Investing Billions - E88: Lessons from Investing in 81 Venture Capital Funds - Dave Neumann

Episode Date: August 22, 2024

Dave Neumann, investor at Molten Ventures, sits down with David Weisburd to discuss fund of funds deployment strategies, how GPs should approach fund size and interesting power law data derived from Molten’s 2,500 underlying portfolio companies.  The 10X Capital Podcast is part of the Turpentine podcast network. Learn more: turpentine.co -- X / Twitter: @dweisburd (David Weisburd) -- LinkedIn: Dave Neumann: https://www.linkedin.com/in/dave-neumann/ Molten Ventures: https://www.linkedin.com/company/molten-ventures/ David Weisburd: https://www.linkedin.com/in/dweisburd/  -- LINKS:  Molten Ventures: https://www.moltenventures.com/ -- Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at [e-mail] -- TIMESTAMPS: (2:08) Identifying successful managers and the prime years of a GP's career (4:00) Common mistakes of GPs (6:45) The venture capital ecosystem and strategies for success (8:10) Concentrated vs. diversified portfolios in VC (9:43) Molton Ventures' investment strategy and portfolio insights (13:15) Closing remarks and the future of venture capital -- DISCLAIMER: This advice does not constitute an offer to sell or the solicitation of an offer to buy any security; it is neither a prospectus nor an advertisement, and no offering is being made to the public. Additionally, all information shared in this podcast is based on our market observations and industry expertise and in no way constitutes investment advice.   The content provided is for informational purposes only and should not be construed as financial, legal, or professional advice. Listeners are encouraged to conduct their own research and consult with appropriate professionals before making any investment decisions. Any actions taken based on the information provided in this podcast are at the sole discretion and risk of the listener. The podcast hosts and participants make no representations as to the accuracy or completeness of any information discussed. All investments involve risks, and past performance is not indicative of future results.

To date, we've backed 81 funds, 63 GPs, of which I would say about 60 of them are based in Europe. We've committed £153 million of capital. By this quarter, we should have roughly 2,500 companies in the underlying portfolio. Where do you balance the hunger and the ambition of a GP with their experience? You end up seeing fund one being where they are most hungry and around fund three, fund four, they should be most savvy. Let's say you have a hundred funds of five companies each where that GP's entire reputation on those five companies. I think that would be much better than five funds across a hundred companies because you want everybody's best ideas. LPs only receive 50% of the TVPI by year nine of a fund, and it takes 13 to 14 years for 75% of the TVPI to be paid.

What would you say the factors are of a successful manager outside of IQ and background. Dave, I've been excited to chat ever since our friend Jordan L made the introduction. Welcome to 10x Capital Podcast. Thank you very much, David. Thank you for having me. Prior to starting at Molten Ventures, you were at Axon Partners Group. What were some of the lessons you learned while you were at Axon? Giving an example here, if we were talking with a fund and their track record of successful investments came from the UK and their new strategy is about doubling down on another

geography, it's our due diligence really trying to identify where the successful investments really came from. Another thing that I learned was what happened when you took out the best performing company and the best two performing companies of each fund and what would that happen to the fund? So when you were at Axon and you'd have managers that spun out,

what is an attractive manager for a spin out? And what's a manager that maybe is not as attractive? We backed Jato and the founder of Jato raised a life sciences fund. She was one of the main partners at Sofinova. And we also backed Rodrigo from Hello World. And he was one of the main partners from Point9. What worked for us was mainly the replicability of their success. I think what tends to happen is if you have a huge institution behind you, sometimes the intricacies of running a VC by yourself can get lost. So it's being able to do diligence,

whether that person can replicate their success by themselves or by forming a new team that will help them carry forward that's something maybe not a lot of people that think about leaving where they are and joining their own can quite grasp which is the difficulty of running things by by yourself and and whereas before you might have had a team that would do certain parts of the due diligence and work or a back office that would do admin or a team that does investor relations, those roles all make up a venture capital firm and the success of it. It's not just identifying winning a deal and call it a day. In terms of the sweet spot for a GP, let's talk about a GP's prime, his or her prime. Is this five years into their career? Is it 10 years? Is it 20 years?

Where do you balance the hunger and the ambition of a GP with their experience? This is perhaps anecdotal, but you end up seeing fund one being where they are most hungry. And around fund three, fund four, they should be most savvy. Are those the two factors, hunger and savviness? What would you say the factors are of a successful manager outside of IQ and background? I would say yes, but I think there are two other factors. It's the organization around follow-ons and the organization around exit strategy. LPs only receive 50% of the TVPI by year nine of a fund. And it takes 13 to 14 years for 75% of the TVPI to be paid. That's what's been happening

historically in venture capital. But funds are meant to be 10 year. So I think more and more the questions around what happens, what is your strategy regarding IPOs, M&As, what happens around these for the best performing companies. But there's also a lot of great quality VC-backed tech companies that might not reach that VC scalability that we all dream of, but they're still great. So I wonder what will happen to those quality assets, whether they can find a house in private equity firms, private equity strategies, small, medium buyout firms, or if funds will start entertaining secondaries. So yes, it's hunger for deals. It is hunger for exits as well. It is savviness about when or not to invest. It is savviness about when or not to

follow on. You talked about the savviness from a fund one to a fund three and fund four. What are some common mistakes smart GPs make from fund one to fund three and four? One crucial mistake that comes to mind is not doing your due diligence on your LPs. Every single LP also has different strategies. A lot of fund of funds, a lot of family offices, a lot of different LPs. I don't think many GPs realize that LPs have different strategies. Some are focused on first-time funds. Others are focusing on emerging managers. Others require a certain track record threshold. You've highlighted several really interesting points in terms of strategy, LP communication,

in terms of portfolio construction, follow on. What other predictable mistakes do GPs make, especially smart GPs as a fund one manager, maybe even a fund two manager? One more mistake is not adapting your fund size to your fund strategy and your fund capability. So I'm quite a big believer in small funds because they can yield most likely the biggest multiple return. We put the venture capital ecosystem as kind of a zoo. And I think the way things are going is you're going to have

global mammoths, right? You're going to have firms like your usual sort of Sequoia, A16Z index, that will most likely be able to invest across geographies, across stages, across verticals, you name it. Mammoths, global mammoths. And you're going to have regional elephants, right? In Europe, you might have, I'm going to put molten there, but you also have the likes of atomical, norsum, balderton, creandum that are going to win in their region and across verticals, right? You're going to have these elephants.

And these elephants and mammoths can produce and win enough of the best companies, enough of what is out there, the best of the best, that they are able to return a good solid multiple, right? But if you're not one of them, then you might struggle. Congratulations, 10X Capital podcast listeners. We have officially cracked the top 10 rankings in the United States for investing. Please help this podcast continue climbing up in the rankings by clicking the follow button above. This helps our podcast rank higher, which brings more revenue to the show, and helps us bring in the very highest quality guests and to produce the very highest quality content.

Thank you for your support. I'm feeling controversial today. One of the implied assumptions in venture capital in general is fit, in that some of the top portfolios ever have been very, very large, whether it's SV Angel, 500 Startups has a great track record, Uri Milner Start Fund from the YC days. There's a lot of dogma on this issue, which I think is directionally correct, but which sometimes could be overapplied to the entire industry. That's absolutely fair. And I guess, do you think that you can have a concentrated portfolio in the early stages? So I think that this is actually a principal agent question. For fund to funds, it's very optimal to have 10 funds of highly concentrated portfolios. Even take it at the extreme, I'm just going to give you an extreme absurd example, but let's say you have 100 funds of five companies each where that GP's entire reputation on those five companies, I think

that would be much better than five funds across 100 companies than the opposite extreme because you want everybody's best ideas. Now for the GP, that creates a lot of career risk because we all know the loss ratios early on. But if I'm an LP and I'm a fund to fund, I don't mind if 25% of my funds don't hit a power law outcome or return less than 2x if half of them are over 10x or some very high part. As an LP, I want all things being equal. I do want concentration. As a GP, all things being equal at the early stage, I probably want diversification. That's very true.

We dove straight into strategy. I didn't even get to the question about what is Molten Ventures. Of course. No, happy to. And by the way, I'm more than happy to geek out on strategies and data and what makes venture capital tick. So Molten is a venture capital firm. We've kind of been around for decades.

By now, we used to be called Draper Esprit, and we rebranded to Molten back in late 2021. We are a publicly traded VC firm. We IPO'd in 2016 at the London Stock Exchange. I think just a few days before or after the Brexit referendum. So it was a big momentaneous, at least, we had some good news. Molten is bread and butter is to do series A and series B direct investments in pan-European companies. We've been doing that for ages now. Some of our companies include Revolut, Thought Machine, Coach Hub, Ledger, Mana, M-Files, and others. And about a few years ago, one of our partners, Jonathan Sibilia, decided to create a fund of VC fund strategy. The main idea of it is, of course, helping the ecosystem build. The better prepared the companies are, the better quality of assets we

get to see in the Series A, Series B, partnering up and learning from a few of our GPs that do different sort of sectors and geographies. And of course, understanding what is happening in the earlier stages to then drive insights and even deal flow for our direct investments. And it's been part of our track record to also look at secondary strategies. So to date, we've backed 81 funds, 63 GPs, of which I would say about 60 of them are based in Europe. Most of them are doing pre-seed and seed stage focused strategies. We've committed 153 million pounds of capital. By this quarter, we should have roughly 2,500 companies in the underlying portfolio. I don't know if you saw, I was rubbing my hands

together when you said 2,500 underlying companies. You got to share some insights. What are some insights from those 2,500 underlying portfolio companies? What can you share? Three key ones. So one, we did a study on power law. Again, always in the back of my mind, what I learned at Axon, but it was how many companies do I need to take out from each fund that we have in order for the fund to be at 1x or below, right? So if you rank all of the best companies per fund, how many companies do I need to take out? It's like a reverse power law, like what actually returns the principal?

Exactly, exactly. So if you take out the top five companies of the funds that we have, we found that 60% of our funds would be at 1x or below. If you take away the top 10, 90% of our funds would be at 1x or below. So it's all concentrated in 10 and most likely five companies. To bear in mind, we do have a few GPs that we back to have a super large portfolio. So that also maybe explain that remaining 10%. But it's just interesting to see that sort of what happens with your best companies. What would you like our listeners to know about you, about Molten Ventures or anything else you'd like to shine a light on? One is really curious about what happens when you start thinking about exits. Really curious about what happens to venture capital when you put as much emphasis on your portfolio constructions as you do to your follow-ons as you do with exits and what happens to how funds relate to secondary opportunities and being

able to take chips off the table. I wonder if that will help the flow, the cycle of cash around those who invest in venture capital and attract them. On that note, this has been really enjoyable. I've learned a lot. Thanks for jumping on the podcast and I look forward to seeing you down soon. Thank you very much, David.

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