Investing Billions - E26: Winter Mead of Coolwater on Building the YC for GPs

Episode Date: December 8, 2023

Winter Mead, Founder and CEO of Coolwater Capital sits down with David Weisburd to discuss the importance of emerging managers and how Coolwater Capital is building the YC for GPs. We’re proudly sponsored by Bidav Insurance Group, visit lux-str.com if you’re ready to level up your insurance plans. The Limited Partner podcast is part of the Turpentine podcast network. Learn more: turpentine.co -- X / Twitter: @wintmead (Winter) @dweisburd (David) -- LINKS: Coolwater Capital: https://www.coolwatercap.com/  How to Raise a Venture Capital Fund: https://www.amazon.com/gp/product/1736234315?pd_rd_r=7e969602-8c50-4502-bb41-4f524009f450&pd_rd_w=vnJ2J&pd_rd_wg=cRK3G&pf_rd_p=5ae2c7f8-e0c6-4f35-9071-dc3240e894a8&pf_rd_r=CZFMF8GSWENXXZK16V4E&ref_=pd_gw_unk  -- 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, Ahmet 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. Ahmet 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 Ahmet 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]. -- Questions or topics you want us to discuss on The Limited Partner podcast? Email us at [e-mail] -- TIMESTAMPS (00:00) Episode Preview (01:01) Genesis of Coolwater Capital (03:11) Learnings from Hall Capital (04:24) Why venture is fundamentally different than other asset classes (05:10) The proliferation of venture capital (08:45) What is Coolwater Capital (09:53) How Coolwater scaled their emerging manager program (13:20) Avoiding adverse selection (14:15) Episode Sponsor: Bidav Insurance Group (14:57) Operator vs Founder mentality (16:15) GP Mentality (21:30) Coolwater Academy (24:53) How Coolwater helps emerging managers (25:47) Common mistakes emerging managers make (28:49) Minimum viable dataroom emerging managers need (33:38) Operational Due Diligence (35:43) Is there an ideal follow-on policy? (42:39) Coolwater’s mission (44:05) How to find committed GPs (44:33) LP value add 

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

Ariana Thacker at Conscious. So welcome to the Limited Partner Podcast. David, thank you so much for having me. Great to be here. So let's jump right into it. So why did you create Cool Water Capital? Yeah, so there's this idea of helping emerging managers. So that's talked about, I think, in a lot of different ways. Like you have the haves and the have-nots. I think emerging managers kind of fit into this category for a while of like the have-nots. And so I started thinking about this for like a while back. And I got introduced by one of my late mentors, Kurt Dizon, when he was at Hall Capital. And so he was one of the two people who hired me,

Jessica Rizzoff was the other person, and actually Pat Robertson, who's at Dragoneer now. Those are the three people involved. I was pulled in there by a friend. I think she's at Centerview now, Amy Licorant. So I was pulled into that team, I'm like the private equity team, pretty early on. But Kirk was the person really, I think, pounding the table for emerging managers, right? And this was, I think emerging managers had a different, they just had a different reputation in 2010 timeframe than they do today, almost getting close to like 15 years later. And so it felt like back then you could count every emerging manager on, you know, three or four hands. And so, you know, I joined Beezer and Nino over at SAP Ventures at the time, now Sapphire Partners. The idea there was, you know,

investing exclusively into venture. And I think we at Sapphire at the time were more focused on kind of that mid-stage, like that $100 to $400 million category. But you just saw this massive change in the market going on, right? So 2010 to 2015, 2015 to 2020, then 2020, 2021, I feel like was its own category. And now we're kind of in a different market today. We just saw this massive proliferation of funds and the market wasn't responding how institutional investors, institutional LPs would address diligence. I ended up thinking about that long and hard and started iterating on this concept in 2016 of what would it mean to be the

best coach for emerging managers? I wanted to support them. And that's kind of the genesis of Coolwater. You started at Howl Capital. What did Howl Capital get right about the space? They got a lot of things right. But I think two things that I can think of off the top of my head. One was they got the micro VC space right. Right. And so you were looking for exceptional teams that were local. I think that was the second thing was like the local piece. And so we also invested internationally.

And I think they did a good job of finding good venture managers internationally as well in other, in other technology ecosystems. I heard Katie say this a bunch of times when I was there, you know, seed is local, like it's a local game. And so if you're going to invest and put seed managers into your portfolio, you know, thinking about like these different ecosystems, not only in the U S but all over the world of these, you know, scene managers that are, you know, very talented, maybe they worked in the Bay area and then they kind of go back to their respective ecosystems, respective countries. And they're kind of, you know, they've, they've learned the trade and the craft of venture capital and what it means to build a big business, but you're still, you know, betting on that local team and local

firms. So there were a few managers we partnered with internationally and you kind of, you know, follow that talent, follow those teams to those different, you know, regions, areas, cities. What makes venture fundamentally different from other asset classes? Fundamentally, you know, when you think about portfolio construction and kind of what's going to drive returns, like power law is kind of the big concept of what will drive returns at the fund level. So you have to have a great network. you have to have great access, you have to have great picking ability as a manager, you're making like a different bet than if, you know, you're underwriting investment in private equity, you know, and structuring it differently, right? Like you might have protections around the debt,

like you're, you're kind of collateralized in a different way. So there's a lot of I think, you know, different, like fundamentally different's a lot of, I think, fundamentally different concepts you're agreeing to and abiding by if you're investing as a venture investor than a private equity investor. You broke it down 2010, 2015 to 2015 to 2020. How are those eras different? We started to emerge probably out of the great recession in 2011, 2012. I'd say things started to turn a corner. You started to have some bigger IPOs more on the consumer side for venture. If you think about where bigger ecosystems were, back in 2010, Boston was still bigger than New York. And now people don't even bring up that

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

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

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

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

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

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

I was seeing a couple of press releases and was surprised just like, how did I not see that fund? Right. And I think some people might just be like, oh, I I not see that fund? Right. And I think some people might just be like, oh, I didn't see that fund. I saw, I think that year I saw 504 funds, I believe. And yeah, that's a, that's a decently high number. We're seeing kind of two to three X that now at Coolwater, but that's a decently high number of managers. Like, especially if you think about what an institutional investor's pace of investing is, you know, at the time we were a little bit higher, but yeah, it's probably one to five new fund managers per year. So you want, you want top of funnel, but you know, another interesting piece there was

just like, there's so many managers, like, how do you go deep on all of those investment opportunities? And I think one perspective is like, you don't need to, another perspective is like, just tighten your filter. And we definitely did that when I was at Sapphire. We do like a strategic offsite every six months or so. And another perspective, and I think this is the Coolwater perspective more so, how do you build relationships with managers? And how have you been able to scale to so many managers at Coolwater? What's your secret sauce?

So we run a couple of programs. Like the core program is for fund managers. So I wrote this book in 2018 called How to Raise a Venture Capital Fund. It seems to have helped a lot of managers kind of wrap their heads around that initial zero to one phase, let's call it, of building a fund. That's interesting, but it doesn't really give me the relationship or give Coolwater the relationship with someone. So I don't have a better perspective. That's interesting, but it doesn't really like give me the relationship or give Koolwater the relationship with someone. So I don't have like a better perspective. It's definitely impactful and helpful, but it doesn't lead to a better relationship. So the idea there was how do you lend help to someone? And if you know me, like my personality is very much like,

you know, I kind of acknowledge what I don't know and try to know as much as possible to be as helpful as possible. And so the idea there was, you know, after Sapphire, I consulted with, I think it was 15 different investment firms, all emerging managers, funds one through three, and helping them in a number of different like functional capacities, but really more so on like back and middle office than front office. Because at Sapphire and at Hall, it was very much more like front office, buy side, like you're underwriting the investments, right? Like you're an investor, but there's all these

other things that are happening when you're launching and building an investment firm. So it's kind of that concept as well, which is like, okay, there's all these additional things you have to do as an emerging manager that aren't just investing, all these other functions you're responsible for. It's the same thing where if you're building a startup and you're the CEO, right? You're like, yeah, I just want to like build this product and like solve this problem. But then you're like, wait, all of a sudden, like I'm running a business and I'm scaling a business. And so I think that you see that same pattern play out with emerging managers. It's like, okay, I'm doing this for two people. I could continue to do this for two people at a time for the next, you know, 40 years of my career.

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

And then all of a sudden it's like, oh, I'm going to be the COO for what? Like a hundred firms? Like you're not, right? Like just physically, that's impossible, right? You just physically run out of time and space. And so like, what do you need to do to change the model? I think I heard this as well when Andreessen was coming to market, right?

They're like, oh, Andreessen, they're gonna have this amazing market development team, right, they're built on this unique model to help managers, like to help founders. Like, but the best founders don't need like help. That's probably like more true than less true. Like the more true part is like the best founders are probably like the ones that you're not answering all the questions for, you know, seven days a week as a

VC, but it's not true that they don't need help. And I think that's true with Coolwater as well, which is like, you have the best managers. Yes. They're just amazing at, you know, implementing and executing and building and doing all the right things, but like they still need help. Right. In terms of positively selected managers, not adversely selected, what is it, what is the value that you provide to them? Yeah, positive selection. Like, so I was having this conversation this morning, right? So there's a couple of concepts or a couple of archetypes, let's say,

in venture managers, right? Like you can work at, and this is up for debate, but you can work at a tier one firm. So again, you can have positive selection, right? Where from an institutional LPs perspective, positive selection would be like that archetype. You know, you've worked at a tier one firm and you're spinning out like that is a very tried and true archetype of like what we'll get institutionally back. But again, like where, where's the compliment? Like why is cool water interesting to a firm like that?

That's the same reason why an amazing founder takes venture capital money in the first place, because they can build something faster, or they view the partnership as strategic, right? And so the positive selection aspect is these self-aware, you know, apprenticed, like really great, high potential investors are kind of saying like, okay, hey, how do I do this faster? Today's episode is sponsored by 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 and 10X Capital, driving down our fees considerably while providing a premium solution. I'm proud to personally endorse Amit and I ask that you

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

already had some track record. And again, I think there's a difference between an emerging manager track record and a more institutional track record. You're looking for these people with high potential that are all, that already demonstrated like high discretion as an investor. And that can come out in, you know, a few different ways. Is it analogous to a very smart CTO that might not know how to sell the product, but is very good at developing a product? Is that where you bring in alpha? That's the idea. Like if you're a CTO and you're going to become a CEO, right? Or you're the CTO and you acknowledge that you're building a company, right? There's different parts that you

have to build. That's not just the product. And there's different teams you have to manage that aren't just the engineering team, right? Or the product team. So yeah, there's definitely like an analogy there. It requires a certain personality type as well. I think one of the paradoxes as a VC, I look for individuals that are almost uncoachable, maybe an eight or nine out of uncoachability, but have the wherewithal to actually be coached in the areas that are necessary. Beginner VCs oftentimes look for people that are highly coachable. Those, in my opinion, have not led to great successes. Is there a similar dynamic in emerging managers that you foresee? There's this ability to like swallow your own pride, right?

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

I'm not going to build the company. Like you're so focused on the solution that you're kind of like okay these are the things i need to put in place to actually get to the solution i was having lunch with one a 10x capital partner who took coinbase public while he was at goldman he said that brian armstrong was very focused on doing a token tokenization offering of coinbase when they were going public and as soon as he saw that that was going to delay the offering he immediately pivoted into pragmatism and he went public. And of course, in retrospect, it was a brilliant move given that Gensler was now becoming SEC chair and it might have delayed his IPO by many years. So there's this mission-driven aspect with a pragmatism that is

very rare in most leaders. Yeah. There might be also like an element of just like some creativity, right? Like you have this like focused, almost blockheadedness sometimes of people that are just like, you know, charging through walls, but sometimes they realize that, yeah, it might actually be better to, you know, throw a hook on top of the wall and like climb up and over. Right. So that, and like, but to your like marrying that with like the pragmatism, like sometimes you're like, oh, well, the wall's too high here. Maybe, maybe I should actually like walk down the wall a little bit and like I'll find a door or something. So there's some of that going on, I think, with managers too. And that's not articulated in the right way. There's a creativity there. There's these traits that you're looking for that maybe are very akin to like a great technology company founder. Like I'm looking for, you know, with an emerging manager

to kind of say like, yeah, if you do grow up, there's going to be a lot more things here to manage. And like a lot of times this is a lonely game, especially when it's early and you don't have like massive management fees to like, you know, scale out a huge organization. Like a lot of times it's like very lonely and no one's like telling you what to do or how to do it.

And so there is some of this like creativity that goes on, you know, coupled with pragmatism that leads to, I think the scaling and the growing up from an emerging manager to an institutional firm. It seems like mental fortitude is an important thing in emerging managers, specifically solo or two person teams. What other psychological traits do you see in emerging managers that are predictive of success? The fortitude piece is definitely key. The creative piece, like I mentioned, I believe is key. I think you have to have like an exceptional insight, right, into what makes a great investment. And that's probably like the apprenticeship piece or like why we look for existing investors in the first place.

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

kind of boil it down into like the absolute essentials and And then like, just like ruthlessly manage those essentials. Reminds me of a poker analogy, playing tight aggressive, which means you play a few hands, but when you're ready to play the hand, you play it very aggressively. And then everyone knows you're going to play that hand again. It's like in the next one. I had during COVID, I made two substantial investments, one in Robinhood and one in HoneyBook. I can't talk about returns, but they've done really well. And my thesis was very simple, which was people didn't know whether, you know, and Robinhood and one in HoneyBook. I can't talk about returns, but they've done really well.

And my thesis was very simple, which was people didn't know whether the world would end and whether everyone would die. My thesis was very simple. If the world doesn't end, then the return would do well. The numbers are good. If the world does end, then the money will not be worth anything. Anyways, you might as well invest.

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

like the academy. So it's very focused on knowledge, content, training, how do you improve? Right. And I think that's, you know, even if you disagree with like going to college or doing a vocational school, like you have to agree that at some point you need to learn your craft. Right. And the, the bet there on like the cohort is how do you learn your craft faster? And then that's coupled with the club piece, which is more like the community piece. So it's how do you learn your craft faster? That's great. But like, I think you can learn it even faster if you do it as a cohort within a community, right? You have the shared experience across like the different cohorts. And we have three cohorts right now. We have one that focuses on building your track record for very early people that are undecided whether or not they

want to become a fund manager. That's called explore. You're exploring whether or not you want to be a fund manager. We have build. So you've already explored. Now you're ready to like build something. It's kind of that launch phase. So that the build program is focused on fund managers explicitly. Like, yeah, I'm ready to like figure out what it means, understand all the different pieces, right? Like I need to know what it means to be a fund manager and all the different pieces of fund management maybe this has come up in the past but like the existential piece is like the zero to one like which I think is a known concept now via via Peter Thiel like this existential piece of like I got to get the fund off the ground and once you get the fund off the ground wait now I've got to

raise another fund now I've got to invest this fund now I've got to build that infrastructure so there's like the idea of like existential getting the fund off the ground to persistent, which is like, now I need to build even more. And so the build program, maybe we should have called it like existential, or maybe we should have called it like launch or something. But the build program really is like the, Hey, like I need to get my fund off the ground. What is everything I need to know to do that? Right. And how do I do that the best? And then once you do that, like the journey doesn't stop. And so as you think about like the ground, what is everything I need to know to do that? Right. And how do I do that the best? And then once you do that, like the journey doesn't stop. And so as you think about like the cohort, right, the Academy, it's kind of, we think about it as like, let cool water problem

solve for emerging managers. Again, we think that's where our special skillset is and our ability to deliver the most amount of impact is for the early stage ecosystem and for the innovation ecosystem. So that's it. The Academy is like, Hey, you know, as an emerging manager, before you start, when you start as like, after you start and when you're scaling, like you're going to have these problems, right. Or challenges or, you know, opportunities to overcome. How can cool water play like a complimentary role there? And now, right. Like it's turned into a community of that's the club. That's the second piece of cool water. So it's like, okay, well, we don't just want to like help people and then just like, let them go. So we manage this community as well. The community now

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

That's exceptionally high. I think that's higher than Zappos in its best times. What do emerging managers credit you with? So the three things to answer your question explicitly, fund management, like these concepts around like what it means to manage a fund, operations, right? So people, again, like this is something people, emerging managers in particular, like think they know, but there's like these gaps there. And then fundraising strategy. This like encompasses like the ability to differentiate yourself, right?

Think of the founder, that's the CTO, that's really good at building product, but can't actually sell and articulate with what they're actually building. Like they're just two in the weeds. And so you need someone to kind of like tease it out, pull it out, like that's fundraising strategy. It's like helping people with the narrative,

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

to your best friend being like, Hey, I've had this really good idea. I've invested in 10 unicorns, like accidentally. And like, I'm pulling together this fund thesis. Like, what do you think of this fund thesis? And like, do you think I should be a fund manager? It's kind of a big decision. I'm going to do this for the next few decades of my life like if that's the conversation with your best friend like fine like you don't need to have ducks in a row but if you start reaching out to people be like hey i'm fundraising right and they're like whoa that is so good you've invested 10 unicorns that's amazing like i want to invest like where do i sign and you're just like i haven't actually done any of that yet right so funnily enough like that happens

more than you think that is a process in and of itself, right? Like the, the actual, the back and forth, the managing that process, the KYC, all of that, I think is like a fundamental mistake that surprisingly a bunch of managers make. Another one they make is like, they don't really understand the market well enough. And again, maybe this falls under the fundraising strategy piece, but if you talk to like a very savvy LP that invests into venture, right? Like that is kind of one of their big mandates or like their only mandate. They really understand like the market context because like they've talked to 500 managers or they've talked to a thousand managers. And so a lot of emerging managers,

I don't know what they're doing, like, but they should talk to as many people as possible. Again, like you should have 20 best friends and talk to them all and like pitch them and like, get like, like process that feedback. That's like coming up with a narrative that is strategically positioned relative to the current market. That's a second mistake where people kind of like, they don't do enough diligence on that side, which may be a yellow flag for LPs because you're like, Hey, look at how special I am. And a bunch of the LPs are like, well, actually you're not special, right? Like, cause 50 other people are doing that. And I've talked to all 50 of them. A third mistake is like, they talk to some of these conversations like too soon before they,

again, this is ducks in the row, but on a, like, not just the fundraising piece, but it's like, now it's like, okay, I'm digging into your data room. Like you have to pitch me, like, I need to understand like what you're doing. And so I do think a lot of people stub their toe on that. And some LPs are unforgiving, right? Like Coolwater has this unique type of culture as an LP, which is like, it's the safest space to talk about everything. Right. And like our personality is like, we just want to like help you as much as possible. If you've already proven that you're a great investor coming to Coolwater,

this is the safe space to talk about stuff. But I think a lot of LPs are rather unforgiving where it's like you pitch them, they're like, okay, you don't have your ducks in a row on like, you know, this is a completely unbuttoned up process. Your data room is deficient. Your narrative is indistinguished.

And like you have pitched me on stuff and I've asked you these fundamental questions that every institutional fund manager should know. And you actually haven't been able to respond to me in a way that gives me confidence that if I give you $10 million, like you're going to know exactly what to do with it. You mentioned ducks in a row and data room. I think you've, you've made the entire audience very, very afraid of LPs being unforgiving. What is the minimum viable data room that you need to see from emerging managers? Wow. Tough, tough question to ask on a pod. This is more like, can I share my screen type of question? The minimum data room can have

an LPA and subdocs. That's period. So if I scared people on the last comment, like how easy is that? You don't even write your LPA and sub docs. You just need to like pay someone to do that. Right. So that's, that's the minimum data room. So hopefully that's a redeeming answer. But like, if you're like most people, you're probably gonna have a few more things in a data room, fundamentally pitch deck.

This one's obvious. Right. And that there's the pitch deck, right? I'll just put a pitch deck in there, but there's like the pitch deck that tells the right story and again does these things that are more nuanced like where do i sit in the ecosystem is my strategy special have i you know checked off for an lp like the right things in that pitch deck right so the pitch deck yes but right there's another layer to developing a pitch deck and like including the right information. If you've invested before, right, which is most likely yes, like if you're raising a fund, then I would include that track record,

that investment track record, right? And again, like there's including the track record, right, which has, you know, a few amount of columns and there's including a track record that like has the information that LPs are actually seeking, right? So you start to like see that every piece of the data room, there's like, there's a checking the box element of it. Right. So you start to like, see that every piece of the data room, there's like, there's a checking the box element of it.

And then there's the actual, like, what are LPs actually looking for when they kind of like download that and play around with it, the track record case, like most LPs, most institutional LPs want it in Excel, maybe that's true for most LPs, but I feel like if you're a merging manager, you get away with a lot of other media in terms of like how you're, how you're sharing your track record. Again, like don't, don't overcomplicate it. There's a lot more, there's a lot more you could fit into your data room. If you're trying to raise more than like $10 million, they'll probably pass if you don't have like a portfolio construction model.

They may pass if you don't have some compliance information, like if they're a bigger check writer, like they kind of want to see that you've set up the business already. Like, hey, I'm going to write like a big check into this business that doesn't really exist, right? VCs probably do this diligence as well. Like, okay, I'm going to write you a seven figure check. I want to see like that this business actually exists and everything's set up and the bank accounts are all set up. So again, like you probably like do yourself a service and like put that type of stuff that proves like the business is already in business in the data room so that people can be like, okay, yeah, it's, it's filed. It's legit. You've got the bank accounts. The state has approved it just so that gives people, I think more confidence. If you're a bigger team,

like include like a separate folder for biographies, right? Like you might want an organizational chart, right? There's this idea of, right? Like what does the organization do? If you're a little bit more complicated than I'm a solo GP that runs around and does like enterprise software, maybe include that, right? That could be in your pitch deck, but maybe you want to break it out. Cause some people like go into a data room looking for specific answers. Yeah. And then if you, you know, if you start to think about graduating into, you know, the big leagues, like you might have an FAQ document and a DDQ and like these other things. The list goes on a little bit more than that.

It's in my book. It's also something we talk about a lot, but data room shouldn't be scary. Like you don't wanna like overdo it. Like you wanna make it as efficient as possible if you're an emerging manager. Like if you're five funds in, like you should have an exceptionally robust data room. If someone's betting on your first fund, include the materials that you are

hearing questions from the LPs. If you've all of a sudden decided, okay, I'm going to raise this fund. I've got my first few documents in there. Then all of a sudden, you start getting all these questions. LPs are like, hey, what about this? Do you have like, that might happen. So it's a very, like the data room can almost be like this bespoke development per GP. And if you start to see that LPs are getting stuck on a certain thing, like, Oh, I don't really understand. Like, you know, you're investing into 200 companies or you're investing in 10 companies, or you've got this weird waterfall structure, or, you know, you're investing into this new type of technology. How does that work? So you might have these additional pieces that get added to your data room. And think of it as like, my data room is there to help LPs do their own work

and give them confidence that I know what I'm talking about, that this is a good bet, that I've thought very long and hard about the strategy. You mentioned compliance. What kind of compliance are you looking for? It's like the big picture is operational due diligence, ODD. But, you know, there's certain institutions, most institutions, I'd say that, you know, if they start moving through the process, like first, they're going to want to bet on you and your track record and the strategy. But if they get past that initial phase, then they're gonna move into legal due diligence

and operational due diligence, right? And to the point of like, I wanna show that I have legitimate operations and infrastructure. How do you do that? What are the things you need to put in your data room that show like you have a real business, it's been filed with the state, right?

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

I'm the only person in charge of that, right? That is potentially something that's dangerous, right? Like what if someone like signs into your account, right? Like there's a security risk there and then you're in charge of like all of it. So creating like dual permissions for wire transfers, right. And you know, maybe you work with your fund admin on that and they give you that document and you put that in your data room, right.

So there's little things like that. And like, again, like it's a laundry list of things when you, you know, get bigger and bigger, but there's these things that you should just put in and if you've already done them again, you're doing yourself a disservice by not including that in the data room, showing LPs that again, like are doing their own homework, right? Like that you've like thought of this

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

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

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

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

And is there really a better risk-adjusted bet at like the N plus one or the N plus two round to put those dollars to work into my best companies? And like the reason this I think has changed and become harder to answer since 2020 and 2021 is because like that market environment blew up graduation rates, right? Where 70% used to be like a great graduation rate,

but then all of a sudden, like a lot of preceded seed managers, I felt like it got probably over to 90% plus, right? Where it just almost every single one of your companies, like if they were, they had any like, you know, semblance of like progress, they were raising capital in that timeframe. And so people are like, they were just, you know, investing into their pro rata without like the ability to like the way reserves were traditionally like used was to like just do it in the best performing companies. So best practice is probably having a process

when the follow-on happens, where you have an explicit conversation to determine like the updated status of the business and make a, you know, re-underwriting decision. Like, is this a better risk adjusted bet? Is the company in a better state? you know, re-underwriting decision. Like, is this a better risk adjusted bet? Is the company in a better state? You know, is the company like, has the risk been reduced for this company being a successful outcome? Right. Like make that a process. It's an ongoing exercise, like from what I've seen been done, like it's a very hard exercise to do. Like, and it's never, it's always going to be hard because like, you can't predict the future. You can't predict graduation future. You can't predict

graduation rates. You can't predict product success. For early stage venture, it's very hard. If you tranche your capital and you're a different asset class, fine. But in venture, it's super hard. What if you have more failures? So now you have this extra money. Do you make additional extra bets, new bets? I was going to do 30 companies. Now I have the money to do 40 because I have a higher, you know, loss ratio or, you know, if more companies graduate, like, do you invest in all of them? Right. Or like, which ones do you like, you know, again, like who are your favorite children versus not like, how do you pick those? Do emerging managers, in your opinion, get heavily penalized for not doing their pro rata? How does that play out over many generations?

I think like the way it probably plays out is the best investors do their pro rata in the best companies. And they like double down over time. If I'm an LP and I'm looking at your fund four, and like I've seen you invest in fund one, fund two, and fund three. And like your best companies are your 100K checks. Let's say your portfolio construction is like, I wrote a 100K check, and then I doubled down five to one. So I put a 500K check after the 100K check. If you're looking at fund four, and I'm doing the underwriting, I'm looking back at your fund, and all of your best companies are 100K, what does that tell you? It probably tells you that you haven't actually picked your winners,

like you just got lucky. So there's something to be said like, hey, actually this person was playing in the right space. They had access. They put the 100K in like the right company to start, but they're not, they've missed something on the portfolio management side where they didn't put the 500K after the right 100K ones. And I think if you get bigger, that could actually like lead to suppress returns.

Like if you're putting, you know, you put a million, you put 5 million, like that's going to lead to suppress returns. Like if you're putting, you know, you put a million, you put 5 million, like that's going to bring down your returns. And the LP might say like, well, okay, maybe they'll still make the bet and say like, hey, you're just like, you're in it. You're picking the right things. But in terms of portfolio management,

it's like you're putting, you know, the good dollars after bad most of the time. And you've proven that over three funds now, right? So like at your fund four, like that'll be a different evaluation. If it's a fund one to fund two, and I'm like now at your fund two, it's so hard to tease out like, okay, great. You followed on your pro rata. What does that tell you? It tells you that like David has really good relationships with his founders and he's able to get that, like he's got the information, right? So he's able to get that next

check-in and like defend his pro rata, especially if like you're investing alongside, you know, the tier ones. And so like, that's what an LP is looking for. And they're like, wow, like, that's, that's really cool that David was able to invest like next to those like five tier ones, and like defend his pro rata. Like that's really exceptional. And even buy up ownership because he had this like five to one, you know, thing like that's really impressive. Right? So they look that's more like signal, which is why I think a lot of is one of the reasons not the reason but why LP is a lot of time wait to get to fund three or fund four, like there's really impressive, right? So that's more like signal, which is why I think a lot of, it's one of the reasons, not the reason, but why LPs a lot of the time wait to get to fund three or fund four. Like there's a lot more like substance there

and the evaluation is like fundamentally different. You could almost argue that in a GP that returns a good fund without doing significant follow-on consistently has very good sourcing and a GP that is very good at following on has good picking. Two different skill sets in a GP that is very good at following on has good picking. Two different skill sets in a GP. Ideally, you have them in one, but I think both are important.

We spent quite a bit of time talking about portfolio construction and how you assemble your teams and how you assemble your cohorts. What would you like the listeners to know about you, Winter, and about Coolwater. Yeah, I think there's an opportunity here, right? So what is Coolwater trying to do? We're trying to help emerging managers make the journey easier. We're making it easier for everyone in the world to be a fund manager. The idea there is there's a commitment to founders. There's a commitment to early stage VC. There's a commitment to innovation. There's a commitment to innovation, right? There's a commitment to like technology development. And like, you've demonstrated a commitment to being a great investor and a great fund manager. Like those are the people that Coolwater is looking to intersect with. And I'd

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

bigger way and like, you know, the meaning of venture, like getting them to come in and align with emerging managers and understand the emerging manager world. Coolwater does do that a lot. And so for our cohort, for example, like we bring in every cohort, 50 new LPs and experts, and I have a couple of follow-ups on it's too interesting. One is you want to find committed GPs. How do you suss that out in your qualification process? We just, you know, ask them if they're active and like, before we do that, like ask them like what they want. It turns out like if you, if you start the conversation that way,

a lot of people actually want to, they want to contribute in a way that even if they are an active LP and could invest into the fund, like they want to contribute in like other ways as well. I'm too intrigued when somebody mentions LP value add, it's like talking about unicorns and mythical creatures. Well, what is LP value add? And specifically, what do GPs consider LP value add to be?

LP value add comes in a few different categories. Like one is advisory, right? To qualify as a teacher, they've usually invested in 20 or more emerging managers, right? So they have a perspective, they've seen it play out. Ideally, they've sat on LPACs. It's like if you are giving advice to like a venture backed company and it's like that, and you're trying to help them scale, do you want to hear that from someone that's made may like two angel investments or do you want to hear that from someone that's on like 10 boards right so i think you're kind of qualifying for that level of expertise those are the people that like should come in and offer advice but i do think there's value out there i do think there's like lp value add can be like the type of conversation that cool water tries to create which is like hey hey, this is a safe space. Like we're solution oriented. We're trying to get to

a better place. Let's just like put everything on the table and like figure out like how do we get to that better place? So that can be LP value add, like LPs that actually serve as mentors to emerging managers. And there's not a lot that do that. Like if you think about who the mentors are, the mentors are more like the GPs. Like it's kind of like your big brother or big sister on the GP side. It's not like your big brother, sister LP. So I think that can be another form of value add. It's about networking when you're kind of fundraising. So value add can be, yeah, let me introduce you to these people that I actually know care about life sciences. I don't do life sciences, life science investments, but I know five people that do. Why don't you talk to

them? Because like I've, you know, spent 30 to 120 minutes on your opportunity and this is actually really interesting and, you know, they care about life sciences. So that's LP value add. I think LP value add in the emerging manager world starts to get different than just like the LP value add of like the traditional VC world, meaning like it can actually focus on, you know,

syndication, co-investments, business partnerships. So you do see a lot of that, right? And that's been, I think, tried and true for a while. Like, you know, a lot of VCs, you know, not only in the last 10 years, but before that thought about like bringing in their LPs strategically. And that isn't necessarily like something you can command, like your fund one, you know, you're not going to be like, sorry, I'm not going to, I'm not going to take your. Like your fund one, you're not gonna be like, sorry, I'm not gonna take your money because you're not strategic enough. Maybe some people will do that,

but that's literally like less than 1% of people do that. They're more like, what, you're gonna invest in my fund? That's awesome. Like, okay, great. But there is something to be said around like understanding what your LPs do and being able to like sort them strategically and being able to like leverage that. And there is more of that in the emerging manager world, high net worth,

and they're tied to like, again, like they can help with business partnerships or be early clients. I've seen this, especially in like the, the kind of the deep tech and the industrial tech, right. Value add from an LP can also be keeping you on, keeping you honest, like an on track with like, if you, if you set the intention, right. And this is what Coolwater is trying to do at scale, but for other LPs, like if they're, if they're listening, like to just like, keep, keep them honest, like you're not sending out the right reporting, right. Or like you should be doing an annual meeting or some of these things that I think are good for governance and good for like building the business that a lot of LPs just kind of like

wait until the next fund and then judge you on it. When I think they should just be like, feel like there's maybe there could be more of an open communication there and say like, Hey, you know, it actually says like in your LPA that you should be doing an annual meeting. You didn't do one last year. I forgive you, but you know, you think you should think about doing this because it's like a great way to, you know, strengthen our relationship. I think LPs can play a value added role. They should think about it selectively and strategically, like they're not board members, but they can play this like role. And I would almost argue that a lot of emerging managers are okay with that. Cause they probably sit on the other side of the table, like not quivering in fear, but definitely like thinking, okay, what do my LPs think? Right? Like I haven't heard from them in six months.

I'm reporting into this vacuum and they never like, you know, I spent 10 hours on my quarterly letter and they didn't even say like, thank you. Just kind of setting that like expectation. I don't think the expectation in the market has changed enough. Like with what you're doing with hashtag open LP, with like LP transparency, like all this stuff, like there's more people who are vocal on the LP side, but I still don't see like the behavior changing where like, there's still like a lot of fear from GPs. And it's like, yeah, I think Lyndall Eakman over at Foundry kind of like talks about it. It's like, you know, putting the partner in limited partner, right? That concept of like, how does that manifest at the, at the market level? It's like GPs being okay to ask LPs. It's the same thing.

If you're a company and you ask like people on your cap table something, right? Are they not going to invest in your next round? Or you ask your board something, like, are they going to fire you at the next round or something? Like, it's that type of fear that might exist where it's like, okay, trying to play my cards like perfectly right. But like, trying to like, you know, on the partnership side, like, is there a time to ask LPs? I don't see this nearly enough to like, ask all your LPs like,, Hey, checking in, like anything I could be doing better, anything that you want. Like, I really don't see that. It's like the update, like, Hey, I made these five investments, but there's not like, Hey, you know, you're really smart. You've, you know, you put a check

into our fund. Like, what do you want to see more of? You know, that trusted relationship is something that you earn, you know, as a VC that you have that when you're the first call before or after a board meeting. And when people come to you with vulnerability, it's a skill. It's also skill from the CEO side, as well as GP side to be able to be active with their LP base without being annoying. It's a very nuanced skill. It's a skill that a lot of great fundraisers have as well. Well, Winter, you mentioned OpenLP, you worked with Beezer at Sapphire, you worked at Hall Capital with some of the greats, and it's very evident in everything that you do for the community and the thoughtfulness that you bring to your position. Of course,

thank you, Ari, for making the connection. Thank you so much for jumping on the podcast, and I look forward to continuing the conversation in Salt Lake or New York very soon. Thank you for listening to this week's episode. 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.