of the inherent conflicts in insurance, where insurance agents are incentivized to send their clients to the most expensive option. Amit has always been an incredible partner to me and 10X Capital, driving down our fees considerably while providing a premium solution. I am proud to personally endorse Amit and I ask that you consider using Bidav Insurance Group for your next insurance need, whether it be D&O, cyber, or even personal, car, and home insurance. You could email Amit at [e-mail]. -- Questions or topics you want us to discuss on The Limited Partner podcast? Email us at [e-mail] -- TIMESTAMPS (00:00) Episode Preview (01:36) How PwC evaluates venture companies (03:25) Non-consensus learning about VC (04:30) Look for entrepreneurs that are trying to solve a critical problem (06:25) What is dara5? (08:36) How can information provide alpha? (11:01) The importance of data when co-investing (12:32) Warm versus cold intro co-investments and how to implement a double gated process (15:53) Episode Sponsor: Bidav Insurance Group (17:22) Smaller funds and ownership levels (19:06) Build long term relationships with GPs: education and casual conversations (24:13) The changing power structures in fundraising (25:34) The competing dynamics of a challenging market and investor friendly terms (28:16) How family offices should invest in venture (31:19) How to unlock the mean venture IRR of 50% (34:29) Which is a better investment: top decile backed company or an emerging manager? (35:45) Reaching Series B increases likelihood of unicorn status to 24% (37:27) AGM best practices (39:45) The importance of sharing knowledge (41:40) Why only early stage venture is non-zero sum (45:46) What’s actually going to happen in the VC reset (50:21) The emergence of European VC (51:52) Don’t be scared of emerging managers

We've always been a big believer in smaller funds. I know everyone has a bit of a different definition on smaller funds. Ours is between $70 and $250 million, I would say, as a sort of sweet spot. And generally, we're in those funds. We're trying to be anywhere between 5% to 10% of that fund. So we're never a cornerstone investor, but we do want to be probably a top five, top 10 in terms of size. And other LPs that drive towards that sort of ownership do it for various reasons. You know, some people might want to take part of the GP, some people might want to sort of negotiate better

fees and better economics. We do it for the sort of co-investment side of things and making sure that we have a close relationship with the funds that we back. So one of the key things that we look for when we go into a fund is how collaborative they are and how much they do co-invest with their LPs. James, you've been an integral part in the startup ecosystem, reviewing over 3,000 startups a year for over seven years at PwC. And today, you're investing in some of the most cutting-edge managers from pre-seed to Series A with a focus on emerging managers at DARA5. Welcome to the Limited Partner Podcast.

Thank you, David. Yes, brilliant to be here. And yeah, looking forward to cracking right in. Let's start with at PwC. As I mentioned, you evaluated so many startups. What did you do at PwC? And what did you learn there? Something I wanted to do very quickly in my career

was spend time with early stage companies, people who like to take risks, who are dynamic. So I first started that through PwB's Corporate Accelerator, working with companies on sort of a commercial front. And then a little bit later on, in more of a sort of investing capacity and helping companies to do their sort of Series A, Series B financing roles. And so I guess in those sort of capacities, what I was doing was no really different to what a venture capital associate,

venture capital analyst is doing on a day-to-day basis. It's looking at market trends, seeing where the activity is highest, where venture funding is going, and then starting to look at companies on a sort of qualitative and quantitative level. And so that assessment does change depending on what type of stage company you're at. David, I'm sure you're very well versed in this yourself. But on the early stage side, we would often look at things on the qualitative side. It would be much more to do with the people involved, whether those entrepreneurs had been ex-entrepreneurs themselves, whether they had got people within them in the team that really genuinely understood that problem.

Had they come from that background, had they come from that sector and experienced it kind of firsthand. And only when you were kind of, I guess, getting to sort of a series A, series B sort of stage for a funding company, would you be able to look at things on a more of a quantitative stage.

So yes, you'd be looking more into the metrics, the KPIs, the backers of the business, but it is an art. It's definitely an art between that sort of qualitative and quantitative analysis. And I don't think anyone's necessarily written the perfect formula on it just yet. Well, you might have not written the perfect one, but I'm sure you got a lot of learnings. Let's double click on that. What are some non-consensus things that you learned at the early stage?

That's a good one. So I think one of the things that I liked to get under the skin of, and it definitely took a few conversations, and a while to feel comfortable in asking is, why the founder is doing the business it is doing? And the answer that I liked to see the most was that they had experienced this problem firsthand. I think there's definitely been probably too many companies founded over the last three, four, five years because it was seen as a bit of an exciting, easy thing to do. Capital was readily available.

People were ready to jump ship into a startup. And so I don't think too many people thought about the longer term reasons why they wanted to do that startup. And so one of the things that was... It took a bit of time to learn how to identify the people who are doing it because they like to do it and the people who they want to do it. But you want to find those people who have those obsessions, who day in, day out are thinking about this. They're the people that are motivated, that you can trust in. You mentioned obsession. The way that I like to put it is I look for entrepreneurs

that can't opt out of starting a company versus opt in. Too many people, especially in bull markets, you have the same thing in other industries like crypto. They come in just to make money. The reason you really need to be obsessed with opportunity and with the problem is for two reasons. One is the opportunity cost, there's always going to be a new shiny object and like a dog chasing the next car, you're going to end up chasing the next car in the next full way. How many of these crypto investors have now become AI investors? How many of these crypto

entrepreneurs have become AI entrepreneurs? And that is not a recipe for success. The second aspect is having this obsession, having this non-financial incentive in order to solve a problem helps you get through the dark times. Every entrepreneur goes through dark times, whether it's Elon Musk or whether it's a first-time entrepreneur doing a pre-seed opportunity.

And having that extra hump or extra motivation to solve a problem is really critical for the long-term success of the startup. I couldn't agree more. Too many times people see the entry and exit point of a business and just assume that it's a kind of a linear road in between those two points. And it's totally not. It's up and down. And even people like Elon are feeling that. But they're the people who don't give up and they're the people who people aspire towards the most because they're just relentless in what they do. I think Elon's certainly an interesting and extreme example. I think every startup, every great startup dies at least three times, probably at least five times before it succeeds. By definition, a great startup is one that is going in a non-consensus direction in full tilt.

And anytime you're running 100 miles per hour against the grain and against the wind, you're going to have a lot of friction. So tell me a little bit about DARA5. Yeah, so I joined DARA 5 about two years ago, actually. So the Dara 5 was set up about four years ago, and it came from a next generation family who wanted to invest into the venture capital and private equity worlds, but wanted to be doing it alongside other families from a similar demographic. Fast forward to today, the setup is very much a multifamily office, but very much focused on next generation families

and individuals and coming together to invest into private equity and venture capital, largely venture capital. So about 75% of what we do is in the venture capital world. And that's focused very much on a split thesis between investing in funds and in companies. So we look to try and invest into earlier stage funds, later stage companies, and try and a little sort of mission statement, which we can definitely double down into is to

try and invest into the private markets with a public market level of information. What do you mean by that? So public markets, everyone has a much fairer playing field because there is financial information readily available or much more frequently available. In the private markets, it's a lot more tough to come across this information. And so it's generally in the hands of the agents, the venture capitalists who are backing these companies. And so what you can do

as a fund of funds or someone who invests into these funds as an LP is able to get this information. So if you're getting this information across 15, 10, maybe 15, maybe even more funds, and they've got 20, 30, maybe 50 underlying companies, all of a sudden, you're getting that financial information on 500, maybe 1000 companies, private markets. And so if your selection on a funds level is at the top tier, the underlying assessment of that is that you will have top tier private market companies sitting underneath that. And so what you can get to in a period of time is having a private level, private level companies with a public market level of information in the best companies that exist. What is information that you're getting that is providing you alpha as an LP?

Oh, I love that. So it's, I think one of the things to kind of take a step back that has always been challenging is the structure of information. So, you know, the things to kind of take a step back that has always been challenging is the structure of information. So there's no kind of one way of doing things. There's no one way of necessarily valuing a business or assessing a business in the private world. And so that does make it complex to keep this information together in a structured form

where you can analyze it in one way. But quite often, what we want to be seeing from the LP, from the underlying GPs that we're investing in, is a degree of information that allows us to analyze businesses together. So yes, that can be financial information like the revenue growth, the margins that that business is doing, obviously, depending on the sector. There's KPIs that you want to be assessing too, revenue per employee, employee growth. I think the most important thing is to be proactive with it all.

So you're able to effectively make a bit of a thesis assessment yourself and not rely completely on the GPs. I think having an informed opinion as an LP certainly can't hurt. How have you utilized data from your general market research in order to make better decisions? That's a tough one. It's something that we are continually learning about. I think that the one thing that I am trying to get it to in a position is be able to automate as much as that's possible.

So whether it is requesting data from gps in a certain format whether it is trying to create models and some sort of technology in-house to be able to automate the collection of lp reports that you get on a quarterly on a monthly basis so that you can spend time making decisions and spend time with perhaps the founders and the GPs more. We're very much in a people business at the end of the day and spend time talking to the individuals that are involved because I think they're there, especially in the early stages where you make your decisions. You don't make your decisions purely on numbers and what you're telling in a spreadsheet. Yes yes, they inform you. And the more data that

we get, the more informed we can be. Can you give us a couple examples of some use cases and how you use data to make better decisions? Okay, so today, so the one place I would point towards would be the way that we assess co-investments. So 40%-ish of the dollars that we're looking to deploy is into the co-investment world. And so we quickly need a way of assessing these companies when you're looking at sort of 300, 400 companies at a time. So we will ask for information on those companies that we can put into a structured format

and metrics around the revenue growth of the business, what their sort of average contracts look like, the metrics, the margins involved in those companies, the amount of employees that they have. And then we can make some sort of back of the cigarette packet calculations around sort of revenue per employee. These allow us to see how those are updating sort of on a quarterly by quarterly basis.

Having sort of close relationships with GPs allows us to be able to get that sort of on a quarterly by quarterly basis. Having sort of close relationships with GPs allows us to be able to get that sort of level of information. I think it would be a little bit different if we were, you know, 250k check in a $200 million fund. Having a sort of close relationship with these GPs allows you to get this information in a format that you want so that you can see which companies are growing most quickly and which companies that you should be tracking ahead of time so that if co-investment opportunities come up, you're ready to sort of pull the plug straight away.

I do want to get into your tech size. But first, I have a really great co-investment for you, James. It's a great entrepreneur. It's a hot company. It's amazing. It's the best portfolio company I've ever seen. How do you evaluate that?

How many times a week do you hear that? How many times a week do you hear that? I hear that one a lot and it's definitely coming around more at the moment. I think it's a real challenging one, the co-investment world, because you've got a kind of buy-sell side conflict, right? On one point, a GP really wants this business to do very, very well and has to believe in that company. But on the other side of things, if they don't sell it well enough to its co-investors, whether that's other GPs or it's LPs, that company isn't going to raise

the money that it needs to take it to the next level. So there's a bit of a conflict, I think, of interest. And you definitely have to make sure that you're working with partners that you're able to trust and partners that you can believe in. And that's why it's important to make your own assessment of these companies as well. I think when you get something like that through the door, if I haven't been able to see it proactively, then it is challenging to do in a short space of time. I do want to be able to have made my own assessment on that company. And that definitely comes from some of the ways that we collect data and the regular touch points that we're getting with managers.

So if someone random called me up or messaged me on LinkedIn saying, what you said just there, I'd be pretty scared. And I would be... The bar to be assessing that company would certainly be at the highest it could be. One of the guests that I think had the most interesting and also the most experienced guests in this space, Roland Reynolds from Industry. He's been investing since 2006.

And he uses a couple of really interesting strategies. One is he uses what I call a double gated process, which means in order for him to even look at investment, it has to be one of his GPs to your point, you don't take cold, cold inbounds necessarily. The second aspect of that is he, he likes to pick the top 10% of his GPs. So if he has, in his case, 4,000 companies, he's only picking out of 400 companies. And then he basically picks from that. That's a good way to take away the error from co-investing.

The other aspect, and this goes back to quarterly reports and having a relationship with GPs, which we're going to go into shortly, is that he's talking to these GPs months and months and years, sometimes before a round is happening. If you look at some of the top companies in somebody's portfolio, for example,

we have a company Maximus that is absolutely crushing it. I've been communicating that to LPs on a quarterly basis. I think that's important. I think having that relationship is really critical. And if you're playing defense, if you're being reactive to co-invest, you're going to be almost by definition

adversely selected. I couldn't agree more. I mean, I'm probably one of the younger guests that you had. And so I'm learning from these people all the time. It's great to be involved with it. And it's great to see the sort of level of guests that you're getting on the podcast here. And I couldn't agree more. I think I don't like to agree with everything when a discussion is being made. I'll definitely try and sort of contradict you at some point today. But with that point, that's the sort of aspiration that I want to get our operations to, is that we've got that level of number of companies underlying, and we're able to select the best ones.

That's that sort of public market level of number of companies underlying and we're able to select the best ones. That's that sort of public market level of information, investing in private markets. It sounds like they're there already, which is a fantastic place to be. Today's episode is sponsored by Badaw Insurance Group. Badaw Insurance Group is run by my close friend, Amit Badaw, who insures me both personally and at the corporate level. Most people are not aware of the inherent conflicts in insurance where insurance agents are incentivized to send their clients to the most expensive option. Amit has always been an incredible partner to me in 10X Capital, driving down our fees considerably while providing a premium solution.

I am proud to personally endorse Amit and I ask that you consider using Badov Insurance Group for your next insurance need, whether it be DNO, cyber, or even personal car and home insurance. You could email Amit at amit at luxstr.com. That's A-H-M-E-T at L-U-X hyphen S-T-R dot com. Thank you. I was talking to one of the top hedge fund managers in the world, and he privately told me that he had been around for many decades and public markets investing had gotten much less interesting since the fair disclosure rules. So as soon as everybody had to disclose the same amount of information to everybody, he basically, you know, was alluding to is the alpha in the private markets, the information asymmetry

and lack of information dissemination that leads to alpha in the private markets. I promised to talk about check size because I think that's one of the most differentiating things that you do. Talk about your check size strategy and why that's a critical part of your overall LP strategy. Yeah, absolutely. So we've always been a big believer in smaller funds. I know everyone has a bit of a different definition on smaller funds. Ours is between $70 and $250 million, I would say as a sort of sweet spot. And generally, we're in those funds, we're trying to be anywhere between 5% to 10% of that fund. So we're never a cornerstone investor, but we do want to be probably a top 5, top 10 in terms of size. And other LPs that drive towards that sort of ownership do it for various reasons. Some people might want to take part of the GP,

some people might want to negotiate better fees and better economics. We do it for the sort of co-investment side of things and making sure that we have a close relationship with the funds that we back. So, you know, one of the key things that we look for when we go into a fund is how collaborative they are and how much they do co-invest with their LPs. Is it something that they have done? Do they have a process in place to do that?

And how willing to share they are in the kind of co-investing world? Because co-investing done right is a way of unlocking more of the top forming returns for better economics. And so as an LP who is keen on doing co-invest, executed right,

it can multiply your strategy to make it perform even better than just doing the LP side of things. Let's talk about the life cycle. Let's take it really granular. Let's say you invest it in my latest fund. Congrats. It's highly oversubscribed.

Congrats, James. So you're an LP. How do you build a relationship with a GP? What's the best practice? Yeah, I love that question. I haven't actually been asked it too many times before with prospective GPs. And maybe they should have done

because it would have prepared me a little bit more for that answer. But I think I talked about this on LinkedIn a week or so ago. Too many GPs only talk to you when they are at a critical moment in their fundraising journey. And so fundraising is a long-term game, whether you're a founder or whether you're a GP, but particularly on the GP LP sides, because your fund is open for a year and you know in two or three years time that you're going to be fundraising again. So really, those touch points should be coming at not just the times where you need people the most.

But I think the people that have done particularly well in this over the last few years have been people that have understood what I want to get out of a GPLP relationship and ask the questions as opposed to kind of like almost dictating the answers. And so what do I want to get out of GPs? Well, one of the key things I want to be doing is learning. I want to be educated about what you're specializing in and why the sector is so exciting. So, you know, I've been speaking to a fair few space funds over the last couple of months because space is an area that, you know, we're keen on exploring in the future. And this is an area that I don't have that much background in. I don't have any sort of large level of information coming to me prior to speaking to these GPs. And so

yeah, that educational piece is important. Having casual conversations is amazing. Conversations without an agenda. Seeing people in person is obviously very important if you can get those touch points. And just understanding, like, if you are in the same sort of category as each other, you don't have to be perfectly right for each other on day one. But are you within a sort of,

are you within the parameters that you might one day, you know, right for each other on day one. But are you within a sort of, are you within the parameters that you might one day, you know, write for each other? And if you are, then they're the people and they're the conversations that you need to be double bounding on and speaking to as casually,

but as often as you can and making sure that those touch points aren't, you know, overly exertion on the LP that you're speaking to, but you remember at the end of the day. So much great stuff to unpack there. A couple of things and a lot of credit goes to my guests. I had Raja from Churchill, which is subsidiary of TI8Graph,

one of the top investors in the entire space. And he has a texting relationship, similarly to Roland as well. They have a texting relationship with their top GPs. And the way that I would frame it is it truly is a marriage. So be careful who you're marrying in both in a traditional marriage

and also in GPLP world, because unlike the typical US marriage, which is seven years, the typical GPLP marriage is actually 14 years if you're at the pre-seed scene, that's assuming just one vintage. You really have to have this high level of alignment, whether it's in terms of values, in terms of morality, in terms of a view on the world. For example, we don't accept LPs that are really concerned about paying us, you know,

carry on the upside. I return 100x and they're saying, why did you take 20, 25x? That's not an LP that I'm interested in, period. It's just not a way that I want to live the world. No judgment to them. That's just not how I align. That's not how I think. That's not how I invest. I have, I won't say a family office. I'm an ultra high net worth. And anytime I get a deal from somebody that I'm not very close to that has no economics, I almost immediately say no. If somebody sends me a deal through a reputable source, and they have some carry, I'm like, okay, good, I could actually dig in. There is no free lunch in this world. And you do you do get what you pay for. The other aspect of that is basically

the cadence and how you interact with somebody. As you said, there's a famous book, Build Your Well Before It's Open. It's not a relationship if you only go to somebody when you need them. You have to actually have skin in the game. And the reality of it is, there's only so many actual relationships you could have in your life.

You have to look at it as a portfolio. If you are investing in me, James, and I'm investing in you, that is one of my 20 to 30 portfolio of relationships. And I'm going to go all in there. There's no hack around that. There's no way to build a portfolio just in time. There's no way to come to somebody and say, write me a $20 million check. Just trust me. I'm a really good guy. I'm a really good girl. You have to build that over time with trust. And a lot of times with smaller checks, followed by medium sized checks, followed by larger checks, and there's no hack there. I would implore that people really look at it as a portfolio and as investment and treat their LPs the way that they want to be treated by them, and vice versa as well. Do you think the size of that free lunch

has changed over the last 12 months? The carry, the economics and all that sort of world in GP to GP, has that changed much? I think that's a great question. At TEDx, we've done multi-billion dollar deals in terms of our SPAC franchise and our public franchise. And one thing that you know, if you've done those kind of deals, and all credit goes to the rest of my team, I'm on the venture side. But I've been involved enough to understand one very important truism in the business world. And that is that power structures change very quickly. And how you treat somebody when you have the upper hand is how they're going to treat you when they have the upper hand. So yes, there might be small fluctuations where suddenly VCs have the upper hand and now they're basically abusing or taking advantage of their LPs.

But as we saw in this last market cycle, it's turned around. So I think smart VCs are able to understand that and are able to take a long-term approach to it. And things have definitely gone out of hand. And the same thing happens on the VC side with entrepreneurs. It really is about building a long term relationship. Can you time a market in a way that short term? It makes sense. Yes. But that's not something that I advise myself. So speaking about market is now a good good time right now? I think emerging managers are down by 75% to 80% in terms of investment this year. Is now really a good time to invest? Are we still early to be investing in the space?

This is probably something that I think about more days than not at the moment. It's a very weird time in venture because on one hand, funds are finding it more challenging than they have done for the last decade to raise a fund. And that's a reflection both across emerging and established managers and in the data of how many funds will actually end up getting funded this year. investor-friendly, very increasingly investor-friendly times where funds are able to make decisions at a better or a slower rate. So your hope there is that they will make better decisions. There is an increasing demand from founders

and businesses for their capital as the supply reduces. So on a simple economic perspective, more demand, less supply, you should be getting a higher quality output from that. So I think for the people that are in the market right now, they're probably licking their lips and they're probably probably pretty happy with where they are and where they're going to deploy over the next couple of years. It's obviously tough for LPs who have probably blown their budgets

in the last few years and over allocated because they didn't want to lose the access that they've got. Venture is very much an access class over an asset class. And so there's been a lot of LPs in the last few years who have been very scared to lose that access and spent from future budgets. And so now they're kind of in a position where the budget kind of needs to catch up with the spending.

You've obviously got that kind of liquidity side of things as well, where people haven't necessarily got the liquidity that they wanted out of some of their private market deals in the last few years. And so their private market position looks quite heavy on paper. So I still believe that 23 to 25 are fantastic years to be investing, but got to be investing sensibly as a GP. And you've got to obviously be able to have the capital available to allocate as an LP, which unfortunately, not everyone does right now for various reasons.

You mentioned deploying capital as an LP. Institutions, although they have gotten overweighted, are more disciplined than traditionally a single family office, multifamily office. How do you advise your families that you help invest? How do you advise them to deploy and venture? What's the best practice on a typical market cycle? The beauty and sometimes the frustration in the family office world is that ultimately, people do make the decision for themselves and they can be impulsive. That can be their downfall, but it can also be the way that they win as well. There's definitely no one size fits all in this world. And there's definitely no one size fits all when it comes to venture.

I think in the venture world, if you're doing it yourself, you need to be investing in things that you understand or certainly in sectors that you have experience in. If you're doing it on behalf of someone else or you're doing it with others, then that experience doesn't necessarily have to be there. Generally, if you're going into earlier stage companies or earlier stage positions, I would always want to be doing that through a fund manager. There's such a large volume of qualitative information you have to analyze there. But unless you are really bugged into how a person works or a particular sector, you're not going to do that right on your own. I spoke to a company today who, we've spoken, I think, three times now, they're at the seed stage. This is the third time they've pivoted their model. It's working. Now they are getting paid customers. The growth that they're experiencing month to month for the

last months is finally there. This is the third time they've pivoted that model. That happens so much in early stage venture that i i would always prefer trusting in people who live and breathe the early stage no people know their sector very very well and then when it comes to a bit more of a quantitative assessment where you have that metric those metrics and that data maybe perhaps at a i would put it around maybe a late a, early series B. That's where you can start to be investing in the venture world a little bit more like a public market investor. So I think too many people in the sort of family office, multifamily office world in the last few years,

just backed all the crazy fun ideas at early stages and didn't necessarily do it with a thesis and probably got a fair few crypto businesses and maybe a few AI companies in their portfolio now that they're probably not too sure what to do with. Yeah, I think that's interesting. The best analogy I've heard for fund managers is, James, me and you are going to be partners. You get 80%, I get 20%. Let's do business together. I'll do all the work. But I think there's a lot of wisdom in picking managers. If you look at

venture capital, it's power law driven, meaning it's basically binary. The best investments at Jason Calacanis on he turned $25,000 into $100 million. 4000x return on Uber. Now that's exceptionally unlikely, but does happen. And there's been many 1000x plus returns, or the median return in venture is roughly 10%, 9 to 10% is what people have told me. So if you just kind of do it on the whims, and you don't have alpha, you don't have access, as you mentioned in venture, you're going to likely get a 9 to 10%. If you do it systematically, if you do it intelligently, the mean in venture is 50%, roughly 45 to 50%. There's two different data sets I've really looked at. So you either get 10% and get 100%,

or you get 45 to 50%, pay 20%, maybe pay 25% for premium manager, and you pay on the profit. It's a kind of no brainer to use fund managers to access venture specifically. We could argue on the public markets, we could argue on index funds and all of that. But that is not the purpose of this podcast. The purpose of this podcast is the discussing things like co-invest. And I want to double down on that because I think you do have one of the most interesting programs. So what is an ideal co-invest? You talk about, you know, you want to go with your managers, you talk about wanting to, but what are some signals? Are you ever using signals? How much of it is Sequoia is doing a series A, they're investing

for the first time, I'm interested, versus this is a really interesting strategy. Tell me about that and tell me with as much detail and granularity as you can. Yeah, absolutely. So the data doesn't lie. If you follow the big players more often than not, you are going to perform well. I spoke to a business last week, their business called SignalRank, a very, very interesting company. They do the pro rata rights for GPs

who are unable to do them themselves. And they have a sort of economic structure that looks similar to a company doing a fund, doing a co-invest together. They've got a very interesting data set together that shows a top 100 seed fund has roughly about a 2% chance of hitting a unicorn. But if that business hits a series B, that jumps from 2% all the way to 24%. So there's no denying that if I'm a co-investor with one of my early stage funds and a Sequoia or an Accel comes in to do

a Series B, I'm definitely going to be interested in that company because it's got a one in four roughly chance of becoming a unicorn, which is pretty good, like thrilling strike rate. Now, that's one side of things. The other side of things is doing things that you'd have a genuine interest in. You've perhaps met the founders at one of the AGMs of your funds, and you've been able to strike up a pretty good relationship a little bit over time. I'd say the first piece that we just talked about there is kind of like short-term co-investing. Long-term co-investing is where you're able to kind of make a bit more of your own thesis on things. You're perhaps almost acting a little bit more like a growth stage VC yourself. And you'll be able to take things on a kind of

more macro level of, okay, understand the movements in that market, taking your price and the number of customers that you could get, hopefully understand the market that you're going for. Do I see a decent exit out of this? Is it an attractive exit in, say, three to five years? If it's a Series C, Series D company, if the answer to those things are yes, then I'm going to be getting pretty excited about it. I think that you shouldn't necessarily always trust others

to follow your signals. But I think it's kind of a balance between the two. I'm going to put words in your mouth. Would you say that a Series A backed by Sequoia is more risk adjusted or a better deal than just investing in Emerging Manager? Is the co-invest for a high signal deal essentially more valuable than the manager investment itself from a purely financial standpoint so would i prefer to invest in a secure back series a let's just say like a three million ticket or would i rather put three million into like a

50 million dollar emerging manager or 300 000 to 10 emerging managers just that's very different that's right i i would rather do the 300k into 10 for sure if it was one on one i think i'd still rather the manager um the sequoia deal yes it's very attractive it's a one in four chance but um the big fund returners are going to be coming from backing those emerging managers who are doing sort of pre-seed seeds, seed investments. So if I'm getting sort of 40 or 50 underlying companies for my money there, I think I'd rather take my chances on that. You mentioned 24%. I haven't heard that.

I've interviewed over 50 people, recorded and non-recorded. I've never heard anyone mention the 24%. Yeah, so this comes from this company, SignalRank. It's their own personal data. And they put a sort of algorithm together to calculate how the likelihood of a company reaching unicorn is changed between seed and Series A when being backed by a top 100 fund.

So the data that they've got there, so the jumps from 2% seed, they're roughly one in 50 companies all the way up to a surprising one in four. And so their whole piece there is that if you as a, I don't want to be bugging them too much, but we're not investors or haven't done anything with them yet.

Not yet. No, they are. So this is a kind of company that we need to be very aware of and to take seriously because co-invest there is going to be technologies to develop and improve that process. And this potentially could be one of those businesses. But I think if you as a MSI, just in the space more generally, you're a pre-seed to seed fund, and you're not able to take your pro rata rights, then you're not actually double downing on performance that is right in front of you and will set you up for the next one, two vintages that you're planning to race.

You mentioned annual general meetings, AGMs. We haven't yet discussed that. You're the first guest to bring it up. And I'm curious, you've been to many of them. I only know of one a year. What are the best practices at AGMs? What are your favorite AGMs to go to? And what are the best practices? I'm going to start with my least favorite and the bad practices

because I think that it's much easier to stand out as a bad one as opposed to a good one. So what's the point of an AGM? The point of an AGM is to bring in your LPs, maybe some of your prospective LPs as well to show off what an amazing fund you are and what a good year you've had. They are not there for you to put out 20 of your 25 portfolio companies and have them present 10-15 minute pitches each and sit there forwardless for three to four hours in an afternoon. That is definitely not the point of an AGM. And I have seen that happen in practice. A good AGM has sufficient time for the guests to converse with each other. Because if you think about the people you're putting into a room, it's a very, very powerful room. And they're probably

very interested in speaking to each other. So you want to have some guidance and some structure to the day, but the ones that I've seen actually be really, really interesting, I've taken away some very valuable connections, are ones where they give you time to be able to meet other people, mingle with each other, because they're basically like a conference where there's a bit more of a sort of first connection feel to it in a sort of smaller

group of environment where you know everyone in the room is is a pretty um has an interesting background or represents someone interesting or is interesting themselves so the whole a good AGM should feel like a small refined conference in my opinion I I remember nine years ago, I had a Warriors box seat. I invited Alfred Lin, who's kind enough to be a friend and acquaintance. And he basically said, thank you, but no thank you. And I was shocked by that. And I later realized that individuals, the most important people in the world, are more focused on who they're around when they're at. They have unlimited access to things like Warriors box seats, to Warriors floor seats.

What they really want is that connection with other like-minded, very smart individuals, in this case, LPs. What are you looking to get from talking to LPs? What is the best relationship that you have with LPs? How does that look like? I think something that I've begun to really value in the last couple of years is I have a group of LPs, some more emerging LPs in terms of their age demographic.

They are sort of maybe a next generation at an institution or next, or they have just recently become partner at a sort of more of a family office setup and there's there's there's a lot of there's a lot of power that can happen in in sharing and i do see more sharing happening in that sort of culture than i than i thought would happen when i first joined the sort of lp side people are very happy to talk about funds to share in cool notes jump on calls with you and to discuss funds.

Probably no different to what VCs do when they're looking at founders and talking amongst themselves about the kind of deals that they're doing. LPs are doing it as well. And as someone like myself with lots of experience myself learning in the future,

that's invaluable in learning from people who have invested in more funds than me or have invested in different areas to me is to learn from each other. So I think that best practices piece is on a sort of collaboration front. And I'm seeing that from a group of LPs, particularly in the European scene

of a sort of similar age demographic that they're very happy to share in the work that we do. I guess the one thing that's quite that I was I've been thinking about recently is unless it's like an absolute high flying fund, there's probably always opportunity for me and a friend who's an LP to go into the same fund. That relationship obviously changes between VCs because usually the round is pretty finite in size. And so that competition to get into those rounds is obviously increased. So it's a bit of a different thing. I do think there's more room for LPs to be collaborative than perhaps VCs. I've been thinking about the zero-sum, non-zero-sum nature of venture capital as an industry.

I interviewed Jason Calacanis and he astutely said that the precedence seed is non-zero-sum and the series A, series B is zero-sum and sharp elbows. It goes back to what you were saying, which at some point goes from a qualitative to a quantitative game. I think you see the same thing in the LP ecosystem, where you see the emerging manager space is non-zero sum. And then once you have access to Founders Fund, Sequoia, Andreessen, Lightspeed, name your top tier fund, you're going to be less likely to introduce them to other LPs because you want that allocation to yourself.

What do you think about that thesis? Do you think there's any truth to that? I think that frustratingly spots on. I was waiting for a place I could disagree. Look, the top funds are always going to be taken by the same LPs. It's probably why some of the LPs have overspent on their budgets in the last couple of years because they didn't want to lose their access into these top funds. And I don't think anyone's going to deny that those funds

haven't been high performing and have a good chance of performing again because of the brands that they've been able to create. VC is all about brand at the end of the day. If you're able to create a great brand, then entrepreneurs are going to be able to find you, hear about you and want to work with you. That obviously is challenging to create the emerging side. You have to prove to entrepreneurs why they should be working with you and partnering with you.

Now, the caveat to that is, if you've got a manager who's trying to prove why you should work with them on the entrepreneur side and the LP side, are they going to be harder working, more motivated, more enthusiastic about their work than someone who's been doing it for 20, 25 years? I don't know that that's, again, a qualitative answer. But on a person-to-person level, I look at those people and you can see it in their eyes how much they want it and how much they're determined to

make it work. So I think there's definitely a truth about there being more opportunity to collaborative, to share ideas and perhaps end up both investing in a sort of emerging fund. We want to be playing in that emerging fund area ourselves. So our perfect sort of entry point is probably a fund two, maybe a fund three, going up to sort of fund five. We don't want funds to kind of be going too much larger and often you see sort of funds do progress in that sort of fund size post that vintage.

I think if we went into a Sequoia or an equivalent fund, we would just be kind of a row on a spreadsheet on a piece of paper, right? We would be a nobody. And that's because we're not putting a $100 million check in and the chances of us getting a good co-investment program together

with a fund like that is going to be very, very slim because we're 0.1% of the fund instead of five or six. I had a very successful private equity fund manager, not venture capitalist. He showed me they have an acknowledgement letter. Anybody that invests less than $10 million needs to acknowledge that they're not going to get access to the AGM.

They're not going to get special access to management. I think, by the way, I'm totally in favor. I will sign every acknowledgement letter from every top fund. Let me just put it out there. I love the idea. I thought it was interesting, but it goes to your point, which is you have to have the self-awareness to know

where you are valuable and where you are not. A lot of people, same thing when I started in this space, I was so excited to talk to Harvard Management Company and Yale and of course, historic and prolific in terms of David Swenson and everything. But does Yale, does Harvard management really want to build a two-sided relationship with an emerging manager? Maybe, maybe they have different pockets, different individuals. But I want to be alongside people

that are aligned with my vision and with my mission and where I can not only take value, I could also provide value. And I think that's the only way to have a sustainable relationship. Yeah. To be honest, I do think VC is in a bit of a sort of 2.0 situation right now. I do think there's going to be a bit of a reset coming through where VC will start seeing itself in sort of two buckets. One being those sort of much larger funds,

AUM driven, and they're going to be driven by the big LPs in this world who want to be putting in $50, $100 million checks. There's still going to be very much a place for those sort of funds in the world. I think where we'll see them changing in their sort of ideas in the kind of companies that they're investing in, I think those are going to gravitate much more towards sort of an early sort of style over equity funds where they are going to be thinking about minimizing the risk of losing that money as opposed to generating huge returns. So what would that look like in practice? It might be going into slower growing businesses, more profitable companies, which has been the sort of current trend of VCs telling their portfolio companies to try and become as a sort of persona.

What that will leave is sort of a true venture layer underneath smaller specialized funds who are taking bets on sectors that are genuinely going to change the world for the next generation. Now, whether that is the things in space, whether that's in the next sort of layer of energy that we're using, the next layer of computing power that we use. I think that it's time for VC to kind of split into two, a bit of a reset and see those sort of two buckets.

Yeah, I 100% agree with that. I think one of the easy way to look at VC is if you have a mega fund that's investing at a $30 million free technology risk, and you have another one that's investing at a $10 million free technology risk. On average, the one that's investing at $10 million is going to return higher. It's just a math. Once you're investing on a qualitative basis versus quantitative basis, you're going to have significantly higher returns if you're investing on a qualitative basis at a lower valuation. It's not one to one. Obviously, when you have more cash

on the balance sheet, you have more runway. And sometimes they are a little bit more progressive. But all things being equal, there's a huge advantage for emerging managers. So Harry Stebbings was talking about this on one of his podcasts a week or so ago. And he was saying, you know, there's still seed rounds being done on 5 on 25. And it's like, have people not learned the lesson from, you know, 2021? These seed funds, okay, $25 million pre-money valuation doesn't look that different from, say, a $12 million valuation. But yeah, that's a 2x difference. That could genuinely be the difference between your fund being the mean versus the medium, right?

So I think these people need to kind of be pretty careful about where they are getting involved from an entry point. And Harry was sort of reinforcing that last week that there's still a lot of players kind of not really thinking about their entry prices in the market. Absolutely. And Harry Stebbings, the GOAT in VC podcasting,

and obviously a fellow Brit, you mentioned the 2x difference. The 2x difference, just to give you some numbers, what is a mediocre fund? 1.5x DPI. What is a good, great fund? 3x DPI. So a 2x multiple is monumental

in terms of differentiating between a mediocre and a top performing fund. I have to almost list every single guest, not to offend anyone. But we've really went out there and tried to get the very top LPs. Who else should we be interviewing? Even people that have never been on a podcast, leave that to me and Eric to get them on. Who else should we be interviewing? I think that you should be trying different types of LPs. So you've done very well with this sort of endowment

institutional-like model. It would be great to see some more people who invest on a personal level, who are that sort of agent and principal almost together. Perhaps people who have been very, very successful in their entrepreneurial world or on the family office front. There's some more that you can do in the European space as well. There's been some big funder funds that have sort of been raised recently, like Iceland Capital. There's other LPs out there in the European space that are actually being pretty attractive right now.

There's a lot of US LPs who want to come over to Europe and sort of allocate over there. A lot of the US funds are sort of opening London offices because they're looking at Europe and going, okay, well, the quality of talent is equal here, but the prices of the businesses are cheaper.

Yes, we have to work out the exit strategies for them. It's definitely not as good here in Europe as it is in the US. But companies can go over cross borders so much nowadays that we're seeing more and more people perk up interest in Europe. So don't disregard Europe,

but see some more LPs on that side. We definitely don't. Two of my favorite guests have been David Clark and Steve Chasen. Steve Chasen at Rothschild, David Clark at Vencap. Amazing Clark and Steve Chasen. Steve Chasen at Rothschild, David Clark at VanCAP. Amazing guests and also amazing human beings. And I would put you in that group as well, although obviously you're younger,

but you're on your way to the same profile. It's been a pleasure. You know, we went off topic almost the entire interview, and that's because you have such a wealth of knowledge. And I don't think that's a coincidence. I think diligencing 3,000 companies a year for seven years ultimately experiences a numbers game. And of course, at Dara5,

you're doing some really interesting things. You're backing some of my favorite managers. And I think you're approaching it from truly a relational standpoint, which I do think is rare. I really appreciate you jumping on the podcast. What would you like our listeners to know about you or Dara5 or anything else you'd like to highlight?

Anything else I'd like to highlight? Don't be scared of the emerging managers because every experienced manager was an emerging manager at one point in time. You know, Asic Team was an emerging manager in the early 2000s. People have to start somewhere, listen to ideas. It's a people's game at the end of the day. If you take 10 calls,

five of them might be terrible and a waste of time. But one or two of those 10 is going to be golden. Just to add a little bit on that. One is if you want access to the next Sequoia, you have to invest in the emerging manager space, or you could be worth $100 billion. That's true. Or be a foundation. There's two paths. To be fair, there are two paths. But if you really want access to the emerging managers, you have to be in early. There is no free lunch when it comes to getting into top venture firms. There's anywhere from 2 to 5,000 emerging managers today. The good part about that is there's a lot of empirical evidence of outperformance.

We're not talking about, hey, there's 10 funds, they're doing really good, look at them. There's a lot of data-driven empirical results from how emerging managers do outperform established managers. Some of those data sets come from PitchBook, Cambridge Associates, as well as of course, our friends at Aliborn Partners. So there's a lot of data that empirically prove what you're saying. So we want to continue to highlight emerging managers during a difficult market cycle. Thank you, James. Look forward to either meeting up in London or New York. You have an open invite. I really appreciate you letting me go on and probe your strategy out full. Thanks, David. Yeah, it's been absolutely awesome to be on and looking forward to doing it in person next time. 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 will forever hold a special place in the heart of the LP introduced. Please introduce the LP to David at 10xcapital10xcapital.com and do not worry about having us double opt in. We thank you for your support.