Investing Billions - E89: How a Fund of Funds backed by one of the world's largest insurance companies is revolutionizing the venture capital landscape

Episode Date: August 27, 2024

Iyan Unsworth, Vice President of AXA Venture Partners sits down with David Weisburd to discuss How a Fund of Funds backed by one of the world's largest insurance companies is revolutionizing the venture capital landscape The 10X Capital Podcast is part of the Turpentine podcast network. Learn more: turpentine.co -- X / Twitter: @dweisburd (David Weisburd) -- LinkedIn: Iyan Unsworth: https://www.linkedin.com/in/iyan-unsworth-1016a896/ AXA Venture Partners: https://www.linkedin.com/company/axavp/ David Weisburd: https://www.linkedin.com/in/dweisburd/  -- LINKS:  AXA Venture Partners: https://www.axavp.com/ -- Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at [e-mail] -- TIMESTAMPS: (0:00) Episode Preview (2:25) Key Investment Regions and Geographical Distribution of AVP's Portfolio (4:01) Ideal GP Characteristics and Decrease in Funding for First-Time Funds (7:42) Full-Time Commitment and Historical Performance of Venture Capital (9:02) Principal-Agent Problem and Market Contraction Analysis (11:07) Profiles and Importance of Partnership in Emerging Managers (12:04) Evaluating Teams, Dynamics, and Performance in Venture Capital (15:00) Sensitivity in Performance Discussions and Incentive Reassignment (18:54) Conservative Fund Strategies and Transparency in Track Records (20:05) Complexities of Deal Attribution in Diligence Processes (22:03) Discussion on Secondaries (24:22) Closing Remarks

Tell me about AXA Venture Partners. It's one of the larger insurance groups in the world, created over 200 years ago, and has expanded globally since across many, many different countries, and they employ in the hundreds of thousands of employees. We do see a lot of noise out there, especially when it comes to new managers coming to market, saying they're going to launch this new strategy. The percentage of funds that we invest in based on our funnel is below 5%. What's the number one mistake that emerging managers make?

We're in an asset class or a world where ambition and vision and almost unnatural belief in being able to deliver something exceptional is necessary. But as LPs, when we look at emerging managers, I have to believe that what you're trying to accomplish, you can do. You're raising a $500 million seed fund. You're saying you're going to capture 25% plus do. You're raising a $500 million seed fund. You're saying you're gonna capture 25% plus ownership in the best seed companies coming out of Europe, and you're gonna deliver 10X, and you've never done anything of the sort before. Very difficult for me to hang my hat on that.

There's only been 28 funds that have raised first-time funds in 2024. What's driving that? It's unbelievable, and believable at the same time. Ian, I'm excited to chat today. Thank you, Jordan Nell, for the introduction. Welcome to the Tanex Capital Podcast. Thank you for having me.

I'm very excited. I'm excited as well. So tell me about AXA Venture Partners, AVP. Tell me about how it relates to making LP investments. Yeah, sure. So maybe it's worth giving you a little bit of background on the whole platform to start with, and then I'll kind of dive a little bit into the LP side. Not everyone is familiar with the AXA brand, but it's one of the larger insurance groups in the world. Created over 200 years ago and has expanded globally since

across many, many different countries, 50 plus, I think, and they employ in the hundreds of thousands of employees. It's a massive organization and it's one of the biggest insurance groups globally. So that's our kind of seeding LP group that helped us launch this platform about eight years ago. And so behind us, we have a lot of investment and institutional know-how of what it takes to build a fantastic alternatives platform. As AXA has done many different things in the private equity and alternative space over those 200 years. But they decided to seed us in 2015-16. We're global investors, U.S., the two coasts, but, you know, U.S. wide.

We focus on Europe and we focus on particularly Western Europe and Nordics. So like France, UK, Nordics and DAC are kind of the key areas we look at. And then we also invest in parts of Asia as well. There's some pretty massive markets in terms of macro out there, China being one, India being one. Yeah. What's the strategic reason for why AXA is investing as an LP? It's a great question. The reason AXA decided to do this is because, well, they had successfully built an investment platform in the past where there was a story of Ardian, which is a large private equity play in Europe. They're like a $200 billion AUM fund today that used to be AXA private equity. They grew it and spun it out after like 15 years of that

platform developing under AXA. And AXA remains one of its largest LPs today and will always be. Around 2015, 14, it was time to launch a strategy that would look at the tech space and help people on the ground from that strategic angle. Let's talk about your portfolio. You invest in US, Europe, Asia. What percentage of your GPs are in those geographies? Yeah. So our strategy is very much designed to be aligned with where we see the most opportunities in all those different places, right? So we think of the biggest markets in venture, US forms over half of what we do. And that's probably reflective of the opportunity that's available, probably could be more. Europe is somewhere between 25 and 30%. And then if I

group kind of Israel and those parts of Asia I mentioned, and within that remaining, let's say, 15%, there's all those. And we also do venture LP secondaries and co-investments. And when you look to invest in a GP, what are the characteristics of an ideal GP? If you can show capturing high ownerships in the best companies as early as possible in the places that matter, then to us, that is proof points that you're differentiated by default because you're doing something better than others to get to those opportunities. It's the outcome driving the conviction. Absolutely. Samir Khaji from Allocate shared a first-time fundraising activity for first-time funds in 2024.

It's down over 90% from 13.4 billion in 2023 to 1.6 billion in 2024. What are the main factors driving such a significant decrease in funding for first-time funds? There's only been 28 funds that have raised first-time funds in 2024. What's driving that? It's unbelievable and believable at the same time. So, you know, it's this, a lot of what we can say as LPs is you can mirror with what you say as GPs. It's this phenomenon of flight to quality, right? As markets retract and people become more risk off, they tend to gravitate towards things that are easier to understand that are less risky. It's people trimming down their portfolios and on the supply side and just like focusing on the few relationships that matter and not really paying attention to those riskiest opportunities out there, much like what you see on the company

side, right? If you're not a company who's able to also show excellent metrics and you're just like one of the top 5% of companies out there, it's very difficult for you to raise at the series B plus, right, at the moment. And it's kind of the same thing at the fund level, or let's say between LPs and GPs, it's that same kind of dynamic. In that same sweet storm, the five largest venture funds, to your point, have gone from a 20% market share in 2023 and 21% in 2022 to 45% in 2024, which is staggering considering there's thousands and thousands and thousands of funds,

of venture funds in the market. Is this quote unquote flight to quality, which I would label a flight to brands, is that a sober and rational move or is that an overly conservative and incorrect posture? Is this people just being afraid of, you know, for their job or is there some hyper rationality going on in the market? There's a bit of both there. I hate to take that easy answer, but, you know, in a lot of cases as LPs, we do see a lot of both there. I hate to take that easy answer, but in a lot of cases, as LPs, we do see a lot of noise out there, especially when it comes to new managers coming

to market saying they're going to launch this new strategy. And the percentage of funds that we invest in based on our funnel is below 5%. So we also filter through a lot of things. And you'd be surprised how many funds out there will say they're going to, they're pitching something that they're going to, they think they're going to do really well. And as people who have seen, who have pattern recognition on that side of the market, we see pretty quickly when a lot of things won't work. And so, you know, although we think as LPs, we are constantly having conversations with new managers and we think it's very important

to keep a pulse on that side of the market. Going and investing in Andreessen's recent funds is a great way for somebody who potentially doesn't spend that much time on venture or maybe venture is a small part of their allocation as an asset allocator to index the market and get exposure to a great proportion of the best opportunities that come through in venture over the next cycle. But if all you do is venture capital like us, it makes no sense because you really need to balance out that part of your portfolio with potential alpha generating opportunities that are going to often be funds one, twos or threes. So it depends on how much time you want to spend on venture. Venture is not an asset class to have one foot in. It's definitely somebody's full-time job,

or you should be even investing in a fund to fund, I would argue. I look at these multi-stage funds essentially as a different asset class, essentially equivalent to a growth equity type exposure, which has quicker returns from a DPI perspective, but a much more banded return profiles, shorter timeframe, banded returns, but you're never going to get a 10X fund. It's just almost structurally impossible. And going back to this retreat from emerging managers and also retreat from early stage investing, I do consider it largely irrational for a couple of reasons.

One is venture capital has proven itself as a great asset class going back to the 1970s. The only reason to really change the thesis is for one of two reasons. One is if you have a macro belief on the cycle of the market, if you think that we're at the top of the market, like, you know, some people made a judgment call in 2020, 2021. Of course, some people made that early in 2020, going back to 2017. If you really believe that venture is overbought right now, then it does make sense to not invest in a certain vintage. If you're not playing macro investor, you're not trying to pick the troughs and the peaks. I think the only reason to really get out of the asset class, which is essentially

what you're doing if you don't invest in the early stage, is if you believe that the future will not look like the past. Is the age of startups over? Are we no longer going to get $10 billion, $100 billion startups? And I don't see any rational reason why that's not the case. In fact, I see a thesis that would suggest that companies, whether they get bigger or not is a question, but they are getting much more efficient capital raising because of these forces, including AI. You now have these companies like MidJourney that are $10 billion valuation, I think have never raised outside capital. That would be unthinkable even two, three years ago. So I think the returns are here.

And I think those that invest in this vintage are going to be rewarded. That being said, unfortunately, there's a principal agent problem inside of many LPs, which they're not paid to take a lot of risk. And also, even when they make the right decision, those results aren't known for four or five years. So oftentimes you have to deal with a lot of headwinds for many years until your strategy is proven right. So I do think there's an irrational aspect to this, but it is shocking when you look at an industry that is essentially contracted by over 90%. It's worth discussing. But I wonder, of those 28, was it 23 or something? 28, was it 23 or something? 28. Yeah. 28 of those

28. I wonder what the profiles of those funds look like because, you know, you talked about persistency of returns and I couldn't agree with you more. In fact, I would say, you know, that phenomenon is, is ever present at every level of venture capital for sure. Um, and when we pitch, you know, our, our, uh, when we do our pitch to LPs for our fund to funds, it's like, if you can find the right people, stick with them over time, and they're able to demonstrate strong returns, the likelihood of that happening over time more and more is more the case than anywhere else. And when you aim high at the highest level quartile of returns within the asset class, then you have a winning strategy if you can get there, broadly speaking. And first-time funds, as we know, we've seen the data. It's like they generate the most alpha, but it goes both ways, right? You can end up with terrible, terrible returns. Maybe not in my time, but I've seen data to show like zero X funds in the past. I don't know how, but it happens. And so I wonder what the profiles of those 28 look like.

How many of those 28 are first-time managers? First-time managers, yeah. Very few. Many of them may be spin-outs from those same multi-platform funds. You mentioned when we were talking that you over-index on partnership. What did you mean by this? Over-index on partnership, it's even more in the topic we're talking about with emerging managers and new funds and new managers, where you don't have that much data to hang your head on. Thinking very deeply and

spending a lot of time on the people is crucial. And I keep making the analogy of like how you think about founders on the GP side and how we think about GPs is actually comparable. A lot of the managers we work with, the most important aspect of their diligence is to look at the people running the firm. You know, do they have confidence in the entrepreneur's execution capability, ability to iterate and to create? And if that is a five out of five on every dimension, then everything else kind of follows. And for us as LPs, it's very much comparable to that. Like we like to have a map in our heads.

Ecosystems. The whole ecosystem. And once we know that, you know, we know where they come from, we know what they've done in the past, what deals they've led. If we don't know, we can reference those things with founders, with other LPs, with other GPs. We get people in a room and we spend a lot of time with them. If it's a multi-person partnership, we like to see how they interact, how they think, how they compliment each other if they don't. And those are all the intangibles, but they are so important in making an investment decision and become almost the only thing that matters. The earlier you go in a manager's journey because you have less and less to hang your hat on.

That's quantifiable, right? If we see a track record of like, you know, 4x fund, 5x fund, maybe there's a great performance thing going on there for a number of cycles. But then there's something about the team that's just off and we can't get comfortable with it. So strategy and team and performance, everything links back up to the team in that sense. If we can't get comfortable with that aspect of the GP or the opportunity rather, it's very difficult for us to form conviction. You mentioned that there's sometimes one or two people driving the majority of a fund's performance. Talk to me about that. When we do diligence as LPs, you have a good view of where the values are created in terms of

deal attribution. So there might be three investment partners in a firm, and you can see on paper that 60% of the fund's values have come from that single partner. A lot of the time, it's just tenure. Some partners have been involved with the firm longer. Therefore, they've had more chance to make more investments. And therefore, just by the fact that they've been there longer, they've had more opportunities and more value attributed to them. So it's a question of tenure in some cases. In some cases, it's a little bit more nuanced,

but you get the real question. So take a situation where you have three GPs. One of them is super deal focused, just likes investing. That's all they do. And they do a good job at it. The other partner, second partner might have 50% of their time doing deals, but they also happen to be great firm builders and great at hiring people, training people and being a culture carrier. Not something you can see on paper, but if you look at it on paper first, you're like, oh, what's going on here? You have a conversation with the group and you try and figure that out.

In some cases, it's like, you know, sometimes it really is clear. Everybody's putting the same amount of time and effort into investing. And it so happens that one or two of the five or six or whatever the number is, they're the ones that are actually driving the value 80-20 rule. And that's a little bit more of a difficult conversation to be had with the manager. Why is that a difficult discussion? Let's say you have a six GP team and one or two of the people are driving a lot of the returns. It's a good performing fund. Is that not okay? I've been involved in certain situations like that where it's not 95 and five, like you said, but it's more like starting to look a bit more like 60-40 or 70-30 or something like that.

You can see there's a great dynamic between people and everybody's got their niche and whatever, whether it's internal, whether it's external, like if it's brand building, if it's running the firm. There might be a lot of things grooving there and there's no disagreement between the existing partnership. But you as an LP, sometimes people don't even notice these things. You'd be surprised. LPs don't necessarily figure this out. So you might be the only one in the room going, yeah, we've noticed something on paper here. It looks weird. What do you think? It's a sensitive discussion because it's a people's business at the end of the day. And if people get along and they like working with someone else, it's not as easy as just saying like, hey, get rid of this person, right? How often do you see incentives reassigned in those cases? If you look at role and tenure,

those are kind of the two most common dimensions to which you could look at this situation, right? So the most common situation I've seen is you get a firm that's been around maybe some of the original partnership is is getting on with their age and they're coming closer to retirement age and their role as their tenure expands their role changes over time and a lot of time you see these situations where you know become less active on the investment side and they tend to move more into these like you, intangible roles where you have more of a chairman-like position or advisor, et cetera, right? You'll see situations where first-generation partners will hang around because it's their firm, they started it and they're not fully transitioning out. And sometimes the economics are not shared

the right way between them and the new generation, right? And that's something that we don't particularly like. But if you're responsible and you have enough clarity in what's going to happen, you make that transition as clear and well-structured as possible early on. So in that case, you should see change over time. extreme example where someone's just not contributing anything or contributing less, it's rare that you see firms say, hey, let's take away some of the economics from those people and reallocate it to some of the others that are doing a better job. Often the partnerships we work with, they're very much a kind of you're in or you're out type of culture. And if you're not a core part of the team and you're not carrying your weight or more than your weight to some extent, you're very quickly going to get pushed out. And that's just the nature of the game. So in that case, it's more an interrupt situation

than reorganizing incentives. 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. What's the number one mistake that emerging managers make that you wish emerging managers would not make? It's the over-promising under-delivering. It's when people don't right-size their fund to their strategy.

And that speaks a lot of things, right? I mean, I think we're in an asset class or a world where ambition and vision and almost unnatural belief in being able to deliver something exceptional is necessary. But as LPs, when we look at emerging managers, it's like, I have to believe that what you're trying to accomplish, you can do. So I'd almost advise emerging managers that are thinking of launching something new is try to be as conservative as you can for your first fund so you can under-promise and over-deliver. Much better story coming into fund two and fund three and sometimes four. I'll give you an extreme example.

You're raising a $500 million seed fund. You're saying you're going to capture 25% plus ownership in the best seed companies coming out of Europe, and you're going to deliver 10X. And you've never done anything of the sort before. Very difficult for me to hang my hat on that. And the number one question you're going to get from an institutional LP when you're out to raise your second, third, fourth fund, sometimes it takes that long as they get to know you, is they're constantly going to ask you, have you done what you said you were going to do? And have you executed on that?

So the consistency of messaging with execution is the most important thing. I remember seeing a deck last week where some logos on a page, people saying they've invested in X company that, you know, category defining company, everybody knows it. And I go back to my data and I see that their name isn't actually next to that company. It's somebody else's. And it's perhaps a little bit more nuanced than that. Maybe there's a person was involved, but not so much situation and it's worth digging maybe. But I think I am also surprised to see how often managers don't realize how much data we have and see and have seen through time to be able to triangulate things and to really assess whether what they're telling is true. So to summarize,

I would say it's like, rather than over-promising on delivering, do the opposite and just be as clear and transparent and honest as possible about your track record and what you've done in the past and that will act in your favor in so many ways. When it comes to deal attribution, how many VCs can be attributed to one deal? It's a good question because you'll get situations where, and it's within our, even our own portfolio where managers will say, Hey, actually deal attribution, we don't really do. It's like somebody sources a deal, we all jump on it. And often it's the analyst. So sometimes you have to take that view that it's a firm-wide effort, and that can be fine. But in the case where it is usually clearly defined

and there's someone designated to it, it's usually, again, like a lead and, you know, what do you call it? Like a lead and sub-lead, I guess. I would say one or two people at most. Three becomes a little bit convoluted. It's like, how does that work? You know, but at the end of the day, the way to do it from our, the way we do it is like, we look at who's on the IC at that point in time and who makes the decision. And often there's a partner that's leading that deal

with somebody's help, maybe a principal, maybe there's another partner who's acting as a second point of contact, but usually, you know, it's one or two people taking the vote at the end of the day. That's how we think about it. What do you look for in a fund too? So you obviously don't have DPI typically when somebody's raising a fund too. What's your diligence like for a fund too? That's one of the trickier ones, right? Because as you say, you get to fund too. And depending on the strategy, if we're talking about, you know about seed, even series A to some extent, and anything below that, it takes companies more than a fund cycle to show any kind of traction, at least on the fundraising side of things, right? So you might, in that case,

you know, you're still looking at the intangibles, you're still focused on team, you're still focused on the execution part. So perhaps the markups are not the interesting things, but it's like, can you see the ownerships there? Can you see that the entry points make sense and that they are aligned with what was said in the pitch initially? And then you have a long conversation with the people who made the deals, who did the deals about those companies, and you try and dig into the underlying fundamentals of those companies. You're based in London. How often do you meet with your GPs in other countries? Yeah. So being based in London is actually quite a strategic advantage, I would say.

So it's the biggest tech hub in Europe by a large margin, at least in terms of venture activity. We're quite well placed as well between US, Europe, obviously, and Asia. So all the different places we like to invest, we can be on a daily communication with all three of those places which is nice and uh and because it's such a hub you know people come through here a lot so we get to see people even just being here but we also come out to the us you know two to four times a year minimum so we tend to see people in europe at least once a quarter uh and we tend to see people in Europe at least once a quarter. And we tend to see people in the US once a quarter or two, three times a year on average. So, you know, going back to all the points I said before, because team is such an important aspect to underwrite when we do everything we do.

For us, it's crucial to spend face time with people. Informal settings and informal settings, both are very important to building those long term relationships. So we do make sure to do that more than once a year. What would you like our audience to know about you, about AXA, about anything else you'd like to shine a light on? I mentioned venture secondaries at some point in this conversation. It's a part of the market we've been focused on since day one. It's very immature relative to private equity secondaries as a part of the market, but it's really grown a lot over the past 12, 18 months,

I would argue. And there's a lot of attention being placed on it. I don't go a single day without hearing like, oh, another billion dollar fund dedicated to venture secondaries has been raised. So it's an interesting one because we are seeing people transact more and more in that space for various reasons, some of them structural and fundamental, like companies staying private longer, that's persisting. So therefore exits are more scarce, IPO windows shut-ish, and large M&A opportunities,

transactions aren't happening in frequent numbers, right? There's the regulatory side of things that make that more difficult, et cetera, et cetera. So people are looking for new ways to create liquidity for themselves, for their LPs, so on. So in addition to just like reaching out, we're very open to have a conversation with anyone within the ecosystem we work in, whether it's a new fund you're raising or if it's like just wanting to talk about how we look at things, talk about managers. But also secondaries, I think, is a place we're spending a lot of time.

It's been a pleasure to have you on and I look forward to sitting down soon in London or New York City. Me too. Thanks, David. Thanks for listening to the audio version of this podcast. Come on over to 10xCaval podcast on YouTube by typing in 10xCaval podcast into youtube.com and clicking the subscribe button. On the YouTube version of this podcast, you could see the graphs, visuals, and key takeaways

that accompany every episode.