Investing Billions - E72: Investing in Top Emerging Managers with Jamie Rhode

Episode Date: June 18, 2024

Jamie Rhode sits down with David Weisburd to discuss Screendoor’s strategy of backing emerging managers. In addition, they discuss friction points between LPs and emerging managers, leveraging insights from GPs and LPs in manager selection, and how to diligence a first time fund.  The 10X Capital Podcast is part of the Turpentine podcast network. Learn more: turpentine.co RECOMMENDED PODCAST: Patrick McKenzie (@patio11) talks to experts who understand the complicated but not unknowable systems we rely on. You might be surprised at how quickly Patrick and his guests can put you in the top 1% of understanding for stock trading, tech hiring, and more. Spotify: https://open.spotify.com/show/3Mos4VE3figVXleHDqfXOH Apple: https://podcasts.apple.com/id1753399812https://podcasts.apple.com/id1753399812 -- X / Twitter: @lady10x (Jamie Rhode) @dweisburd (David Weisburd) -- LinkedIn: Jamie Rhode: https://www.linkedin.com/in/jerrcfa/ Screendoor: https://www.linkedin.com/company/screendoor-partners/ David Weisburd: https://www.linkedin.com/in/dweisburd/  -- LINKS:  Screendoor: https://www.screendoor.co/  -- NEWSLETTER: By popular demand, we’ve launched the 10X Capital Podcast newsletter, which offers 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/  -- Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at [e-mail] -- TIMESTAMPS:  (0:00) Episode preview (0:43) Jamie joining Screendoor (2:35) Friction between LPs and emerging managers (4:38) Fragmentation at the seed stage (6:44) Importance of grit and endurance in founders (8:17) Underwriting first time funds (12:39) Expanding beyond first time funds (24:36) 10X Capital Podcast Newsletter (26:17) Portfolio construction as a venture LP (34:35) Final thoughts

And so for me, when I think about that early stage venture, I don't need big brand names to get venture like Return. I actually need to be investing in venture funds that are finding founders that don't have a plan B, that have a chip on their shoulder, that have unlimited self-belief. They need to have a differentiated mindset because when you think about all the winners, they essentially were non-consensus and created brand new sectors. For more ideas on how to raise venture capital in this market, make sure to subscribe below. Jamie, I'm excited to have you back on the podcast. Your first podcast was one of the all-time favorites for many people. So welcome to the 10X Capital Podcast. Thanks.

And thanks for having me again. Same strong beliefs and early stage venture, just different jersey. Excellent. Well, you joined ScreenDoor. Congrats on that. Tell me about the decision to join Screen Door. Yeah, thank you. For me, I've been investing in early stage venture for a really long time, had really focused in on the pre-seed, seed or first institutional check market. And essentially that was emerging managers. I mean, I think most first check funds tend to be emerging managers. But at the same time, being at a family office, I had exposure to other asset classes. And what was interesting to me is when I looked at the Vista, Tomo, Ramos of the world, I saw they had

this standardized playbook that they implemented on all of their portfolio companies. And I started thinking, can I implement that? Or is there a firm that can implement that in the early stage space? I think specifically with emerging managers, there's a ton of friction when it comes to LPs investing in emerging managers. There's a lot of complexities and separating the signal from the noise is really, really challenging. So is there a way to implement this standardized playbook, reduce the friction, allow not only a firm to back what I would say is the next iconic managers, but help other LPs invest in this space. And I would say when it came to Screen Door, Lisa Cawley, who was hired a little over a year ago, I've known for a

long time. The GP advisors, I've known a significant amount of them for a long time. And I started to realize what their long-term vision was, is to be the best platform for new managers across their entire life cycle. And so for me, when I think about early stage venture, it's parallel driven and it's the tails or the edges that drive those big returns. And so to gain exposure there, you need to invest in the new, and that's what Screen Door was doing or is doing. They're investing in the new. They're not afraid to back managers in the edges while also having a wider mandate of reducing the friction and helping not only their investors, but other investors access the space. I want to get to the tails a little bit later, but you mentioned friction.

What friction do emerging managers face when they're on the market? It's sometimes two-sided, where the friction piece of it is, is where do I find LPs? Who's actually allocating to new managers? And you may be introduced to a significant amount of LPs, and some of those LPs want to invest, but their check size might be the size of your fund, or they have restrictions around track record, operational complexities, are you institutional in nature? I have a mandate and you don't fit this box perfectly. A lot of LPs have buckets and you may like a manager, but you can't fit them perfectly in the bucket. So you have to pass. And so I think for emerging managers,

it's really hard for them to find LPs to understand, especially for fund ones, how to go from being an investor to a fund manager. There is a lot to do when it comes to being a true institutional venture fund that I don't think a lot of fund ones, or let's even call it fund twos or threes, recognize that there's a lot of back office and not sexy things that you have to do to be super successful. You're solving a two-sided marketplace essentially for LPs and GPs. How do you make it easier for LPs to invest into your emerging managers? I'd say for my personal experience, I was doing a lot of hand-holding for a lot of these emerging managers.

They needed to be institutional in nature, but being at a family office, I had the flexibility to invest in smaller funds. I recognize that LPs tend to invest in smaller funds. I recognize that LPs tend to fall into two buckets. One, they don't have the capabilities to invest in emerging managers. Like I said before, their check sizes tend to be the fund size. They have a lot of operational requirements or they want to invest in emerging managers and they have the capabilities to do it in terms of check size, flexibility on structures, track record, but they don't have the team to really do diligence and understand the population of emerging managers, which I think is 4,000 emerging manager funds.

According to my newsletter, it's 4,000. That's insane. And it's completely fragmented at seed stage, by the way. There have been only three funds that have been in more than 3% of the unicorns at early stage. How many funds? Three that have been in 3% or more of the unicorns at the seed stage. Wow. So that means there's only been... Out of 845 unicorns. Wow. What does that tell you? That it's completely fragmented at seed stage. And so

for the way we think about it is you need to be investing in the managers that are bringing new perspectives, that are thinking and investing differently. Because if you break down those 845 or somewhat 850-ish managers, 70% of those unicorns have had underdog founders, immigrants, women, people of color. 30% of those unicorns have had one founder who's not white. 82% have had one white founder. 62% have had a first or second gen immigrant founder. And only 21% of immigrant and female founders raised from the top 10 VCs. So right there, what that tells me is, okay, the top 10 VCs have covered a subset of them, but there's a whole other section of unicorn founders that are not raising capital from the top 10 VCs. What's interesting to me as well as

the all white male local Ivy League architect of a founder was somewhat infrequent at 11%, and only a third of founders native to a country where they founded the company graduated from a top 10 university. And so for me, when I think about that early stage venture, I don't need the big brand names to get venture-like returns. I actually need to be investing in venture funds that are finding founders that don't have a plan B, that have a chip on their shoulder, that have unlimited self-belief. They need to have a differentiated mindset because when you think about all the winners, they essentially were non-consensus and created brand new sectors. So it's what really attracted to me to Screen Door because they're constantly investing in

the new, they're constantly backing new managers. And the data shows that it's highly fragmented at Seed. I want to unpack that a little bit. I'll mention all those qualities they said as essentially chip on the shoulder. Why does chip on the shoulder lead to outsized returns? In early stage venture or any private asset class, there's such a long feedback loop. It's really hard to know if there's one specific attribute like chip on the shoulder is highly correlated to success. But what I do know about early stage venture, and I just said it, it's really long feedback loops. You need to have the grit. You need to have the endurance to keep pushing through when you went and did a hundred pitch meetings and you

got no, or they said that you weren't good enough or that it's a venture winter and you need capital and you're going to run out of money in six weeks. So you figure it out. And so I just think the qualities and the attributes that founders need to really endure the journey that it takes, what, eight years on average just to become an outlier. That's not even in theory the full journey. That's just to become a billion dollar plus company. There's a whole longer runway to managing a successful company at that size. And so for me, it's really making sure that I understand GP's walk of life. I need a deep understanding of essentially how they invest. How do they get to this place? What has their life journey been to shape, you know,

their decision making process, their edge, their unique network? Because unfortunately, no matter how data driven I am at the early stage, I'm just a person underwriting a person who's underwriting a person. So let's talk about your underwriting on fun ones. How do you do that? You know, what I think is really unique about ScreenDoor is that it's not just a team of highly seasoned LPs. It's a team of highly seasoned LPs plus experienced GPs who help augment our process. So we kind of indicated before, the population of emerging managers is huge. LPs need help navigating where the non-consensus lies. They're inundated with manager introduction. The big piece is first, sourcing. So we need to be able to source not

only managers that come inbound, but outbound as well. So we play a lot of offense, engage with GPs before they decide to officially be a GP. And I'd say the secret sauce there is our focus on partner and limited partner. And our edge for aiming for outsized returns lies with the GP advisors. So today we have 14 GP advisors. I would say that those 14 GP advisors have been through the highs and the lows of running a venture fund.

They've been through all the cycles. They really understand what great nits look like because they were a fun one at one point. And now they've been fortunate enough to be successful in their venture journey. So we're able to tap into that GP advisor network when we're underwriting a manager. We can lean into them specifically around going deeper on the sector or vertical expertise of that underlying GP. The biggest prize that I've seen at ScreenDoor is when I get to tap into these GPs on references.

I thought I was really good at references, off-list. I'm like a private investigator. I can find anyone, but I can't get the feedback that, say, Satya or Charles Hudson gets when they talk to a founder. It's a lot more candid. They ask a lot of different questions than I do because my experience is being an allocator. Their experience is being a GP.

So I get to tap into their expertise when I'm doing that underwriting process. Additionally, I get to tap into their expertise after we make a commitment because we will pair two of our GP advisors with the underlying manager, and they're able to provide guidance and mentorship around LPAC, operation, investor reporting, founder pay-to-play situation, all the decision-making that goes into being a venture fund that I think a lot of LPs have a limit in how much value that they truly can offer. You have several of the hall of fame of emerging managers and now emerge managers like Hunter Walk and Satya, Charles Hudson, Kirsten Green. Why are they

so active in helping other emerging managers and investing in other emerging managers? This is a great question because I asked the same thing. I asked everyone, what's your why? Why are you doing this? And what was really interesting was a couple of key points. One, all of them were getting inundated with emerging GPs asking for help around fundraising, capital. None of those established 14 GP advisors had a source of capital to go to for not just capital, but counsel. And so now they have a formalized funnel of where to send all the managers that come their way. It's this green door. And so the full-time team will vet that. And then we tap into that GP advisor network and they can come in and give that advice and

counsel when needed. It allows them to be in the know of when new emerging managers emerge before they become those iconic brands. So I would say when I think about some of the really great emerging managers that I backed, call it six to eight years ago, they're not emerging anymore. They're established. But the networks that they were investing in, in a fund one and fund two are very different than where they're investing in a fund four or five today. And so that's just a natural network change because you become more experienced, you back a lot more portfolio companies, that led to a wider net of networks, and maybe you came out of an operating role, or maybe you came out of a brand firm. And so your

networks have changed. It's not necessarily a bad thing, it's just different. So by having a relationship or having engagement with the new emerging managers before they become the emerged managers, you know, it keeps them in the know of emerging trends and networks. A lot to unpack there. You mentioned ScreenDoor works a lot with first-time funds and is it an exclusively first-time mandate? So I would say ScreenDoor started off as an exclusive first-time fund mandate. We are expanding that mandate as I think the long-term vision for ScreenDoor is off as an exclusive first-time fund mandate. We are expanding that mandate as I think the long-term vision for ScreenDoor is to be a singular platform to back the best emerging managers and really help them become those next iconic firms. So the goal here is to expand that

mandate and invest beyond fund ones. There's a lot of competition, obviously, from a lot of great LPs. What is your edge when it comes to getting into the very top managers? You know, I think our edge is that we offer pretty unique LP value. When you take a look at the full screen door team, it's three full time people, but you add this, I would call extra leverage to the firm that isn't impacted by interest rates. I have four GP advisors that are 14 GP advisors that I tap into. they help us win. They help us pick and they help us win because there's a uniqueness of, I'd say, help that we can offer. If you are not a founder magnet, if you are not a superstar investor, I can't do anything for you. That is

level set your job. You better be a founder magnet or I don't know why you're doing this. But there's a lot of behind the scenes work that goes into going from an investor to a fund manager. And that is one of the criteria that we look for at Screen Door when underwriting a manager. But that's where we can tap in and help. I would say additionally, what's unique about the sourcing piece, and just because my past experience hadn't been investing in brand funds, this is where Lane, you know, her superpower is. And she's backed some of those established funds and had backed them early, is playing offense, talking to the junior partners at some of those brand firms and deciding, do I stay or do I leave?

And there's been multiple instances that we've received kind of the insider track to, I'm going to leave XYZ firm in six months. Doing some soft marketing helped me name my firm or helped me work through the strategy. And that's just an insight that I had never experienced because I never played in that world before. But I'd say that's super helpful being so early in these firm or fund life

that it gives us pretty cool access. So tell me about that. So let's say I didn't co-found 10X Capital. I was unhappy and I came to, I wanted to start my own fund. Is the idea that you're able to anchor or commit and de-risk some of that process? Yeah, I would say that's a key part of it. So at Screen Door, you want to be a minimum 10% of your fund side. I say minimum because we have the flexibility to invest in small funds. So we invested in this $13 million fund earlier this year. We want to size that up

a little bit just because it needs to move the needle for us. But at the same time, our preference, strong opinions loosely held, is to invest in managers $100 million or less. So in that situation, we would be minimum 10%, $10 million check. And then we want to be a cataclystic check. We want to be a signal to the market that we've done significant institutional due diligence and help our GPs rate capital, whether that's from LPs that we know in the marketplace or LPs that we work directly with. For us, that long-term vision is that one day our LPs essentially take our allocation. And so we want to be that cataclysmic check that really helps these managers raise.

And you do institutional due diligence on a first-time fund, which sounds like a paradox. So what does institutional diligence on a first-time fund mean? Sometimes I get a PowerPoint and an Excel deck, and sometimes I get a whole lot more. It's really unique to the VC fund. I'd say from an institutional style standpoint, level set, I need audited financials. It's typically why we don't do less than $10 million. We do high quality ODD work. I think it's really important that you've set up, you know, your back office and your operations properly, making sure that you've structured your LPA

for it to be reasonable, recognizing that you're a fund one depending on your fund size, but that that LPA is set up for long-term success. So when you go off and raise your fund two, your fund three, and your fund four, it's a lot easier if your fund one LPA is of high quality, of standard quality. And this is where I start to think about that friction. If you keep your back office pretty standardized, it's a lot easier for a new LP to go through the due diligence process. Okay, great. This LPA is pretty standardized with generally market-friendly terms. I wouldn't say premium carry for a fund one, although I still

tend to see that nowadays. If you're using high quality service providers, I think that's really an important piece of it. I think also recognizing that if you are a fund one, if maybe your past experience was at XYZ large brand fund and you worked there for 10 years and you did 30 plus deals at, you know, one and a half million dollar checks and you got a couple of winners in there. If you go off and raise a $50 million fund and you're going to write one and a half million dollar checks and you got a couple winners in there. If you go off and raise a 50 million dollar fund and you're going to write one and a half million dollar checks, that feels relatively OK because you did that before. If you were an ex-operator and you wrote 25 angel checks at 15K each and you go off and raise a 50 million dollar fund to write a one and a half million dollar check, red flag to me.

You need to crawl, walk, run. So I want to see that your past experience has led you to create this venture fund that you're going to raise today. And it makes sense. Do you have an edge because of your past experience? Are you able to go and have that vision to build an enduring firm? I want to hear what your why is, and it better not just be because I want to be a venture investor and wear some bro vest and all words like I need to know why you're really doing this because it kind of stinks sometimes. Like it's not easy. And it takes on average about eight years for an early stage venture fund to hit a DPI of one. So you're not going to really eat until it's eight years beyond. So it's really important to understand, you know, what that long-term vision is. And I would say, lastly, is your portfolio construction

high standard to set you up for success? And does it match your strategy and does it match your fund size? A lot of interesting things to unpack there. One is you talked about making sure that you have the institutional backend or to set you up for future funds. Give me some institutional service providers that you would recommend. What's the stack that you would recommend for an emerging manager? Fortunately, that is not my wheelhouse.

When we get to talk about the team, I'd say Lisa's past experience is more on the operations side of things. She started off her career kind of working in more of the operational due diligence piece, although she's had a great experience as well doing the investing side. What I've seen is when a venture fund recognizes

that my superpower is investing and I am terrible at valuation, managing the audited financials, K-1s and all that. If you're in a fortunate enough situation, now this could be AUM dependent or this could be based off of you've had a very successful career where maybe you had a great exit or Carrie's already kicked in from a prior firm. So you can take those management fees and use it for non-salary items. Hire a part-time CFO. Hire someone part-time and outsource the headaches of fund management. That's really what I've seen has set up fund managers for

long-term success when they can use their superpower, which is sourcing, picking, winning, investing most of the time versus realizing, oh, no, it's been two years since five of my startups raised capital. The auditors are knocking on my door saying, you can't trust the valuations from two years ago. Go value those companies for us to do K1s and the K1 and the timeline reporting and all of that is really important. So that's where it's very situational. But when you recognize what your strengths and weaknesses are, and you can find ways to kind of plug those weaknesses, that's really important. And you say CFO and fund management. So does CFO be doing the fund management,

or are those two different positions? I'd say the two can blend because you can't completely outsource it. You're the one that's underwriting those companies. You're the one that's deep in the weeds with the companies. But kind of managing the nuances of all that and the timelines and the paperwork that's required, you know, that may not be your superpower and that's OK. So if you can outsource some of that back office piece, especially as you raise subsequent funds and you start thinking about how many portfolio companies you actually have, that seems like a bit of a headache to handle all on your own, especially if you're a solo GP. At which stage should you have a part-time CFO become a full-time CFO? What are some of those metrics? In terms of AUM or if you have, let's call it 300 portfolio companies, how are you going to manage that? I do think with AI and automation, there's probably ways to make that a lot more efficient. But the nuances is, have you done this before? Is this your first time investing as a fund manager? That's where

maybe it's worth tapping into something else. I've backed a fund manager before who all three were ex-operators and one of them was a CFO and took a company public. So in that situation, I don't think you ever need a full-time CFO. You have the experience to do it. But I would definitely say when you start to realize that the back office and the CFO style responsibilities are taking away from being a true investor and you feel like you're not giving sourcing, picking, winning 100%, then that's probably when you need to outsource. Speaking of portfolio responsibility, a mutual friend of ours asked me to ask you about how do GPs manage large portfolios? When you were at Virtus,

you were famous for investing into larger portfolios. How do you actually scale the portfolio management and the portfolio responsibilities? It's really interesting because at the early stage in pre-seed and seed, those cap tables have multiple names on there. I mean, you don't need to be taking a board seat. Typically, in a highly diversified portfolio, you're not taking a board seat. Your value add could be all-in funding, hiring, network connections. So when I see a highly diversified portfolio, my question to them is always time management. So what's the cadence of investments? What's the cadence of post-investment value add? And can we properly allocate your time to that so we can match it? Because at some point, those startups typically do not need your help anymore. Maybe on occasion you get a phone call for an introduction,

but at some point someone else has followed on, has taken a board seat and is doing the typical help that a series A, B, C fund will do. And so that's where your help is not as needed. And then I also ask this question is how much time do you spend on the good companies versus the bad companies? And is the advice for the bad companies fail fast so you can go and start the next thing? Like, you know, how do you allocate your time between the good and the bad? And how do you allocate your time in terms of investment cadence? And I've seen some of those diversified funds go a little too fast. I think you need vintage or diversification.

That can end up hurting them because you're dealing with too many things at the same time. I would say also, you know, hiring proper junior staff or hiring venture partners that maybe can tap in and provide value and is super helpful. Absolutely. I had Balaji Srinivasan episode 60, and I asked him about how he scales because he's across hundreds of companies. And he said, he puts up a list of the companies, just start scrolling down, somebody is asking him for too much. And he said, this is my portfolio. And it's just a question of how long he has to scroll down before the person gets the message. How do you deal with a portfolio CEO that's asking for daily or weekly meetups? How do you counsel GPs deal with kind of the squeaky wheel? I think this is where you have to have the conversation around removing your behavioral

biases when investing and doing fund management. It can be really challenging too if you really like the CEO. Is this a CEO that you'd be friends with even if you weren't invested in them? And so you have to move that behavioral bias piece and recognize where is my true value at? And if spending once a week with them for the next six months is going to be crucial to them being a successful company, okay, spend that time if your time isn't spent well on other companies. I mean, like it's a balance there. And so you have to recognize that you can only do so much.

And I think that I don't want to get in trouble here, but it's a lot more luck than skill at the earthly stage. And so are you really going to be the game changer that turns it into a unicorn company? Like, really? If your value add is so significant that it really can help that company get the next follow on funding? Sure. It just comes down to, I think, your belief of where your time is best allocated and recognizing, hey, there's other people on the cap table that could possibly help you more than myself. But you have to brand yourself as that type of venture fund. Don't have a poor reputation by treating founders poorly. Be transparent and be honest and say,

this is all I can help you with. You know, I have other portfolio companies. I think you're better suited engaging with this person. We'll get right back to the interview. But first, to stay up to date on all things emerging managers and limited partners, including the very latest data on venture returns and insights on how to raise capital and limited partners, including the very latest data on venture returns and insights on how to raise capital from limited partners, subscribe to our free newsletter

at 10xcapitalpodcast.com. That's www.10xcapitalpodcast.com. I also find that that's a skill in and of itself for CEOs to know how to utilize their cap table and know what to ask for, like you said, game-changing things like fundraising, perhaps M&A key hires, and not overly rely on investors for day-to-day tasks. Talk to me about your own portfolio construction. You mentioned that you have a minimum 10%. So how do you construct your portfolio as an LP? Yeah, I would say, especially when you think about OECD venture, it's parallel driven. And so that mean return somewhere around a 50% IRR over the long term, at median, somewhere around a 10% IRR over the long term. So it's really, really important

to capture the winners. I mean, that's what's driving that mean return to be so high. What's really funky to think about with the power law is there is times where the mean return, so get every single one and you got the average return, is greater than the top quartile return. That like blows my mind because that means that the top decile or the top 5% are driving that return to be so big. So you need to build a diversified portfolio that you have a high probability of being in at least the top quartile, if not hopefully the top decile. And so for the way I think about that for myself or even for LPs building out their own diversified portfolio is I would say it's around 20 plus managers over call it three to four vintage years.

Each one of those managers needs to be accreted to my overall portfolio. I don't want to add three managers covering the same sector or covering the same network, especially if that sector and or network is not wide enough. Does it require multiple managers? Because I'd say software is pretty wide. Or is it deep tech where I have one manager, best athlete in deep tech, and it's covering that for me? So I think about it from a holistic standpoint of each manager being creative, each one of them covering a sector that's wide enough where I'm not taking additional sector timing risk. I think you're taking enough risk backing,

you know, if on one, tw, and threes. You don't want to have to worry about, oh, no, is this sector, let's call it climate tech, for example, is this sector going to produce a huge outlier in the next three vintage years? And did I just find the fund manager that's going to find it? I want my fund managers, because we have a preference to tilt more towards pre-seed and seed, to have low reserves. I think that reserves can exist in certain strategies, can exist in certain stages, specifically therapeutics. I think reserves make a little more sense there. But essentially, when you're investing at the pre-seed and seed, that's the cheapest entry point possible. Any time that you're

following on, you're typically following on into a higher price round and dollar costs averaging down your overall multiple. So for me, I need to have a deep discussion with GPs around their decision process of why this reserve ratio and how do you make that decision? You know, are you underwriting it still on a separate capital basis? I can't stand when I ask the question of, okay, so you have 30% reserves and you made a 500K check investment into the seed round and you want to put a million dollars into the Series A. Let's separate out those dollars and do a decision analysis around that million bucks into the Series A and the opportunity cost of following on versus doing another deal. And when I get the feedback is I don't ever separate that out. It's one check. It's one company. All I'm focused in is ownership. That's a red flag for me

because you're blending your multiple where potentially you could have bought more ownership at a cheaper entry point. And I would say lastly, for me, each of those managers needs to have enough shock on goal to be in a winner. I mean, we talked about this earlier. There's only a couple venture funds that are in more than 3% of the unicorns at the seed stage. So I think the goal to be in a winner. I mean, we talked about this earlier. There's only a couple of venture funds that are in more than 3% of the unicorns at the seed stage. So I think the probability of success just naturally is pretty challenging. And so it's important to be in enough investments to be in a winner and also grab enough ownership that first check in to have each investment, you know, be accretive. I'd say move the

needle for the fund, just like I think about it, minimum 10% of a fund because I need that fund to move the needle for me. You mentioned something very interesting that goes underreported, which is the importance of getting into the right subsector within venture capital, almost as much as potentially even more than the best athlete. It's a common wisdom in an institutional investor land that sometimes private equity does well, sometimes hedge funds do well, sometimes credit, real estate, et cetera. But for whatever reason, venture capital LPs are very fixated on the person and not the market, although venture capitalists themselves are very fixated on the market. How much of a pre-seed or seed portfolio success has to do with the sector that they're in versus

the skill of the manager? What's really hard about that skill conversation is you're not going to know for probably eight to 10 years if that fund is top quartile, top decile. I think it takes somewhere between seven and nine years for an early stage venture fund to settle into their final quartile. So if you're first quartile, it might take 10 years to get to top decile. So I think it's really hard because the feedback loops are so long

that by the time you know, is that skill that you had in picking the right companies still applicable today? I think in terms of sectors, you need to have coverage of all the sectors that exist today and all the sectors that exist tomorrow. So that's why I say strong opinions loosely held. When I talk to managers that have a sector focus or have a specific thesis, I always ask the question, okay, if you find a startup that you think is going to be amazing and change the world, but it doesn't fit cleanly into your box, will you still invest?

And what I'm looking for is yes, because you can have your preference, you can have your lane, but I need to make sure that your opinions are held loosely enough that you wouldn't pass on something great because it doesn't fit perfectly into your little box. And so that's applicable to sectors too, but specifically it's on the LP to do the underwriting of the sector's potential. How many outliers have emerged in that sector today? How many startups exist in that sector? Is this only 3% of venture funding today? And why do you think in the next three vintage years, it's going to fight back itself and produce a lot of winners. You can look in the public markets that maybe they're not venture-backed companies, but there are acquirers out there. There is a huge TAM here. You have to do the work

around the sector to have a strong enough thesis that there's going to be winners that emerge there. Because if all it is is a ton of $400 to $500 million exit as an allocator, go deploy that and buy out in growth equity. That's where you see those types of exits and returns. Less risk too. We were talking offline, you were talking about top startups as a fertile hunting grounds for emerging managers. Why is that? Part of that grittiness or that endurance that you need to essentially survive as a founder or startup investor. You know, if you were an early operator at some of the successful companies, you were having a front row seat to being non-consensus, but right. You were able to see the journey that it took to get through the millions of no's, get through the multiple mistakes,

get through what it takes to go from 10 employees to potentially 10,000 employees. And I think that spin-outs from large brand investors have a place in the portfolio. I think you get unique edge that way, and typically you have a track record to look at. When you look at networks, some networks, like YC or Stanford have consistently produced significant outliers. I think company networks

are a breeding ground for new startups, especially when it's venture winner and people are cutting employees. Those employees I've seen go on and start startups. And so if you have the network being at a Meta or a Google, you probably have a deep Rolodex of fellow employees that are going to start startups. So I think it's important when you're building that diversified portfolio that you get a mixture of all types of GPs. But from a network standpoint, I always like to look at the networks or the X companies that have produced a lot of outliers. I mean, look at the PayPal mafia. Penultimate questions. You're obviously very close to many emerging managers. What percentage of their portfolio is going into AI today? I would say 100% if I really want it to be hilarious. I would say that when I talk to...

110%. Yeah, seriously. 120. Most LPAs. Wow, you were safe at that point. I would say that the conversations that I'm having with the existing portfolio and even new managers is not being 100% AI focused.

It's how is AI being implemented in the portfolio companies today and the new portfolio companies that you'll be investing. Just because I don't think it's a true standalone vertical yet. I think it's very horizontal that when I'm talking to consumer focused funds, it's AI is being implemented this way. When I'm talking to hardware, when I'm talking to even on the life sciences side, I'm seeing a lot of AI being added in biotech. How am I staying relevant and ahead of the curve and implementing AI into the portfolio companies?

And honestly, as an LP, how am I implementing AI into my processes to create a lot more efficiencies and invest better and faster? Thanks for jumping on round two. I learned quite a bit. What would you like our listeners to know about you now that you're at Screen Door? I would love everyone to know I am an open book. Any fellow data job, please reach out. I think it's really a small subset of data-driven investors in early stage venture. It's hard to do that. It's a lot more qualitative in nature.

So please feel free to ping me on LinkedIn. Any emerging managers, we have a GP submission form on the Screen Door website. So please fill it out. And we love, honestly, talking to a lot of different types of investors and GPs always here to learn. Awesome. Thank you, Jamie. Well, look forward to sitting down physically soon and hanging out and talking VC metrics and data.

Thanks for jumping. Thanks for jumping on the podcast. Thanks for having me. Thanks, Jamie.