Investing Billions - E22: Alex Edelson of Slipstream on The 4 Sources of Alpha for Emerging Managers

Episode Date: November 21, 2023

Alex Edelson of Slipstream Investors, sits down with David Weisburd and Erik Torenberg to discuss the four sources of alpha for emerging managers (Sourcing, Picking, Winning, and Value-Add). We’re proudly sponsored by Bidav Insurance Group, visit lux-str.com if you’re ready to level up your insurance plans. The Limited Partner podcast is part of the Turpentine podcast network. Learn more: turpentine.co -- X / Twitter: @asedelson (Alex) @dweisburd (David) @eriktorenberg (Erik) -- LinkedIn: Alex: https://www.linkedin.com/in/alex-edelson-604767b/  David: https://www.linkedin.com/in/dweisburd/  Erik: https://www.linkedin.com/in/eriktorenberg/  -- LINKS: Slipstream Investors: https://www.slipstreaminvestors.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 Ahmet at [e-mail]. -- 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 -- Questions or topics you want us to discuss on The Limited Partner podcast? Email us at [e-mail] -- TIMESTAMPS (00:20) Episode Preview (01:46) Slipstream’s fund strategy (02:57) What to look for when diligencing a GP (06:32) The typical Slipstream diligence process (07:34) What Alex wants to hear on a GP reference call (10:05) Why does fund performance decline in later vintages? (12:31) Episode Sponsor: Bidav Insurance Group (16:00) How should family offices approach venture? (18:15) Why concentration drives performance (19:23) Alex’s value add to GPs (21:47) The folly of optimizing on special economics (23:30) Generalists vs. Specialists (26:32) Ranking of Sourcing, Picking, Winning, and Value Add by importance (28:07) How to be a good sourcer (30:59) How to be a good picker (32:25) How to win deals (33:32) Fundraising and investing are different skills (39:51) Lessons from working at QED (47:51) The difference between a good LP and a great LP (49:40) How to optimize portfolio construction (57:00) Are GPs penalized for not doing pro-rata? (58:04) “I want to help venture firms, whether or not I invest.”

Good LP moves quickly, is transparent. Capital is cold, you wire quickly. You're not requiring folks to email you because you're right up against the deadline. Maybe you're reading the updates and other information these folks are sharing and sending thoughts. I think that's a good LP.

I think a good LP is transparent and open about where they stand as they're moving through an investment decision and after they invest about how it's going. What is a great LP? I think great LPs can constructively challenge GPs and help them be better. It's helping them with their strategy. It's talking about portfolio construction or recycling or follow-on decisions. Alex, I'm really excited to have you on the podcast. You're, in my opinion, one of the sharpest minds in the LP ecosystem and you're a lawyer by training and famously serves as the Chief Operating Officer and General Counselor for QED, one of the top venture franchises in the world,

and specifically in the fintech space. Welcome to Limited Partner Podcast. Thank you for that. And thanks to you and Eric. I'm excited to be here. Thank you, Alex. So we're going to chat about QED in a bit, but I really want to get into the nitty gritty

of the day-to-day at Slipstream. So tell me about your fund strategy at a high level at Slipstream. So tell me about your fund strategy at a high level at Slipstream. So Slipstream does three things. First, we're a fund of funds. So we invest in pre-seed and seed funds that are 150 million and smaller, typically 100 million and smaller.

About 90% of the capital goes into nine to 12 core investments in funds. Up to 10% of the capital goes into scout checks and opportunity funds if necessary, primarily focused on funds that get higher ownership relative to fund size. The second thing we do is we co-invest. So as the portfolio companies of the funds we've invested in start to break out, we can put more capital into those directly and we bring opportunities to RLPs to invest in those companies as well. And the third thing we do is work with single family offices, multifamily offices and other institutions to help build out their venture strategies. We bring them funds,

we help them diligence funds. And then often when we invest, RLPs put more capital into a fund. And sometimes even if it isn't a fit for a slipstream, it might be a fit for one of the LPs put more capital into a fund. And sometimes even if it isn't a fit for a slipstream, it might be a fit for one of the LPs and they invest. A lot of juicy things to unpack there. When you're diligencing managers, you're one of the most disciplined when it comes to diligencing. What exactly are you looking for? Yeah, so this is a great question. So I'm looking for, I guess I put these into sort of five categories. So we're looking for a few things. One, we're looking for a portfolio construction that can generate fund level returns. That's typically higher ownership relative to fund size, such that every investment has the potential

to generate excellent fund level returns. The second thing is a competitive advantage unique to the team that's sustainable if they execute at a high level. You would call that their superpower or their edge. Another way to think about it is like, why they should be able to generate a flywheel. So like usually it relates to sourcing,

picking, winning, adding value. And ideally it relates to all of those things. You wanna see that a firm's strategy is built around that competitive advantage. So that often relates to things like operating backgrounds at successful venture-backed companies or otherwise high-growth companies, deep domain expertise, some track record at a prior firm of sourcing and winning good deals at this stage where you can kind of figure out like, hey, what's so special here? Why are they winning? Why are they able to compete?

QED is a great example of this. It's like QED started in 2008. FinTech focused early stage fund. At a time when FinTech was not a word and people thought the category was so small, it didn't justify a sector focused fund. And so no one was doing this in 2008 who had the background of those guys in financial services, having founded Capital One. So when a founder would get on a phone with Frank Rotman or Nigel Morris, who were, you know, Nigel co-founded Capital One.

Frank was there from the very early days. Those founders are wowed. The investors can get to the heart of the company's main issues, can be more helpful than pretty much every other investor. Those things stand out. Those generate a flywheel. And the same things that were true in fund one are true in QED's fund eight. No one else has started capital one or the equivalent of a capital one who's doing early stage fintech focused venture investing. So that advantage remains, but it only remains if they execute at a high level. Founders still need to love them. Founders first call with them needs

to be great. Founders who have worked with them, who QED is invested in need to love them because if they don't, that flywheel breaks down and they will not continue to see the best fintech deal flow. So those are two of the things that I'm looking for. The third thing is demonstrated value add to founders, consistent feedback that like this VC is their most or one of their most helpful investors. The fourth thing I'm looking for is the best later stage investors in these categories think really highly of this VC and want to see their deals and hopefully want to invest in their deals and partner with these VCs. The last thing is scrappy and driven, hungry, gritty. It's such a long game and people need to be committed to it for a long time. So that's sort of how I think about it. But when I step back, I also sort of have thoughts about like, what's a, you know, we talk about like a five tool

baseball player. What's a six tool venture capitalist. That's something that I guess I think about. And it's like, you have to be great at sourcing, picking, winning, adding value, getting portfolio construction, right. And getting liquidity, which is not always a passive exercise. I'm looking for people who can perform at a high level on all six of those things. So you talked about diligencing. I think you're one of the best person at diligencing in the space. Take me through your diligence process and how you diligence in an emerging manager.

It's typically, you see a deck, you do an initial call. I'd say after an initial call, you usually have a decent sense for whether this is potentially a fit. And if it is, I'll dig in pretty quickly. So do a second call. If there's a data room available or other materials, I'll review those before that second call. And then I'm typically also doing some light referencing with mutual contacts, not typically like founders or other

folks I don't know. We'll do that second call. If I'm still interested, I'll typically dive pretty deep into references. There are a few different kinds of references. I focus on two of them though are most important to me. One is, of course, with founders who have worked with these VCs. And the second is with venture investors at the next stage, because I want to hear that those investors trust these earlier stage investors. They want to see their deals. They want to invest in their deals. They keep in touch with them, hopefully on a regular basis. That's a real de-risking for us is if the best investors at the next stage are investing in those companies. What's a good reference in that case? So let's

say you go to Sequoia or a founder's fund. What do you want them to say about the emerging manager? Great question. So what I want them to say is we love their deals. We think they're excellent pickers. In a perfect world, founders love working with them, but I can get that from the founders. I want to hear them say that we want to see all their deal flow. We want to stay really close to them. We think they're as good or better than anyone who's investing in their space. So if I'm looking at a fintech fund and I came from QED, I want to know what QED thinks because typically the funds we're investing in, well, they may come a little bit before QED. And so I want to know what QED thinks. Are these good pickers? Do you want to do deals with them? Do you love their deals? Are you staying

close to their portfolio? What do you think about their portfolio? How do they compare to other folks you're sourcing deals from and the portfolios of those other folks? Those are the types of questions that I start with and then goes from there. What are non-obvious things that you hear that leads you to say, hey, you know what, maybe this isn't for me? One thing that sometimes stands out to me is how salesy an earlier stage investor is. So for example, what I hope is happening is that the earlier stage VC, the one we're investing in, is pretty measured in the way they present companies to later stage investors.

Because that helps their credibility. It can help later stage investors move quickly if the later stage investors know, hey, this early stage investor is being really candid and honest with me and flagging the issues for me to run down. And they're really serving this up on a platter. Sometimes I hear that folks are pretty salesy about their companies to later stage investors. And that makes it more difficult for the later stage investors to do the work on those companies because they aren't sure what's actually going on. The one thing in that regard, it's similar to LP relationships with GPs is that you build a relationship based on trust. One thing that I

think that you didn't purposely mention is the later stage investors and LPs are not just looking for nice guys. They're looking for people that are highly credible. So when you look at those six things, I watched Eric's interview with Alfred Lin. He said Sequoia is very concerned about complacency, which is good for Sequoia. But emerging managers, I'm assuming, have other ways that their competitive advantage decays. And what ends up happening that keeps these early stage vintages from turning into great later stage vintages? Oh, it's a great question. I think about this all the time and I might reframe it. Is there an argument that I should only be investing in funds one through threes? What happens in fund four or five or six? Certainly fund size growing is an obvious

change and that can significantly impact returns. And I would say just anecdotally, that in my experience is the most common reason why fund performance declines over time is because fund size is increasing. The second thing I see is team size is growing. In those first few years, the GPs who start a fund, as those folks start to insert

junior or mid-level investors in their place, maybe a founder is talking to a junior or mid-level investors in their place. Maybe a founder is talking to a junior or mid-level investor. So the magic that a founder feels in that first call may not be the same as what they feel talking to a mid-level or junior person. Those early GPs, those initial GPs might see things in those initial calls that make them move a deal through the funnel that the earlier stage folks wouldn't move through the funnel. And it may make them more comfortable doing non-consensus, unusual things, or at least those senior folks may be more comfortable doing that, whereas mid-level and junior folks may not. There's one last thing that comes to mind for me. One other thing that comes to mind to me on team is that sometimes an initial core of GPs or solo GP,

they're very opportunistic. And so in those early days, they were just doing the best deals that they saw. And maybe those deals were in supply chain or fintech. And so they end up having great wins in those sectors. But now we're like five years into the future and those categories have evolved and they look back at their track record and say,

hey, where we've really succeeded in these categories, let's go hire mid-level folks who are sector focused, who are sector specialists in those categories. Let's go deep in those categories. We have an advantage. And there are good reasons to think that that might help you in the future if you have a successful track record of companies who founders in those sectors might admire and then they might want to come to you.

So you might get positively selected deal flow because you've made great investments in the past. The concern I have in that case, though, is that the GPs were being opportunistic at that time. Are the mid-level and junior folks who are more sector specialists going to be opportunistic outside of their sectors? Often the answer is no, that they're going to focus on the sectors that they were hired to invest in. 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'm proud to personally endorse Amit and I ask that you consider using Badaw Insurance Group for your next insurance need,

whether it be DNO, cyber, or even personal car and home insurance. You could email Ahmet at ahmet at luxstr.com. That's A-H-M-E-T at L-U-X hyphen S-T-R dot com. Thank you. You mentioned the mid-level folks. A lot of them are MBAs, such as myself, a self-hating MBA. How do you institutionalize courage at a venture capital firm? I think it comes down to who you hire and how you reward people. So I think if you hire folks who are independent thinkers, who you trust to run with things, and you encourage to be non-consensus and think outside the box and optimize for things that

aren't like deal heat, which I think can be very compelling to people with limited experience to not get wrapped up in that deal heat and the FOMO that comes with other investors piling into a company that for one reason or another, you may not believe in. If you're really rewarding independent thinking, I think that that's one way to do it. But it's very hard. And it has a lot to do with who you hire. And there's no one clear background that works. It's just more of a personality that I think you're looking for. And if you find people who are original thinkers and are very confident, I think that is the most likely way to do it. I think it comes down to a couple factors. One is, of course, at the hiring side,

people do not change when they're 25, 35. Their psychology does not change at that point. The second aspect is the incentives that you mentioned. If somebody has a cushy 500k salary and low upside, they're not going to take career risk almost by definition. And the third is just bringing these biases, taking them from implicit to explicit, recognizing that there's always organizations and venture capital firms are by default consensus-driven, understanding the organizational nature of venture capital firms, and explicitly messaging around that you are actually looking for contrarian thinking. I think that's one of the secret sauces of Founders Fund. That's why everybody is aware of Founders Fund strategies because they message this over and over.

But in some places, I think people, you know, when a company gets marked up in a round, people feel like that's success. And I hear venture firms saying that. I hear GPs telling me, I've had multiple GPs tell me their goal is for a company they invest in to get a two or three X markup and that's success. They have done it. And my thinking is like, man, there's a long way to go. That's very early days in terms of what success looks like. But some firms reward that. And some early stage investors feel a validation from that. And I'm not saying they shouldn't, because obviously, like that's a part of the path to success. You help single family offices, multifamily offices get into venture and build their venture book. What do you advise them

when they first start building out their venture book as an LP? Yeah, it's a great question. And I should say, this was not one of the things that I thought I would be spending my time on at Slipstream. I thought people would want diversified exposure to the types of funds that we were finding and that they would want to co-invest into the underlying funds, best performing companies. This sort of evolved over the last few years after folks saw the investments we were making or heard about Slipstream from our LPs or from funds that we've invested in or others. And it's been a really fun part of the evolution of Slipstream and personally very rewarding for me. And it also, it is not just folks looking to get exposure who have none. In fact, it's often people who have exposure, but want more or want better or want different in some way. And so,

yeah, the first question is like, what are your goals here? How much capital do you want to deploy? How concentrated do you want to be? Are there sectors you want to avoid? Are you comfortable with the time periods here in terms of cash out the door and capital calls and cash back in periods? How long of a period of illiquidity you'll have investing in these funds? And so we kind of sit down and go through what they want to deploy, what strategy they're excited about. Sometimes it's very similar to Slipstream.

They just want to put more capital in the funds we invest in. Sometimes people like to invest in funds that look nothing like the funds I invest in. They're very low concentration, low ownership funds, but I'm talking to all these funds in any case, so can bring them funds that are a fit for them. And so that's typically how the conversations start. And then we start doing the work together. I bring them funds. I tell them what I like. I tell them why I think this could be a fit. I tell them what I'm worried about. And sometimes we're even doing diligence together at the same time. Like we're both running it down. I'm sharing my references. I'm sharing my thoughts. They're sharing their references and their thoughts. And it's collaborative

for others. They want to be more hands off more and get more advice. And it's like, hey, do you think this is a good one? If so, we'll put a little more into this. Speaking of strategy, you have an aggressive strategy, in my opinion, of being in 9 to 12 funds. What's the strategy behind your strategy? Why do you only have 9 to 12 funds in your portfolio? The way I think about it is venture is a really long game. And what draws me and I think draws many other folks to this is the potential to get a very high multiple. The way I think is best to do that is to concentrate. Also, historically, the highest performing fund to funds I've seen are concentrated. They're not typically more concentrated than nine to 12. That is on the more concentrated end, but they're often right there. I could invest in 30 or 40 funds. I think

my returns would come down and I am looking to outperform. And so I would rather keep the bar high and I would rather be very selective about the funds that we think can significantly outperform. And when we find them, invest enough capital in them so that we can outperform. And then that will justify the long period of illiquidity that we all have as LPs in venture funds. You mentioned that you're highly constrained in terms of your portfolio. How important is it that you're a big position in every specific GP fund in order for you to have a relationship or for you to be a meaningful stake

in their fund? That is not important to me. What's important to me is to have a good relationship with these folks. And we build that before I invest. And typically, if we have that, we are close. And I don't know exactly how often they're talking to other LPs in their fund, but I think they're talking to me pretty often. And that's, I think, in part because

I have a different perspective from other LPs, I think, based on my experience at QED in large part. And that was actually one reason I started Slipstream in the first place is I was seeing these emerging managers. We were partnering with them in a variety of ways at QED. And what I was finding was these people started funds in part because they thought they could source, pick, win, and add value. Did they know how to run a venture firm? That typically wasn't the reason that they started. It's not because they were excited to run a venture firm or they were excited about, you know, thinking about how to get liquidity or because they were geeking out about portfolio construction.

And so what I found then was that some of those folks I was meeting then wanted to talk to me about things like portfolio construction, how to get founder feedback, what to do with that founder feedback, what information should we be tracking after we invest as our companies grow that might be actionable to us at a later point when we're making reserve decisions or planning our next fund and thinking about our strategy then, or should we have reserves or should we have an opportunity fund and how to get liquidity and what companies to lean into over time. And so what I was finding was that the work I was doing at QED was helpful to some of the emerging managers that we were working with and that I was meeting there. And that's how my relationships go with them now. So like just in the last two weeks, I've had conversations with folks who reached out

about edge cases. Hey, should we flex on this ownership? I've had conversations about, should we use reserves for this? Should we SPV this? Should we think about cross fund investing? I have a lot of conversations with folks before they go to market for their next fund. What do you think about this portfolio construction? What do you think about this fund size? What do you think about my deck? What do you think about the process we're building around our fundraise? Are we giving enough time? Is it structured enough? Is there a risk of languishing here? And so I think those things keep me close to the funds, regardless of how big of an LP I am. Although I do think that being a bigger LP certainly naturally brings folks closer. Have you considered trying to get special economics in the funds because of the

differentiated value that you provide? Or do you think there will be an LP player that is able to do that in a material way? A lot of early potential LPs in Slipstream asked me that because that would have been compelling to some of them. I just don't want to do that for a few reasons. And part of my experience as an LP, of course, is informed by my experience at QED on the GP side. I want to be the LP that I wanted to work with on that side and that we all enjoyed working with. And when people are asking you for economics, you know, I think the feeling that I have as a gp is like hey this is such a long game if our incentives are aligned i'm really only going to make it

in you know 8 to 12 plus years if we're all successful like let me let me have that let me win that's a long way out but you'll win too if i get you great returns. And so I think I want to be the LP that I wanted as a GP. Also, I do worry about adverse selection. Like I'm able to get into some funds that are very capacity constrained. That is a part of our business. And I think if I started asking for special deals, I wouldn't get into those funds.

And I'd rather work with the best fund managers and be in the best funds than get an incremental economic gain. You'd rather be Sequoia than YC, to use the analogy of you're not necessarily looking for people who are willing to give extra economics, but the best players, period, who there's a competitive market for them. Yeah, that's right. And the plan is, if we're in the best funds and we don't get any economic discounts, we're just paying full fee and carry, we should do great. And when you think about the best funds, say more about how do you think about generalists versus specialists in terms of your portfolio and sort of diversification there? Yeah, I love this question. It's something I think about all the time because, look, I came from a sector-focused fund. I understood and understand why sector-focused funds can win. They can do deals that others don't because they know more than other people. And so they may,

that could lead them to doing non-consensus deals that other people don't believe in. It could help them avoid deals that a generalist who has blind spots in this area may get drawn to. It can impact picking. It can impact winning. Founders as a general matter, I think, get excited when the venture investors they're talking to understand their business quickly, can get to the heart of the issues on their mind and can help them. And I hear a lot of feedback about how sector-focused funds can do that at a high level when sometimes generalist funds can't in certain sectors. And so that is an advantage in terms of winning. Those founders just want to work with those venture firms more. Another thing is if you develop a reputation as a top investor in a space and you are delighting your founders, you will

hopefully continue to see all the best deals in that space. I think that's what's happened with QED over the last 15 years. QED is going to get great fintech deal flow and they should see, I think, and for a long time they would, they saw every deal. They probably still see pretty much every great early stage fintech deal. I mean, it's hard to see every deal, but I think they're seeing as high a percentage as anyone. And so it's a real advantage in that way also. And then it can be very helpful in terms of adding value to companies. Let's say a founder wants help meeting a certain type of customer or partnering with banks or, you know, QED has a lot of experience and relationships in fintech. And that's true of any sector focused fund in most cases. And so they can add value that sometimes generalists can't. So I am very drawn to sector focused funds in certain sectors where they actually have an advantage. In other sectors,

it's not so clear. And in all cases, generalists can win. Like when QED is leading a round, they might be in, let's say, the best fintech company of 2023. Let's say they just led the round last week. There might be generalist investors in that too. And so generalists can certainly win and they have won historically and they will continue to win. What I'm trying to figure out is why are these folks winning? From a sourcing, picking, winning, adding value perspective, I need to understand sort of why and how someone is winning. And I want to believe that they can generate great performance in a persistent way across multiple funds and vintages. And so I'm more focused on why and how these folks win, but I invest in generalists and sector-focused funds.

And my portfolio currently is about half and half. You mentioned the four aspects, sourcing, picking, winning, value add. I'm gonna put your feet to the fire. How would you rank them in terms of importance for an emerging manager? Yeah, it's really hard to do that. It's really hard, especially to pick between sourcing and picking. If you're a great picker, but you're not sourcing

good deals, then you're going to piss the best companies of a bad batch and you're probably not going to have a great fund. If you are great at sourcing, but you're not a good picker, then I'm basically relying on you getting lucky and just investing in one of the good ones you've seen. Those two stand out to me as the most important. And if I had to pick one, I would say, as long as you are sourcing deals that are good enough, it's more important to be a good picker because then you will get into some good deals. And if you happen to get one excellent deal, your fund is a great performer.

I think adding value is really important, but I would probably put it last. And then I would put winning third. It doesn't matter if you're a great picker, if you can't win. I think folks see enough deals, or a good firm will see enough deals that over time they will be able to get in to the deals they want to

get in. But the pressure is on in terms of winning. If folks need to be leading rounds or getting high ownership, the pressure is lower when you're writing smaller checks. So if I gun to my head, I would say picking, sourcing, winning, adding value. But I don't think I would invest in a fund that I didn't think was great at all of those things. So let's unpack that. Sourcing. What makes a VC, specifically an emerging manager, good at sourcing? I think a few things. People who are a part of communities or have built communities of folks where there is deal flow in those and coming out of those or going through those somehow. You are part of a successful startup. You build a community of certain types of folks that's seeing great deal flow. Those can be ways that people can be great at sourcing. Generally, having a reputation in the founder

community for something that is valuable to them. You could be loved by founders for being able to help with getting to market or getting to product market fit. And they will then hopefully send their founder friends your way. That's a great way to source. Of course, these people ultimately need big networks. I think that's sort of table stakes in venture. Another thing that comes to mind, which I rarely see, is if you are building relationships with folks before they start a company, that is about as close as I've seen to proprietary deal flow. And there are a variety of ways to do that. But if you can do it such that you're basically the only person getting a look at those opportunities because the founders were putting their ideas and thoughts together with you. So by the time they decided to start a company,

you were the natural person to invest and they never ran a process. Not many folks are doing that. And it's very compelling from my perspective. There's like high quality in terms of founders and ideas. So you're definitely preaching to the choir uh, to the choir there in terms of with, with, with on deck. Um, what do you think are the best ways that you've seen people do that or try to do that? Or where is the opportunity to, um, to sort of build a practice, uh, that, that, that does that? I think you have to ask yourself, what are the best founders look like?

What types of roles do they have at companies? What do their backgrounds look like? Are they leaving venture-backed companies? Are they product folks? Are they software engineers? Or what are their roles? And can you start building relationships with the folks that you think make for great founders in the sector you're playing in?

And that's how I've seen it work. And I should add to my last answer that when someone is on a fund two or a fund three, it's a little easier to see what that sourcing looks like because you can talk to the founders and you can say, hey, founder of a company that these folks invested in their prior fund. Of all the investors who are on your cap table, who are you sending deals to? Which types of deals are you sending to each of these investors and why? And then you start to get a sense for like, where's the flywheel? What is the deal sourcing mechanism? That's a big part of my diligence on sourcing. In terms of picking, one, is there such a thing as good picking at the preceding seed? And two, what does it mean for emerging manager to be a good picker?

I think it's people who see something that a lot of other people don't see. And that is a reason why this company may be successful and they ultimately end up being right about that. I think it's trite to say like, oh, I'm looking for someone who's non-consensus and right. I mean, I suppose we all are. I would say the opposite of that is something I'm looking to avoid too. Like I am looking to avoid people chasing heat. If you are in because you get comfort from a great multi-stage or otherwise tier one firm. And you're like, look, aren't I great?

I've invested alongside all these great funds. I'm not here to tell you that's not great. I just wonder who's doing the picking and is it really you or are you just in these networks where you can kind of get into these funds and you can make investment decisions based on other folks' diligence. So I'm looking for people who are doing the work themselves, who are digging in, who are looking for particular things in founders and in ideas, and that they are investing even if others are not. They are investing before others get to conviction. That is appealing to me. That's a better way. That's a way you can get ownership, low entry valuations. And if you end up being right, that can lead to great fund performance. So we're getting to the finish line.

We need to win the deal. As you mentioned, sourcing and picking doesn't really matter if you can't win the deal. How do top emerging managers close the deal? I don't think there's one way, but I think if there is a way, it's being aggressive, adding value, being helpful, proving how great it would be for the founder to have you on their cap table. And look, if I were to step back and talk about like, what's an ideal scenario, the ideal scenario is that you've been getting to know this founder before they were raising, you were making a decision about them and they were making a decision about you

long before they started this fundraise. And so by the time they started fundraising, they would hopefully know how great you are, how much you can help, and it would be obvious that they want you in. But in the more common case these days, I'm sure, of competitive rounds moving relatively quickly, I think it's proving how much value you can add and how great of a partner you can be to them.

So you said off-camera something peculiar, that great managers don't have to be great fundraisers. That wasn't part of your criteria. Can you expand on this? I think fundraising and investing are different skills. And some great investors are not great fundraisers. Some VCs are great fundraisers, but they are not great investors. And these things can converge over time. Like over time, if a fund manager is generating excellent returns, fundraising is going to get easier. And over time, if a fund manager who's excellent at fundraising is not generating great returns, obviously fundraising will get harder. But especially in the early days, I think that there can be a disconnect. So you could have a great investor

who has a chip on their shoulder. Maybe they come off strong. Maybe some folks just aren't the most charming, but they are great investors. And sometimes folks just haven't had much experience fundraising and they need a little more to get polished. And you could meet them in the early days and be turned off in a fundraising context, even though they are excellent investors. And so it's funny, one thing that I need to police against is if I'm getting there early,

if I'm talking to folks when they're preparing to raise maybe their first fund and they wanna talk about how they should structure it or their strategy, their portfolio construction or things like that, it's important for me to be open-minded about these folks, especially early in their career, because they could be great investors who just aren't great at fundraising yet. One of the most absurd ideas in emerging managers is that in order to be a great emerging manager,

you have to be an expert in portfolio construction follow-on strategy. It's as if somebody is born out of the womb understanding portfolio construction. And I think there is a lot of false negatives there. You mentioned all the reasons you don't mind when emerging managers are not great fundraisers. Let me push it even further. Isn't that essentially a source of alpha? If you're looking at capital constrainment, if you're looking at small funds will outperform large funds, and you get a lot of your alpha through co-invest, aren't you in many ways positively selecting for alpha when you go after fund managers that are not good at fundraising? It's such a good question because I think about my portfolio as sort of a barbell between

some funds that other folks seem to think are consensus. Like there are a lot of institutional LPs in this. It's obviously still a small early stage fund, usually an emerging manager, but I was not the only one to get there on this. And then there are the funds that I view as kind of like pre or just non-institutional funds. Like other folks are just not getting there on this.

And I'm excited to have both of those in the portfolio. And I am curious how their performance will compare to each other over time. But this kind of brings me back to a reason I had for starting Slipstream in the first place. Like I started Slipstream in part because I was, we were talking a lot at QED about sourcing, picking, winning, adding value, portfolio construction, getting liquidity. So you're kind of hearing often, I'm just hearing for years about kind of what a good early stage venture firm looks like.

And I was living in it and I was working with these people every day and I was seeing how they win. And that was so helpful to me. And then we're getting founder feedback from like, at the time I was there, like over 150 founders. We had that going back 10 years. So it was really rich feedback. And so you're, you're hearing from founders, like what's a great early stage venture firm. They're not saying that, but that's what I'm extracting from it. Because the goal of course, is to like be the best venture firm we can be. And then I'm seeing these emerging managers, I'm talking to these emerging managers and we're partnering with them in a variety of ways. And what was interesting was that like my perception about their quality did not always

correspond to their ability to fundraise. And so some of these folks were like consensus funds at the time. I thought they were great. Other folks thought they were great. They raised their full amount. It didn't always happen overnight. It took some time, but they got there. And those funds, as I reflect on them, are doing well. And then I look back at some of the funds that I thought were great, but other people were clearly not into. Like there's one fund that comes to mind in particular, raised less than 25% of its target fund size, got over 1,500 no's. And then you're like four and a half, five years later,

it's a 5X fund and it has plenty of room to run. And that's not the only anecdote like that. Although that is the most extreme in terms of disconnect between what I thought their quality was and their ability to fundraise. I like investing in both. I don't have an answer right now about which one is best, but I do get particularly excited when I'm in funds that I view as non-consensus because that to me for Slipstream is a way to separate ourselves from other institutions. My LPs often will invest in those funds. There's one right now where there is only one other institutional investor and a lot of my LPs want this fund. And so I think we're going to fill it up. And that is really rewarding for me. One of the other distinctions is unlike a company that can't raise more money, if a fund targets 50 million and raises 25 million, it could still be a great fund.

Maybe they change their check size a little bit, but it's not as binary and draconian as a company that has not yet hit consensus. And in many cases, the long-term greedy answer is for fund managers to stay smaller for longer, have more funds that are smaller, put up consistent returns across multiple funds. And that's how you raise your fund four, five, six, seven, is you show that you can do it consistently. And then you grow into bigger funds when you can take larger ownership that you need to continue to generate great returns on larger funds. I see this all the time. There was a fund that I need to continue to generate great returns on larger funds. But I see this all the time. There was a fund that I talked to, it was like in the spring of 22, they were doing a

big increase in their fund size and they were targeting a $50 million fund. And I thought they were great. They were better positioned to execute at a high level on a $20 million fund. Relative to the amount of ownership I thought they could get in great companies. $20 million seemed like the right fund size for them. And I told them that, and that's why I was out. It was the only reason. And then nine months later, I got an email saying, we're doing a final closing. It's a $20 million fund. Are you interested? That was a great outcome for everyone. I think that was great for the LPs. I think that was great for the fund manager. Absolutely. You talk a lot about QED and how formidable it was. What were your lessons from QED? Yeah. I mean, I feel really lucky to have started there. I joined during fund five. The first four funds were significantly smaller. We started growing

in fund five and the first four funds were also very high performers, like right at the top of the asset class. And so I came in and there was 10 years of data and learnings from success and failure that was really helpful for me. And it wasn't just Nigel and Frank. I mean, it was the CFO, Jamie Loving, who has a ton of experience in venture, has been one of the most helpful mentors for me in the space. There are a lot of ways to win in venture, so I try not to over-index on this. QED's way is one way.

QED's way has been consistent, has generated consistent performance across multiple funds and vintages and across the evolution of a category too. So like major credit to QED is, FinTech at the time QED started in 2008 wasn't a word. And now it's an enormous category that gets a lot of attention from founders in BC. So to keep it up is really hard and a major

testament to a lot of things that are going right at QED. What are a few of the learnings that I took from that that stand out to me most? One was just that many of the best performing venture funds are these small early stage venture funds that no one's heard of. Like QED's funds one through four, I think we would have said that like people didn't really know QED. We were not a big brand, but those funds have been phenomenal. That's one thing. The second thing is it's hard to scale in venture. As fund size grows, it's hard to get enough ownership and enough winners and the wins just aren't big enough. And so it's hard to continue to perform like those earlier small funds.

It can still be great performance and I fully expect QED will have great performance, but those smaller funds with more compelling ownership relative to fund size, those can be some of the best funds. That was a really big learning for me and very counterintuitive that like some of the best performing funds

weren't the big brands. They were these small early stage funds. Another one was like how hard it is for people to evaluate these funds just because like we were, you know, I was learning a lot, like I mentioned before about like sourcing, picking, winning, adding value, getting liquidity, portfolio construction, and as a general matter, like why early stage funds win. And you're hearing it from our founders, we were getting a lot of feedback from, I'm hearing it from the investment team. And then

we're seeing these emerging managers who we think really highly of, and I think really highly of, but they weren't always able to fundraise very effectively. And it was like really interesting because if you look at how we were all thinking about those funds, we were evaluating them purely based on qualitative criteria. There was nothing quantitative

and there was no track record. And that was interesting. By the time there's a track record, it might be too late. You're just chasing returns in a fund that is so big now, it's probably not gonna generate the returns that got you so excited about this firm. So like winning in venture as an LP is about finding the early stage small funds before they get big and are well known. It's having a framework of qualitative criteria and being able to test for

that criteria. Another thing I was learning at the time is the and being able to test for that criteria. Another thing I was learning at the time is the only way I could test for that criteria was to know the founders and to know the other investors, especially at the later stage, who are going to real talk me about these folks. And then you can get a sense of like, who has the scales kind of tipped in their favor to succeed as an early stage venture firm with no brand. Learned a lot about co-investing and LPs' interest in co-investing. And the fact that a lot more LPs say they want to co-invest than actually do co-invest, we could probably have a whole separate podcast about that. I also learned about working with LPs on the GP side, both during a fundraise and after a fund

is closed and having them in your fund. And what it and having them in your fund and what it means to be a good LP and what it means to be a great LP and how to challenge people constructively from the LP seat and how to help them grow, but not be pushy and be deferential. And those are some things I learned that went into me starting Slipstream and that inform my strategy today.

But there are a handful of other things I learned there that really stand out in terms of what a good early stage venture firm looks like. So if you were to break down like, hey, what are the six tools like we talked about? Like let's say it's sourcing, picking, winning, adding value, getting liquidity, portfolio construction. From a sourcing perspective,

some amazing lessons there. Like I still hear today, founders who talked to like Frank Rotman in 2010, like I'll get on a call with someone, they'll say, I wanted to talk to you because you were a QED. And I talked to Frank like 10 or 15 years ago, and he was so helpful. He understood the business more than anyone else understood the business. He didn't even invest. He was more helpful than most of my VCs who were on the cap table. And that led to what QED is today. Sourcing for QED and for a lot of these great venture firms is just making founders love them, whether they

invest in those founders companies or not. That was a big learning on sourcing. The second thing is from a picking perspective, just like having the courage of your convictions and not being afraid to be contrarian or to do non-consensus deals, but also to compete for deals that are hot deals when you're high conviction on it. Like you should try to win. If you understand why you're winning, that is a weapon. That is a weapon in fundraising. It is a weapon when you're talking to founders. It is a weapon when you are putting things out in the world in terms of interviewing, things in the press, thought pieces, things like that.

Really being honest about who you are, how you can help and how you engage with founders before you all sign up to work together. Because I think there are a lot of VCs who probably over-promise and then their founders are not so happy and then their founders aren't sending them their best founder friends

and you don't get the benefit of that flywheel. In terms of adding value, I hear a lot of people say VCs don't add any value. I hear founders say that. I hear VCs say that. I hear LPs say that. That's actually probably true in most cases, but that is not true in QED's case.

I learned that there and how much adding value can help in sourcing, in winning, and in impacting companies. I can't say if any of QED's winners happened because QED added value. I don't know how to do that exercise, but I do think QED adds a lot of value and I look for funds that add similar types of value. And in terms of generating liquidity, lots of learnings there. I mean, having a framework for how to think about liquidity,

when companies raise capital, for example, thinking about every round is a buy and sell opportunity. You may not be able to buy or sell in a round, but I hope you're close enough that you can decide whether you're a buyer or seller, that you have enough information. And I hope you're thinking about it. And I hope you're tracking it because we might look back on this and be really interested to see, hey, were you right? Were you wrong? Could you have done things differently? Oh, you were a buyer. Should you

have tried to get an SPV together? Should you have tried to follow on more aggressively? Generating liquidity also as a general matter is not always a passive exercise. It certainly can be, but being active about it and thinking about when and how to take chips off the table was a great learning for me. I would say the last big learning was just like on portfolio construction and like sticking to your strategy. And in most cases, trying to get the ownership you need to generate meaningful fund level returns, being thoughtful about entry valuations. The importance of that over time, as you see these companies start to win and you look back and you're like, man, we had

7% to 10% ownership on a $30 to $50 million fund. You're like, that's really compelling if these companies end up doing well. But if I were to step back and just like abstract all this and say like what at the very highest level I learned there about what a good early stage venture firm is, it's some edge that is relevant to sourcing, picking, winning and adding value. It is a strategy built around that edge and is the ability to weaponize that and communicate it to founders and other investors

and LPs. You said something peculiar there. You said the difference between a good LP and a great LP. What is the difference between a good LP and a great LP? I think a good LP moves quickly, is transparent. Capital is cold. You wire quickly. You're not requiring folks to email you because you're right up against the deadline.

Maybe you're reading the updates and other information these folks are sharing and sending thoughts. I think that's a good LP. I think a good LP is transparent and open about where they stand as they're moving through an investment decision and after they invest about how it's going. What is a great LP?

I think great LPs can constructively challenge GPs and help them be better. It's helping them with their strategy. It's talking about portfolio construction or recycling or follow-on decisions, but not in a confrontational adversarial way. It's supportive, it's deferential, it's trusting, but it's also giving folks feedback based on data and real experience that can help them be even better. And it's also things like sharing perspective on the market. Here's what I'm seeing folks are doing. It could be very technical things in LPAs. Here's what I'm seeing. This is not a standard term or there's actually a fund I'm finalizing an investment into.

And the LPA has a term that is unusual and not favorable to them. It's actually too favorable to LPs. And I'm gonna tell him and say, hey, I might change this. LPs would not expect this. They don't need this. And you might want this.

And so I think you might want to consider changing this. LPs would not expect this. They don't need this. And you might want this. And so I think you might want to consider changing this. And so it's people who are sharing perspective on the market, challenging them constructively, and helping them get the most out of what they're building. You mentioned giving feedback. One of the points of friction is always around portfolio construction. What is your philosophy on portfolio construction, follow-ons, and how should GPs optimize their portfolio? Oh man, this is another great question with like no one answer. There's no answer here. I can tell you what I look for, but there are a lot of ways to win. So I am typically from, as a general matter, drawn to funds that have high ownership relative to their fund size. That often means they are more concentrated. It doesn't have to, but typically more ownership corresponds to more concentration. And so I'm

comfortable with concentration. And the reason I want that ownership is because I am investing in part on the belief that these people are great at sourcing and great at picking. And if they are great at picking and they have a high bar, then I want them to concentrate in great companies and then we can all have great returns. That is the way I've seen outperformance. That's the way I've lived it at QED. That is something I've seen be successful across many funds and many vintages. But we also see plenty of lower concentration funds that are very successful. They need bigger outcomes. The companies need to get bigger exits to generate great fund level returns, but we've all seen examples of those. And so I'm certainly not here to say that that's not a great way to play either. So in terms of at a high level, what I'm looking for is high

ownership relative to fund size, but it's got to be built around what these people are uniquely way to play either. So in terms of at a high level, what I'm looking for is high ownership relative to fund size, but it's got to be built around what these people are uniquely good at. They're not well positioned to execute at a high level on a high ownership strategy, then they shouldn't do it. That fund may not be a fit for me, but they should have a portfolio of instructions tailored to them. On reserves, it's a really interesting question. In a purely hypothetical world where a fund manager is just trying to maximize returns, I think you can make a pretty good argument that they shouldn't have any reserves. Get your ownership up front, get into low entry valuation, take more shots, or have a smaller fund. And that's a great way to get returns. Using capital to avoid one round of dilution or incrementally buy up ownership at a higher valuation is not generally compelling to

me. But we all have examples where that's not true. We've all seen examples where reserves can help returns. So like, let's say you have an enormous winner and you just take your pro rata in the A and in the B. If that is a big enough winner, those investments can also return an entire fund. And it would be hard for me to argue that an investor should have put those dollars into new companies where the overwhelming odds are that those companies will not work out. I've seen this happen. And so

I can't say that's not the right strategy. The second thing is if you were to go a layer deeper, you say like, hey, reserves can be used in different ways. Reserves can be used defensively. So like a portfolio company is not quite ready to raise the next round of capital, or it's otherwise just struggling to raise for some reason. They need more capital. A venture firm might use reserves to support a company. But then you have to step back and say, what is the likelihood a company that's going through that experience

is ultimately going to become a fund returner? It is tempting to say very low chance. In my experience, I've actually seen plenty of these where it was just a little slower getting out of the gates or for one reason or another needed a bridge or a couple bridges. We had this a QED where we would be writing, it'd be agonizing. Should we do another 250? Oh, we have to write a $330,000 check. Should we do this again? We've already done this twice over the last few months. And the company was not, you know, not quite getting there.

And now that company is like worth more than a billion dollars. And so, you know, we've seen these stories. So I can't say that using reserves defensively is not a good strategy. But if someone told me in fundraising, hey, I really want these reserves so I can support companies

that are struggling in my portfolio, I would find that less compelling, of course. Then on the other hand, some people want to use reserves offensively. They want to protect their ownership in great companies. They want to build their ownership in great companies. Sometimes I meet folks where their initial check does not get them enough ownership, in my view, to make the fund math compelling. But they plan to build their ownership over time.

And if they can to build their ownership over time. And if they can successfully build their ownership, then they will have enough ownership relative to the fund size to be compelling to me. That strategy I have seen it work. It is hard. So if that's the premise of, if that's what's needed for a fund to succeed, it's hard for me to get there unless they have sufficient track record of showing they can do that. Because sometimes those companies, their other funds want to invest too. And it's just hard to buy up your ownership in them. But when it comes to like preserving ownership in the best companies, sometimes there are funds that say, hey, we're just preserve ownership in our five best companies. And then my question is like, if you can actually do that, that's great. I can totally support that and get excited about this fund. But then my

question is, hey, do you know at the time the opportunity arises to take your pro rata in the next round, do you know if this is going to be one of the best companies in the fund? So let's say that's like somewhere between one and two and a half years after an initial investment, that a company is raising its next round and you are faced with a decision about whether to take your pro rata. If that's one of the earlier companies in your portfolio, you may not be done making all of your initial investments. It's really hard to know. One question that I ask to folks who have been investing for some period of time is like, how long does it take you to know whether you have a winner?

And the answer I most commonly get is like not less than two years. And so I do wonder how good most folks are at following on to the right companies if they have limited reserves and can only follow on into a handful of their portfolio companies. At the end of the day, I come back to kind of fund

size. If your fund is like 15 to 20 million or smaller, typically strong preference for no reserves. If you're between like 20 and 30, maybe 40 million, it's a gray area to me. I think you could have them. You probably have them like less than one to one. And then funds that are like 50 million and bigger, I'm comfortable with reserves. And I rarely see funds that size that don't have reserves. And there are some practical considerations when it comes to having reserves that don't relate to fund math, but do impact fund level returns. The importance to founders that you have reserves and how that impacts your ability to win a deal. If a VC wants to lead a round, a founder, they might

be more comfortable with someone leading the round who has reserves to support them if they need a bridge and if they want them to be able to invest in future rounds just for signal purposes. On the other hand, if there's someone writing a small check out of a $15 million fund, I don't think the founder at the time they're signing up with that VC is expecting that VC to be able to support them in a time of need with reserve capital. So it is impacted by that practical constraint. And if someone leading rounds doesn't have any reserves, then I'm a little worried about their ability to work with the best founders. In your experience, how much are GPs penalized for not doing their pro rata in the market? I think that's something that changes over time.

I think there are some times when like in 2020, in 2021, when the market was really hot, I'm not sure that folks at the later stages cared much whether the earlier stage investors were following up. I think in other times, just like in different parts of the market cycle, I think it is more important. And I think it can depend on the venture firm and it can depend on the state of the company. So I'm not sure I have one answer. I think it is relevant for founders to consider. And I think it's relevant for VCs to consider, but I don't think there's one answer that applies universally. Alex, as expected, this was the longest interview to date, and this has been one of the most enjoyable. I've really enjoyed going back and forth and you expanding on so many important topics to emerging managers and LPs. What would you like our listeners to know about you and about

Slipstream? I want to be a positive force in the ecosystem. I want to help venture firms, whether or not I invest. I want to help LPs get great exposure. I want to work with the best fund managers. I want fund managers who work with the best founders. And I want to align with people who have long-term interests in the asset class and take the long view here because it's a long game. So one thing I'll note, one of the things that I've learned over going back to my first startup in 2008 is that people show their character very early on in a relationship.

And you just recently met, but you've been amazing friends, made a bunch of introductions, and you truly look at the world in a non-zero-sum fashion. So I very much appreciate you as a friend and thank you for jumping on the podcast. Thanks. That means a lot to me and I feel like mutual and grateful you had me on. Thank you for listening to this week's episode. In order to make sure you do not miss out on next week's episode, please make sure to subscribe below. We thank you for your support.