Investing Billions - E34: Aakar Vachhani Fairview on What The Top 1% of GPs Share in Common

Episode Date: January 18, 2024

Aakar Vachhani sits down with David Weisburd to discuss the role of data in venture capital, Fairview's unique structure, and their co-investment program. They also delve into the discipline of making investment decisions, the advantages of a fund of funds, and the importance of team cohesion in VC firms. Vachhani also shares best practices for data rooms and advice for LPs as Fairview celebrates its 30th anniversary. The 10X Capital Podcast is part of the Turpentine podcast network. Learn more: turpentine.co -- X / Twitter: @Aakar15 (Aakar) @dweisburd (David) -- NEWSLETTER: By popular demand, we’ve launched the 10X Capital Podcast newsletter, which offer’s this week’s venture capital and limited partner news in digestible news bites delivered straight to your email. To subscribe please visit: http://10xcapital.beehiiv.com/  The 10X Capital Podcast Newsletter is powered by Ikaria Labs, a full-service content marketing firm that partners with the top funds, fintechs, and financial services firms to grow their investor communities. To learn more, visit: https://www.ikarialabs.xyz/  -- Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at [e-mail] -- TIMESTAMPS (0:00) Introduction and Aakar Vachhani's background   (1:43) The role of data in decision making and returns in venture capital   (6:55) Fairview's history, unique structure, and co-investment program   (15:58) The discipline and strategy in making investment decisions   (20:18) The advantages and arguments for a fund of funds   (26:50) Qualitative factors and enduring culture in venture capital firms   (33:30) Re-investing in tenured firms and the diligence process for emerging managers   (39:44) The importance of team cohesion and the ability to adapt in VC firms   (42:41) Best practices for data rooms and creating an ideal emerging manager deck   (53:23) Continual engagement with GPs and adjusting investment strategies for potential risk   (58:17) Celebrating Fairview's 30th anniversary and advice for LPs   (1:00:04) 10X Capital Podcast Newsletter

What do we like to see from our experience? I guess the team is the first thing that comes to mind. Like what I see is like it should be the first thing, in my opinion, like way too often it's near the end or it's a few pages in. You know, we've talked a lot about this, like we're investing in the team and that's what we want to know about first. Like, who are you? Why are you doing this? What's motivating you? All of that is like the most important thing, right? And so I really think it's important for folks to hit on that first. And then you can get into the strategy, right?

Like, what's the thesis? What's the market opportunity you see? What are your advantages on sourcing and deal flow or other competitive advantages that you have? Definitely include the portfolio construction model. You know, that's really important, obviously. Track record, you know, goes without saying, but have some sort of track record in there. And ideally, like, please just give us a net IRR,

net TVPI, net DPI. Well, Kar, it's great to have you on the podcast. You've had a brilliant career starting at Cambridge and then spending most of your career at Fairview, where you've been over 15 years. So congrats on the 30-year anniversary coming up for Fairview, and welcome to Limited Partner Podcast. Kar, yeah, thanks for having me on, and appreciate all the work you've done covering LPs and funds of funds that I think really drive the market, but often aren't hard for them. Yeah. I think it's one of the hidden and most influential forces in venture capital.

But going back to you, you started your career at Cambridge Associates. Tell me about your experience there and the learnings. Yeah, that was a great place to start my career. They have an incredible platform. They have some of the best data on venture and private equity in the industry. And so as a young person coming in, really not knowing much about the industry, you think about how the industry has evolved to the point it has. But if you look at the undergrad courses across the country, there's not a lot of places where you can get an education on venture and private equity in a way that you need to be successful. And so Cambridge was fantastic. We had a two-week orientation where we did an immersion on the industry. And as a young professional, you had

opportunities to meet with managers at an early age, to look at data, like I said, as an early age, work with consultants, see a whole range of portfolios across the institutional investor landscape. And I think it really just set me up for my career in a really incredible way. They say data is the new oil. What access did you have to data and how did that drive your decision- making at Cambridge? Yeah, Cambridge is unique in that. I mean, I think a lot of people are familiar with their benchmark data. What they don't often realize is that the data that goes into that is every single underlying fund's cash flow and the cash flows in and out of every company. And I don't really think any other sizable benchmark out there has that depth and quality

of data. And so that's really important because you can trust what you're seeing. You can trust the data is real and you can do just a lot more in-depth analytics. And so really understanding the drivers of returns, understanding what's driving the trends that you're seeing in the market. And then really like over time, you time, being smart about what leads to better returns. That was, I think, a really great platform to have internally at Cambridge. And they've certainly, since I've left, done a lot more with that. You mentioned trusting the return. Why is that data more trustworthy?

Because Cambridge has access to the clients, obviously, that they work with, but also certain funds will also report in optionally into their database. They have access to the financials that feed into the database versus a lot of other benchmark sources out there are pulling from publicly available information. So using like public disclosure. Secondary sources, essentially, versus primary force sources. Exactly. And they don't have access to the underlying cash flow data, which is the really important thing.

You mentioned learnings from what actually drives returns. So what actually does drive returns in your opinion? Some of these things are known, right? I mean, obviously the, the power law in venture is very real. It's talked about, but having worked closely with that data, it was so obvious, you know, to see. And so just being, having a heightened awareness about that, I think was, was important. Really understanding like, as like macro level in the industry, the amount of capital that's deployed in a given year, in a given strategy, you know, like that, that those things can really impact overall,

like benchmark data, index data. And particularly if you're a large LP, that's more susceptible to, you know, reflecting what the market is doing. You know, those kinds of factors are much more impactful on what your experience is going to be. You mentioned the different data sources, and you've spent over 15 years at Fairview, but you also spent time at Cambridge, which is an LP consultant. Tell me a little bit about how does the data and how does the learnings from an LP consultant differ from a fund to fund? That's a great question.

I think there's a lot that you learn from being a consultant that's unique, which is, you know, how those portfolios are doing. They all have different strategies. They have different approaches. They have different sizes of commitments. They, you know, invest in different asset classes. The mixes are different. And so you can kind of have a good sense of like what's happening across the landscape. I think as a fund of funds, we do too, because we see a lot of managers. Right. But we don't necessarily see the LP landscape in the same way. And so I think that's the one advantage on the consulting side. I think on the fund-to-fund side, you know, you have discretion, right? We make the investment decisions.

There's no other outside influence and we, you know, we have control. And I think that enables somebody like us to move quicker, to do things maybe outside the box and experiment and things like that, which over time leads to, I think, certain advantages. So as I mentioned, congrats to you and your entire team on the 30-year anniversary, really investing in emerging managers. I think you guys are one of the first investors in emerging managers on the planet going back to the 90s. First of all, how did you guys get involved in emerging managers and diverse managers going so far back? And tell me a little bit about the history of Fairview. 30 years is like a long time. Even though this is a long-term industry,

it's really unique to have a firm like this, you know, have the kind of history that it's had. And I think, you know, we're fortunate to have this DNA. I mean, you know, our co-founders, Larry Morse, Joanne Price, were really visionaries in seeing that opportunity for investing with diverse and emerging managers with intentionality through a fund-to-fund strategy back in 1994. And that has been our foundation. And I think having that belief early on is just really unique in the industry. And we've seen the industry evolve. We've had to change how we do things. But having that foundation, I think, is just something that's really, really unique about

Fairview. And at that time, you know, you can think about where we are today as, as a industry in terms of emerging managers and how that landscape has grown. Back then it was a really small community of managers and it was not nearly the size of an opportunity set as it is today, but it still was an opportunity set. And it took a lot of work. That first fund took a couple of years to raise. And at that time, it was really only public pension plans that were really active investing in this category. And the fortunate thing that we had was that Larry and Joanne in particular had spent time working with a trade organization, the NAIC, which is still around today, and probably one of the most significant organizations that serves diverse managers

in the country. She, you know, she had headed up that organization and, you know, right off the bat had one of the strongest networks of diverse and emerging managers in the country. So having a great foundation, but also just having that belief and culture right off the bat, I think were important. But it was not easy, obviously. Yeah, certainly not easy going back to the 90s and sourcing and creating a system of record of what's going on in the ecosystem. In terms of today, Fairview has a unique structure. Tell me a little bit about your structure. Yeah, so our structure, so Fairview is a fund of funds and a co-investment firm. We're investing through your traditional commingled funds of funds, as well as single LP funds of funds or

SMAs, where we have discretion, but we customize the investment focus for larger LPs. And we focus on venture capital. We raise dedicated funds for investing with both tenured, difficult to access firms, as well as emerging and diverse fund managers, which is, as we talked about, what we're most known for. And these are both parts of the private markets that have a high dispersion of returns, where we think that relationships, networks, insights, you know, having a prepared mind, plus having a reputation and access, like all that matters an incredible amount. And so we've purpose built a structure, which is our platform, but also our team and our culture to take advantage of those characteristics and use that to identify and invest with the best fund managers. And then, like I said, we also co-invest alongside our managers. We do that through our funds of funds. We don't have a dedicated vehicle today. Essentially, we're

allocating up to 20% of our capital for co-investment. And yeah, that's it. Of course, we've evolved our structure over time along with the market. But yeah, this has been the focus for almost 30 years. How do you avoid adverse selection in your co-invest program? That's a really important part of our co-investment program. We've deliberately kind of taken the approach that we've had because we do see a lot of adverse selection risk. If you had a dedicated pool, you're essentially forcing capital into co-investment, whether or not it's a good opportunity. You have the capital, you need to deploy it. And then there's also a risk that depending on the size of that pool, you could become competitive with GPs in your portfolio or the ecosystem, and we've wanted to avoid that. So we have deliberately taken this approach. And, you know, like when you're not forced to do deals, you could be

selective and we can wait for the right opportunities. And typically for us, that tends to be, you know, this, since we have a lot of emerging manager relationships, you know, these funds are typically smaller. You'll see that, you know, a lot of emerging manager relationships you know these funds are typically smaller you'll see that you know a lot of these firms will have breakout companies and they'll have pro rata in these deals but they don't have the capacity in their funds to do them because the funds are smaller and so we'll be able to come in alongside them in around and invest and that's kind of like one of the purest, truest ways to see really high quality deal flow. And then if you're on top of that, opportunistic about it and very selective,

that's for us been a good formula. Speaking of your program, you mentioned that you don't have a dedicated program in the co-invest. From my understanding, you're creating this friction against investing into funds versus investing in the co-invest

so that you pick the best quality from both programs. Is that basically how you run your program? Yeah, right. I mean, when we're looking at a co-investment, our alternative use of capital is a fund investment where we know with a pretty good degree of certainty what those range of outcomes can be, what the upside can be. And so, you know, again, we don't have to force a co-investment. In terms of your structure at Fairview,

you mentioned off camera that you have nine fund of funds essentially across your portfolio. How do you allocate to those nine fund of funds? The question we get all the time because, you know, for a lot of firms that allocation becomes an issue pretty quickly. For us, the way we've segmented, like I've talked about, we have a tenured manager program where on that side of the house, we've been pretty disciplined about our growth and who we work with. So we never want to raise more money than what we think we can confidently deploy, which means we don't want to compromise the quality of access in our funds and then run into allocation issues where you also, essentially, you start sacrificing the quality of your investment.

So we've just been very careful and deliberate there. And then on the emerging manager side, it's like a non-issue for the most part, right? Like given we're investing typically early with managers that we're often a thought after LP, we usually get the allocation we need. And most emerging firms aren't oversubscribed at the onset. And even the ones that are, we get the allocations that we need. So if we have conviction in a manager, we'll invest through every pool of capital where we have a fit. And then on top of that, we have like the amounts that we invest are fixed. So we know what they'll be. We do deployment on an equal weighted basis within each portfolio.

So that also means there's the same bar for every manager. And they also have the same ability to impact a portfolio's return. Let me push back on that. So you mentioned you invest the same in each manager. Surely there's some managers that you like. I'm not going to ask you to pick your favorite child, but certainly there's managers that you like more than other managers. Why did you come up with the strategy of equal weighted? Like in retrospect, yeah, there's obviously firms that we like better than others. But I think when like if you rewind back and look at the point that you made the decision on a on a manager relative to another, it may not be right. Like, you know,

when we when we talked about this off camera, you said that it was a bit dogmatic. And I guess it could be considered that. But I don't think that's a bad thing, right? Because having discipline on the front end, you know, we've learned is a good thing. And there's there's several reasons why like we and by the way, we hadn't always done it this way. Early in the firm's history. It was very different. But about 10 years ago, we always do this work where we evaluate our own performance. And we realized that in a lot of cases, the commitment sizes were just somewhat arbitrary, right? Like maybe we invested

more in a fund because it was a larger fund, or it was a more established firm, or to your point, like maybe had a little more conviction in. But it turns out that in the vast majority of cases, had we just equal weighted our commitments, we would have generated better performance at the portfolio level. And then so we implemented that change. And since it's served us really well. And so going back to why, like if we believe that if we do our jobs right, and we're investing with the best of the best firms, and for us, that means generally we're investing in less than 1% of the managers that we see. But beyond that, if we're trying to get specific about which one of those 1% will do better than the others, then we found that it's almost impossible to get that right.

And it's pretty much unpredictable. So essentially, we're confident in our ability to identify great managers, but then humble enough to realize that we're not perfect. And so building a portfolio construction to account for that, we think makes a ton of sense. And so that's what we've done. What do you think about... One of the reasons I like the equal weighted approach and everything has its place and purpose is that it keeps you from lazy thinking. It keeps you from saying, well, this isn't worth $5 million, but we'll put in $2 million. And it forces disciplined thinking. That's why we've done this. We want the same bar, the same level of conviction for every manager.

It avoids taking a flyer on somebody. And we see this with GPs, you know, investing directly in companies like there may be a small pool that's carved out for, you know, other investments. We generally don't like that, to be honest. Like, you know, we get it, but there may be some strategic value in doing that. But I think at the end of the day, like, you know, if you're just really focused on generating the best possible fund return, things like that aren't necessarily additive. And what we found is that you can find ways to achieve some of those strategic elements in other ways without having to use capital from the fund. We're going to get very meta. We have startups, we have VCs who fund startups, we have LPs that fund VCs, but you're actually an LP that has its own LPs. Who are your

LPs? Thanks for pointing that out too, because, you're actually an LP that has its own LPs. Who are your LPs? Thanks for pointing that out too, because to your point, I think sometimes it gets lost on GPs and even obviously entrepreneurs and even LPs in our peer group. And I think it's important. And honestly, I think it's an advantage for us as a fund to fund having to go out and raise our own capital from LPs. And this you know, this is a much harder industry than people realize from the outside. It's easy to think that you have it easy, but having to raise our own capital,

we think it does a few things. I mean, one, it gives us more empathy for managers, just knowing what it takes to raise a fund and what they're going through. It's easier for us to relate to them. It's easier for us to gauge real traction. And I think it leads to better relationships on that side, especially with the emerging firms.

David Stegallus, MD, PhD And then on the flip side of it, I think raising a fund of funds is harder than a direct fund, not to mention trying to convince people to invest in a diverse firm that invests in venture capital and emerging managers. The perception of risk is so high. And ultimately that means that we've worked really hard just to earn the right to invest every dollar that we do. And I think that makes us better investors. You know, we can't afford to squander any opportunities.

And for that reason, you know, I think it's important to have trusted, high quality, long-term LPs that are aligned on the opportunities that you're pursuing. And you also want a diversified LP base. I think this is true for LP funds and funds and direct investors. And you want a sustainable LP base. So for us, to date, we've chosen to only work with US LPs. We prefer to work with LPs that align with our values. Ideally, LPs where

we're contributing something positive to the world. I mean, these are all nice to haves, but we've been around long enough that this has kind of played out. And so having like that kind of LP, that's always a big motivator for us. And that is like today, fortunately, the bulk of our LP. So we work with a lot of public pension plans. These would be retirement funds for like teachers and firefighters, like people that are upholding our institutions. And so we have a lot of state level pension plans. And I can probably only share the ones that are public, but we'll start there. Like, you know, state of Connecticut, New Jersey, Illinois State University's retirement system is another one.

We also have cities like Dallas and Chicago and St. Louis and Milwaukee and Baltimore, a bunch of cities in the Northeast. We've also added corporate LPs over the years. But there it's been important to work with the right ones. So one that's public is the partnership we have with New York Life, which has been a wonderful relationship. Visa is another one that's public. We've also stepped up our work with foundations in recent years. And that's maybe another conversation. But Ford Foundation is probably one of our more significant foundation L do, but it's great when we find some larger ones that also have foundations, like in the case of the Balmer Group. So Steve and Connie Balmer, that's a partnership that's been public that has also been great. Those are some pretty dream LPs. What is the best argument for a fund of funds? The parts of the market that we're investing in are really difficult, right? Like venture capital itself. And then you look at emerging managers on top of that. These parts of the market have some of the highest dispersion of returns, maybe in any asset class. And so that means that you have to be really good at identifying and investing with the best managers. And that's really what a fund of funds brings to the table. Not only is it access, but it's market coverage in a really deep way. And then for us, it's like 30 years of manager selection experience, right? And the outperformance that you can gain

leveraging those things can be really meaningful, again, when there's a high dispersion of returns. The other part of it is risk mitigation, which in venture, there is a really, again, high dispersion of returns mean there's a higher level of risk. There's a high level of risk, not only as everyone knows, like with individual deals, but even if you look at the idiosyncratic risk associated with any one fund investment, it can be pretty high. And even the best firms in the industry may have a fund or two that doesn't do well. So you need to avoid that. And building a fund that's diversified helps you do that. It also balances out your exposure across time.

And so we build equal weighted portfolios, but also try to equal weight in terms of vintage years to avoid market timing, avoid either being out of the market or being too exposed to any one part of the market. So there's this discipline that's also forced. Speaking of advantages, you mentioned one of the most important things for Fairview

is to maintain discretion. Why is it so important for you to maintain discretion on your deployment? I mentioned that we were only engaged in the discretionary management of assets. That essentially means that we control the investment decision. And also in the parts of the market that we're investing in, venture, emerging managers, and especially with co-investment, things sometimes move very quickly and you're making really consequential long-term decisions. And if you want to do well, we think they need to be pure decisions. Like the moment that you introduce a potential conflict and you have to convince a board or other decision makers in other organizations and other roles who may be also tasked with doing other things and maybe don't know the market as well as you, I think you really make it hard on yourself

to invest in the best opportunities. And also, as we talked about, you can open yourself up to adverse selection risk. And also, to what we were talking about earlier, you're kind of also wading into consulting territory, which is a different model. There's different incentives. And again, I think it's harder to stay true to focusing on just generating the best returns period. It's an interesting market to say the least right now. Emerging manager deployment is down 75 to 80%. How do you deploy in this kind of market? I mean, for us, it's, it's easy. Like we had nothing, you know, like nothing's changed for us because we've been through these cycles and by cycles, I mean like emerging manager market cycles, which you know,

I don't think a lot of firms have, or a lot of organizations have, and we've seen it, you know know both through like the post in particular like post.com crash and then post-great recession these really massive pullbacks in the way that we're seeing now both in terms of just LP commitments in general but also specifically to the emerging manager category and if you look at the data this year, there's been a really sharp shift in the LP dollars that are being committed to funds that are larger funds, right? Like $500 million plus funds,

billion plus dollar funds. And there's this like flight to perceived quality. And that's what's happened like every other time that there's been this kind of pullback. And, you know, like in 2008, when I started at Fairview, we were fortunate to raise money in 06, 07, we're able to deploy through that period. But we went several years

without raising money for an emerging manager fund to fund. It was really hard. Nobody wanted to touch the space. But we were deploying and we were able to, you know, come out of that time period with not only just great vintages, but some really great relationships. Like some of the best firms are also started in times that are challenging. And again, like the beauty of the fund to funds model, you know, we could consistently deploy. And so our pace and commitment level this year has been very consistent with the last, you know, four or five years. Do you find that returns are inversely proportional with how difficult it is to raise capital? Is that overly simplified way of looking

at the market? David Stein There's definitely a correlation. It's probably a little oversimplified because there's also a reason why it's harder to raise capital, because it's a more challenging market. But we do think it brings out some of the best investors, right? Like if you have conviction in your strategy and what you're building to come out and try to raise the fund in this market, that means something. That means you have a lot of grit, which is a really important part of the formula in terms of what it takes to be successful. In terms of your strategy at Fairview, do you guys look to increase your exposure during difficult times

or do you do the same kind of weighted check average from a time diversification standpoint? Are you looking to deploy the same dollar amount every year regardless of market cycle? Yeah, that's right. I think that's our approach because you can't time the markets. You don't know,

like essentially you're investing in a fund where it's a blind pool and that manager's investing on your behalf over, let's say, three years. And you have no idea what the market's going to be like in the next three years. You also have no idea, arguably, what's more important is when those companies are going to mature in six, seven, eight years. You have no idea what the market's going to be like then. So how can you possibly try to time the market? It really just doesn't make sense. And if you look at the data historically, if you had tried to do that, you probably wouldn't have done well. Some would say the asset class has enough alpha, enough risk not to be trying to

double and triple the risk through time concentration. Absolutely. Absolutely. You alluded to grit as a qualitative factor that drives the top emerging managers. What are some other predictive qualitative factors? We've done a lot of emerging firms over the years. You can imagine we've done over 50 first-time funds. And in those cases, we invest in a lot of new firms, but we don't invest in people who are new to investing. So I think that's just as a base. It's important to have some investment experience, ideally institutional experience. It doesn't have to be, it could be like an angel investment track record. Institutional experience being managing somebody else's money. Or it could even be, you know, maybe you had, uh, had your own firm, um, in a different part of the market or something, but yeah, like managing money on some, somebody else's

behalf. Um, because there's a lot of elements to that that are very different. Um, you know, in terms of the responsibility that comes with that, the expectations, all the requirements. It's just that part of the job a lot of people underestimate. And on top of that, we're looking for people that are not just raising a fund, but they're building a firm. And that means they want to commit their careers to what they're doing. And they're making a commitment to their partners and their LPs. And it generally takes that kind of commitment to be successful. Because the other thing we've seen is like no firm story has been

linear, right? Like even the best firms of today have gone through challenging periods. And so you need this like enduring culture, that trust trust that commitment to building the firm to get through it and that's that's hard to like gauge in in in just one meeting so we end up spending a lot of time with gps in a range of settings to get really comfortable with the people you know that we're going to be backing and what their purpose is and really what their motivations are so that i think is probably like one of the most, most important things. But again, the basics are like some of the things we talked about, but also like just having a sound strategy and thesis that we believe in. And maybe most importantly on that front is like the

ability to intersect with top founders in your areas of focus, you know, like best in class deal flow, which doesn't mean it has to be like the obvious founders or prototypical founders, but actually founders that, you know, you have conviction that will build the best companies in the next generation. And then you want to see firms as they're doing that, do it in a way that have the ability to make good decisions, to win competitive deals, but also be disciplined on pricing and terms, you know, have thoughtful portfolio construction as well. And then to the things I was talking about earlier, too, like just a clear time and effort has been put into building an institutional infrastructure is really important. We'll talk about the institutional infrastructure later on, but you said enduring culture.

When the world is enduring culture and how do you, how do you gauge for that? It goes back to grit a little bit, but it, but it's having like this really deep belief and commitment in why you're doing this and, you know, what you're doing. And it's, it's shared between, you know, the, the team members. And it's like a, you know, that, that in itself, like can form a really strong bond. And, and the reason why it's like that in itself can form a really strong bond. And the reason why it's important is, and that's kind of like your North Star, right? And I think it's important to have that because like I said, no firm's journey is going to be linear. You know, whether it's the market conditions

throwing a curve ball, whether it's challenges in some portfolio companies, whether it's team related issues, whether it's challenges in raising the fund or with LPs, things are going to happen. And you kind of need that guiding light that True North Star to help you get through those things sometimes, because you don't really have anybody else to lean on in those times. You've, you've got each other and maybe you've got your LPs and, you know, maybe some community of you around you, but like it, you know, it could get really hard and it can be lonely if you don't have anybody else. And if you don't have that,

you know, those guiding principles. What are some examples of some great North stars that you've seen specifically in managers that have endured during difficult times? Having a belief in your strategy is important. Like we talked about first-time funds. We've done a lot of first-time funds and a lot of these firms have gone on to become some of the best firms in the market today. But believe it or not, a lot of their first funds were challenged.

You know, like maybe they were a little bit too early on where their strategy, you know, was mapped out. Maybe they hadn't worked out the kinks in decision-making or sourcing, you know, or they were, you know, having trouble kind of building up, you know, the investment team in the way they needed. But just like sticking to your belief on why you started this firm, and you know, what your strategy was, is really important, because sometimes, especially emerging

firms, like that's why you like that is because they're usually early on a trend. Sometimes they're a little too early. And we'll invest in firms where we think it's a big enough category that a dedicated, you know, specific strategy might make sense. Like we invested in one of the first enterprise SaaS firms, I think in the early 2000s.

And it wasn't even called enterprise. It wasn't called SaaS at that time. It was called technology enabled services. And they were a little early, but it was such a massive category that they're the leading firm in that category today. But if all you did was invest in that first fund and looked at the results, you probably easily could have just stepped away as an LT and moved on. When things are good, you don't need a reason to know why you need an asset. But when things

are bad is when you actually need the conviction during the difficult times. And also, how long do you hold an investment for, right? And in this case, you're holding by default in one commitment for a long time. But ideally, when we're investing in a fund, we're committing to multiple funds. Again, we want to invest in firms that are building enduring franchises. And so you're signing up for the long haul when you're committing to a fund early. And sometimes it's hard to hold on to a relationship and continue. Even with tenured firms, we've had them go through generational transitions and whatnot. And a lot of LPs, in some cases, step away. But knowing, but, um, you know, knowing when

to hold, sometimes that's been a really important, uh, advantage for us to bring me into your IC meetings in those cases. So you have a tenured firm, um, and you know, you've done three funds with them and they might've had a bad funds. What are you guys discussing internally on whether you should re-up or not? Yeah, those are really challenging discussions because with the emerging funds, it's kind of easy, right? Like you're signing up for the first fund and the second fund, there's probably not enough data. Maybe even by the third fund,

there's really probably not enough data. So as long as they've done what they said they were gonna do, the execution is sound and the team has gelled well, you're going to continue to support them. It would take a lot for us not to do a follow-on fund on an emerging manager. That's why like the initial diligence and manager selection is incredibly important there and why you can't afford to make big mistakes. And also like if you partner with the right firm,

you want to be there to support them for their next fundraise. Because again, that fund two or fund three can be really hard if your existing LPs aren't there for that first close. So that's a little different. But for the tenured firms, it may be clearer, right? Like all of a sudden, you know, it's a fourth, fifth, sixth fund. Sometimes it's like a 10th or 11th fund. And you can kind of see that performance hasn't been great.

Usually we've seen that when maybe a firm has gotten too big or there's been strategy drift or there's been an extension of the platform that's a little too unnatural. Or you've had team departures or generational transitions that we think, you know, maybe haven't been working out so well. So, you know, it's just taking like honest look. And by the way, because they're tenured, you've spent a lot of time with these folks, like you have pretty deep relationships. So that in itself also makes it a harder decision. But, you know, we just try to be as objective as possible. And in some cases we can see the firm, I think the key is, is the firm doing enough to remedy the challenges that have put it in a place where they haven't been successful. And in those cases, you know, we tend to be pretty loyal to our GP. So if they're able to demonstrate learnings and a reorientation of the firm and platform around what's going to make them

successful again, we're willing to continue with that relationship. But if we don't see that, I think that's an indication where maybe it's time to step back. So let's go to when you build conviction during your diligence process, what do you look for in emerging managers in the diligence process? What are you diligencing? A lot of times it's firms that don't have a traditional track record that haven't, you know, maybe had a, you know, like a portfolio that's been realized and, you know, it's never that clean typically. I mean, sometimes you get these spin outs from tenured firms and it's easy to underwrite, but that's not the vast majority of cases. And so you've got to like, you know, really spend a lot of time on the team and the people and understanding, you know, why they're doing this, what they're doing, what's

the vision that they have, what's the kind of market opportunity that they see? What advantages do they have in terms of their deal flow and the ability to win those deals in competitive situations? But then also, like I said, are they disciplined enough? Have they been thoughtful about portfolio construction? So those things matter. The reputation of new GPs really matters too. Are you respected by founders? Are you respected by other GPs? Something too. You know, like, are you respected by founders? Are you respected by other GPs? Something like that has become easier for us to diligence because we've been around so long. We have really deep networks. There's rarely a manager we see where one of our trusted relationships hasn't been a co-investor with them in the past, hasn't been on a board with

them in the past. And so we can even pretty easily get introduction to those entrepreneurs and get a firsthand off-list reference, so to speak, on folks. And that kind of work really informs whether or not we're going to invest. And then the other thing is team cohesion. And so we spent a lot of time with managers in different settings to really gauge that, you know, like, is this a collection of people or is it truly a team? And, you know, some of the things we talked about, like having this alignment and this like trust in each other, like being able to disagree intellectually, but separate that, you know, from emotions, you know, that's important. So, and those things, like, you're never going to get in one meeting. You're not going to get in two meetings. You're probably not going to get, you know, through just a bunch of Zoom, you know, calls. You really got to spend time with these people and get to know them. And so,

that, like, we're good at upfront screening, but when we start building conviction in somebody, it can take some time. And we put a lot of work, especially on the team front, because the other things I think more or less are easier for at least us to diligence. A lot of people don't realize in startups, one of the biggest risks early stage is the team issues. I think it's probably, if not the highest, one of the highest sources of failure for a company. It seems like you're saying the same thing is true for emerging managers and for VC firms as well. If we do like postmortems on the emerging firms that we've done that haven't done well, it's rarely because they weren't smart people or that they didn't have a good thesis or they weren't seeing good deals, you know, because you could screen for that sort of stuff. And even if you have some challenges in those areas, like you can make up for non-linearity of firm building in venture. You know, you need that team cohesion.

You need that trust between the partners. And you need that support system too, right? Like, it's never easy. You're going to have downs. You're going to have lows. And to be able to power through those and have somebody there to pick you up, like, that really matters. So, and even, you know, we talked about like transitions and being able to pivot. You're, you're, you mentioning pivoting there. How much room is there for strategy creep between let's say a fund one, five, fund two?

Fund one and two, we usually don't like to see a lot of strategy creep, to be honest. I mean, you know, you've deployed FundOne in like three years and on one hand, the market moves really quickly, but on the other hand, this is a very long-term industry and asset class. And I think three years is probably too quick to really change your strategy. We've seen like adding a new thesis area that's complementary and things like that on the fringes that can work. But if you're doing an overhaul and a really hard pivot into a completely different stage of investing or moving into a new category that's by definition going to be unproven, that we view with some skepticism. And I think generally doesn't work out well. You mentioned something peculiar when we were talking off camera.

You said that your diligence process starts with the end in mind, which is an LP memo. What did you mean by that? Right. Yeah, we were talking about, I think we're talking about data room and like diligence process and what can emerging managers do to make the jobs of LPs a little easier. And so we think about, you know, ultimately like the end goal of a GP is to convince an LP to invest in their fund. And the process for an LP, you know, the diligence may be different, but usually at the end of the day, there is an investment recommendation that has to be put together for some sort of committee. And, you know, so I think GPs need to think about like what goes into that. And I think it's more or less consistent across LPs, right?

Like, you know, you need to present a narrative on the history of the firm and the team, a narrative on the strategy and market, a look at the track record. And every LP may have different cuts on data, but it's obviously very helpful if you just have a spreadsheet of the deal data and fund data. And then you want information on the investment process. want you know obviously all the operational diligence and all the policies and things like that documented um and of course like the terms usually we find like a summary of terms is easier but obviously you need like the lpa and sub docs and everything so like having everything together thinking through your materials whether it's a deck or data room with that end goal in mind, I think just makes for a more seamless process. It doesn't guarantee anything, but I think once you have LPs that have conviction, it does kind of ease that process. Taking away the friction from getting to a yes.

Yes. So what are some best practices? We're talking about there's gold and now there's platinum, something that few emerging managers do that you really like to see in a data room. Data rooms. Yeah, really fun, fun stuff. Probably been in like thousands of data rooms like across the firm over the years. I'm trying to make your life easier.

Yeah, this is great. This will be like a PSA for firms out there. But yeah, I think like the things that I mentioned, right, are all important. So maybe, you know, like I said, like I don't see it too often,

but like a narrative on the history of the firm and the team, like the Genesis story, like written out, that's always very helpful. Having a narrative on the strategy and the market and having like a, just a spreadsheet, right? That, or an Excel file that's easy to manipulate with the fund level returns and the deal level details.

Narrative on the investment process. We need to document that. Like, how do you make decisions? And again, everything on the operational process. We need to document that. How do you make decisions? And again, everything on the operational and legal front. And I think one of the best ways to capture a lot of this narrative stuff is just doing a PPM. I think it forces GPs to codify their strategies and their ethos and their beliefs and processes. And it's also in a way that you need need to get buy in from everyone on your team. And I think it's a great exercise to go through. It's worth the time and effort.

And you could probably use that as a guide as you build out the firm. You know, we were talking about North Stars earlier. Like that's a great way to do it. You have it on paper like this is who we are. This is what we're going to do. And you can you know, it can kind of help you stay focused. And I think we're seeing seeing fewer and fewer PPMs, but I can't emphasize how valuable I think that can be. And that's a really important component of the data room. Let's make sure that we have everything in your PSA here

so that you could just send people a link to this YouTube. So let's go into the deck. So again, granularity, I think, is key for a lot of emerging managers. Nobody comes out of the womb knowing how to do a GP deck, an emerging manager deck. So what should be an ideal emerging manager deck? Yeah, good question. Another thing that we've seen thousands of pitch decks, I mean, it's pretty crazy. You would think that would make us good at knowing what's good and what's not. I think there's plenty of advice out there actually on what, what should be in a VC, you know, fund deck, but it does seem like, and it does seem like there's more

of a standardization today, which on one hand I think is great. But then on the other hand, like I think sometimes you lose the individuality or soul of a firm because of that. You say there's a lot out there. What resources do you recommend? I think, you know, I'm just, I'm just thinking of like a lot of VCs over the years have had blogs, right. And I think they've kind of posted their pitch books and, um, you know, that's out there. So there's, there's great programs, you know, like Kauffman, a lot of folks are going

through the Kauffman fellows program now, like they do a great job of coaching on, um, you know, firm building and, and obviously like what goes into a deck. Cool Water is another program. A firm called Plexo has a great program. So there's a lot of these programs that are out there too that are accessible and available to GPs. So I think that's great, right? I think that's great for folks to learn.

But I think, to your question like what what do we like to see um from our experience i guess the team is the first thing that comes to mind like what i see is like it should be the first thing in my opinion like way too often it's near the end or it's a few pages in. We've talked a lot about this. We're investing in the team. And that's what we want to know about first. Who are you? Why are you doing this? What's motivating you? All of that is the most important thing. And so I really think it's important for folks to hit on that first. And then you can get into the strategy. What's the thesis? What's the market opportunity you see? what are your advantages on sourcing and deal flow or other competitive advantages that you have

definitely include the portfolio construction model you know that's really important obviously um track record you know goes without saying but have some sort of track record in there um and ideally like please just give us a net IRR, net TBPI, net DPI, like very simple. Make our lives easy, especially, you know, if you have an institutional track record, there's no reason not to have that, you know, like avoid gross numbers unless you don't have a choice or like, you know, seeing all sorts of things like a multiple on initial investment or a multiple unrealized investment, like those things are useless, you know, and honestly, they seem like a bit disingenuous. Like you immediately lose credibility when you do things like that. So just be straight up about performance. And I think any credible LP will ask for what I just mentioned anyways. And so you're not going to be judged in the way that you think you are. And I think it's just worse to have somebody dig in and realize that the performance that you had in your deck is not really what it was.

And so you kind of lose any conviction that was building any fundraising momentum immediately goes away. You start to question what else did I know? Exactly. It's a big red flag. So there's a lot of red flags. There's a lot of ways to lose credibility. Let's talk about some specifics. What are some other specific ways that GPs lose credibility or some pet peeves that you have? day, which can be off-putting. And I think it's maybe a symptom of the market, right? It's just, we've been through this period of an incredible rate of new fund formation and venture capital. And even this year, like through September, based on our data, we were on pace to see more first-time funds than ever. And so there's no let up. And so you look at the emerging part

of the market, it's incredibly crowded. But on the flip side, we have seen this drastic pullback from LPs, which we talked about, and also this flight to perceived quality. So LPs are less willing to take risks on emerging firms. And so just the supply and demand is way off. And so I think the fundraising environment for emerging firms is just more difficult than it's maybe ever been. And that's led to, I think, just a lot of aggressive behavior. It's led to some pitches that feel a little salesy, you know, and like inauthentic, you know, those things are turned off. Also have seen, you know, for us, like we we try to be very transparent. We try to be efficient in our feedback and we try to come back with advice. Right. Like we want to be helpful and think that it'd be more valuable for an LP just to get a quick no and then things that we think they can improve on.

But even like the reactions to that we've gotten recently are like terrible. You should see some of the comments. And, you know, so I think there's like this loss of an empathy for what LPs are going through as well. And so I think sort of like being aware of what an LP's role is and, you know, how their process works, like, you know, all that could be really helpful. You know, so we, we try not to let things like that, or, you know, we also say, like, don't let a bad presentation get in the way of a good investment. But sometimes, like, how you carry yourself in this market is really, you know, can be revealing, you know, around, like, you know, what kind of person you are and what kind of firm culture

you're going to have. And is that really going to be sustainable in the long run? I don't know. And I think in those cases too, like GP is lose sight of the fact of how long term an industry this is. Raising a fund is supposed to be hard. And if you're doing this just for one fund, it's not the right reasons. Be creative, find other ways to continue to build your track record.

And this should be the type of job that's the last job you ever have. Some would argue it's the best job you could have in the startup ecosystem. And right. It's a very coveted role. People would kill to have a job in this space. So be fortunate that you're even in a place to be able to raise capital and just have some humility for the role. offering feedback to startups, a lot of startup entrepreneurs, and I was one, I was one multiple times, don't realize that feedback is a gift. Not only is it a gift, but it also comes at the expense of the giver. Because when you're passing, it's better to make up an excuse versus actually giving valid feedback. So the person giving that feedback is always taking a risk for the sake of the person getting that feedback. And I think a lot of people would be wise to keep that in context and also to try to gain as much value from that feedback, even if they don't agree with everything, right? You mentioned something about the industry being

a long-term game. Looking back at your portfolio, how long did it go from the first meeting on average, let's say the median, to the first check? Good question. Well, let's start with the range first, and then we can kind of narrow down to the median. So we're talking about just like brand new relationships, right? Brand new relationships. Yeah. I mean, we can move quickly, right? That's one of the beauties of being independent and being a fund of funds. And so I think the quickest we've done, we could move in a couple months, right?

Like meet somebody, like have a ton of conviction, has the track record that we like. You know, we maybe have had some prior knowledge of their work. And, you know, it's just like a slam dunk opportunity. And we can easily get there within a couple months. And then sometimes, you know, it's first time time fun that's new to us we haven't met the team before uh but there's things that we like and you know all the things we've talked about like we want to get to know them we we want to understand the culture we want to understand you know what they're building want to get more comfortable with maybe the strategy and all that

stuff and that you know and then maybe the timing too, like, you know, based on our pacing and stuff like that, you know, it doesn't open up for a little while. So there's been cases where we've waited, like from the beginning of a fundraise to like 18 months later and come in at the very end. Not to mention, you know, all the times we pass on a fun one and, you know, maybe come in down the road and like a fun two or fun three. And there's a lot of people out there. I would call them bad actors, that take meetings without dry powder and waste people's time. That would be the complaint from the GP side.

But you're not doing that. You're meeting, you're trying to de-risk, you're trying to get extra data points, not for the sake of getting data points, but for the sake to build a mosaic of information around the GP. Absolutely, yeah. I think, and maybe this is advice for LPs, don't string people along. If you're not going to invest, don't invest. And if you don't have the money, you should be transparent. So we're always upfront about what pools of capital we

think an opportunity is fit for, what we think our check size could be. I mean, those are things that are usually discussed in the first couple of meetings. And we want to be clear to the GPs on that. I think that's really important. And then once you have that, you know, you can be on the same page around what we need to see. And we'll also communicate that, like, here's what we need to see. You know, we need to see you guys have never invested together before. Like we want to see you do some deals. We want to see how you make decisions together. You know, that's going to be the most important thing for us to get comfortable with because we believe in your track record. We believe in your, you know, your deal flow, or it could be that, you know, they are a great duo or, you know,

a team of three or four or whatever, but they just, you know, we just need to see a track record because maybe they're really young. It's like a few operators and somebody who has done a few deals as an angel investor. You know, see you do institutional size deals. And yeah, in that case, we're not going to be a first close LP. We're probably going to be a last close LP and we'll tell them that. You want to see some of their portfolio and start for them to start proving out their thesis. Yeah. And sometimes that's important because if they haven't done that, it's harder for us to take a leap of faith. And especially on top of that, if it's somebody who's completely new to us, right? I'm too curious. You mentioned you have the same check size for every single

investment and that you don't quote unquote take flyers, but certainly there's some strategies that are high risk, high reward. Do you ever look at something that may be a little bit higher risk, but has higher reward? Or are you always looking for the same return profile in every single investment? We think of returns more at the fund-to-fund level. We have our target returns and we could either do that through a portfolio of funds that will all kind of get us there. But, you know, sometimes we will do firms that we think maybe have more upside. That does mean they have a little more risk, but we try to like mitigate that risk through not check size, but through our diligence, if you know what I mean, like making sure that we're really,

really confident in this firm. And with fund investing, like, you know, I mean, making sure that we're really, really confident in this firm. Robert Leonardus And with fund investing, the good thing is, and I guess this is true about the industry in general, in deal investing too, is you can only lose one extra capital. And quite frankly, on a fund, it's hard to have a zero. You'd have to do really bad. I don't think I've ever seen that. But even to be less than a 1x, it's pretty rare. It's definitely less than 10%. By some metrics, it's less than 5% of funds return less than 1x. Yeah, that's probably about right.

So you kind of know what your downside is. From institutional piece. Another way to ask the question is when you have a highly diversified portfolio, is there room for a crypto seed fund? Or does everything have to have the same risk return? How do you look at that? Yeah, I mean, we didn't do crypto. We have done, so one way in which we've, especially when seed was a new category, you know, and we had this idea that, you know, it was certainly going to be riskier than what Series A was at the time or later, obviously. In that case, what we did was we took, we generally build equal weighted portfolios.

We typically like to have maybe, for, you know, a typical commitment and carved each one of those up into maybe two or three seed commitments to adjust for the higher potential risk. But, you know, over time, we've gotten more comfortable on that front. But that's kind of the one, you know, one example I can say where we've modified our strategy, where we thought there was a higher potential risk. But in general, otherwise, we want every firm to have the same ability to impact our performance. We want the same bar. We want to have the same type of conviction. And at the end of the day, if you're investing in, if we do our job right, like top decile, top 5% type funds, if you're getting exposure to some of those, you're going to have the types of outcomes you want at the fund to funds level. And in general, if everything else is like top quartile, you'll be fine.

Yeah, well, you guys are doing something right. If you're coming across your 30-year anniversary in this space, one of the oldest fund to fund. So Akar, Alex, Alex Edelson from Slipstream was very insistent that we chatted. You were one of his favorite person to introduce us to. And through my reference checks, I also did reference checks on you. And people said you're one of the best communicators

and one of the most honest LPs in the ecosystem. So really appreciate you jumping on the podcast and really allowing me to, to ask you all these questions. What would you like the audience to know about you, Akar and also about Fairview? Yeah. Thanks for all the kind words. I appreciate it. You know, it's, it's been really important for Fairview to have that culture and that,

you know, reputation in the market. And I wouldn't be here if it wasn't for the founders and the leaders at Fairview building that and really big mentors to me over the years. So I think it is important for LPs. I guess we're going to have like a party award here, just try to find really great mentors and surround yourself with people that have experience in this space because that can be extremely helpful as you build your career and learn how to be a great investor. I think that's really great advice.

And I think finding a mentor is really key to success in any industry, including the LP ecosystem. Thanks again. And I hope to meet soon in New York and meet in person soon. By popular demand, the 10X Capital Podcast has officially launched our newsletter

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