Investing Billions - EP135 How to Access Top Quartile Venture Capital Funds w/Mel Williams

Episode Date: February 4, 2025

In this episode of How I Invest, I have a conversation with Mel Williams, Co-Founder and General Partner at TrueBridge Capital Partners. We dive into TrueBridge’s pivotal role as Forbes' data partner for the prestigious Midas List, its strategic approach to venture capital fund-of-funds investing, and how the firm consistently identifies and backs the top-performing fund managers. Mel provides a masterclass on portfolio construction, risk management, and scaling a successful venture investment platform. Whether you’re an institutional investor, a fund manager, or simply intrigued by the inner workings of venture capital, this episode is packed with essential takeaways.

We're not distracted by what's happening in other asset classes. And as a result, we think we're simply broader and deeper in the asset class than many other investors are. We've been generating best in class returns for our investors for almost 20 years. All of our mature funds are generating somewhere between a 3X and a 5X TVPI, or total value to pay it in, capital multiple, and a 3 plus X DPI, or distributions to pay it in capital multiple and a 3 plus X DPI or distributions to paid in capital multiple. We believe we have one of the best networks across the venture industry which increases our insight and our access to the best performing investment opportunities. And then finally, you know we've got a team of

over 14 investment professionals with over a hundred cumulative years of experience investing in the top performing venture managers and the best performing venture companies in the industry. Tell me about the story about how TrueBridge got involved in the Midas list. Forbes started publishing the Midas list back in 2001. And in 2009, they stopped publishing the list as a result of the global financial crisis and the pressures it was putting on the publishing industry, including Forbes. We reached out to Forbes in probably 2010 to begin a conversation with them about how we could be helpful to them in relaunching the Midas list.

And today, we're really the data partner to Forbes for the Midas list. What that means is we collect all the data, we confirm all that data with the best performing GPs and the CEOs of the companies that are really driving performance in the Midas list. We generate the list through a model that we manage every year with Forbes. We work with Forbes to vet the list every year with a blue ribbon panel of industry experts and industry advisors and consultants, and then Forbes publishes that list and we help publish additional content around and about the list, but that's the genesis of the list and our role in the list.

We've been the data partner to Forbes on the list since 2011. The Midas list, the number one list for VCs. Does that give you an unfair advantage when it comes to accessing GP, talking to LPs, and talk to me about that? Our role as a data partner in the compilation of that list certainly gives us access to a level of information that other limited partners might not necessarily have access to. It's very granular deal performance and deal attribution data that other limited partners might not necessarily have access to. It's very granular deal performance and deal attribution data that other

limited partners may not necessarily have access to. We certainly think that helps us make better decisions and be better investors. Tell me more about TrueBridge's fund-to-fund strategy. Sure. So I think the most important thing about TrueBridge is that number one, all we do is venture. That's our entire focus. We have five distinct investment strategies on our platform. We have a core fund-to-fund investment strategy where we build a concentrated portfolio of very best, well-established, high-performing fund managers. We have a seed

fund-to-funds investment strategy where we build a concentrated portfolio of seed and small managers, including numerous emerging managers. We have a dedicated direct investment investing strategy or fund on our platform where we're investing in the breakout winners in our underlying portfolios and investing alongside our managers in those companies. We have a dedicated LP secondary investment strategy or fund where we are investing in LP secondary positions and or directly in companies through the secondary market.

And then finally, we have a dedicated blockchain fund to funds investment strategy where we're investing in and building a concentrated portfolio of the best performing blockchain dedicated managers in the industry, as well as investing in companies alongside those managers. So you have a couple of different aspects, secondary, directs, core, emerging managers. How are these all strategic to each other? We like to think that our participation in one of those strategies impacts the other strategy. Certainly being close to some of the most well-established managers in the industry and understanding whose seed deal flow they want to see the most informs our investing in the seed

landscape, investing in the seed landscape and seeing companies at their inception, seeing how those companies grow, how management teams perform, how markets develop and customers respond to product offerings, informs our direct investing strategy. And so, you know, they really all layer, layer on top of one or the other. Crypto and blockchain, arguably the most volatile asset class in history, even more volatile than venture capital, does that somehow change your portfolio construction or do you have a venture like portfolio construction for your blockchain fund? David, that's a great question.

I think across all of our portfolios, we definitely believe in the power, law, and nature of venture returns in that a limited number of companies drive the overall performance for the industry. And as a result, drive the overall performance from underlying fund managers. We want to get as much exposure to those power law companies as we can. We definitely believe in the quality of our deal flow and our picking ability. Across all of our investment strategies, we tend to build concentrated portfolios. And the same is true in blockchain.

With our first blockchain fund, we are building a concentrated portfolio of no more than 10 managers in that fund. The way we account for volatility or increased volatility in the blockchain space is through sizing our positions in certain managers in different ways and we also expect to see more manager turnover in both our blockchain portfolios and our seed portfolios because those two segments of the venture market are simply less proven and the managers in those segments are less proven than there are in other segments of the venture market. You have one of the most enviable kind of LP portfolios really in the world, not only for fund of funds, but endowments, probably a little, it's probably today,

not as difficult to get the incremental manager, but when you were starting out, how did you go from zero to one? How did you access those first two, three premium blue chip venture funds? David, when we started, um, True Bridge Capital Partners, both my part, myself and my partner, Edwin Poston, were coming from very well-known institutional investing shops where we had front row seats in the venture industry. We had previously invested in many of the managers you see in our portfolio today in our prior roles. So we were able to bring those relationships from the University of North Carolina's endowment and the Rockefeller Foundation's endowment. We were able to bring those relationships to

Truebridge to help begin building our first portfolio. And so that was a huge positive for us in funds one through two or three. We also started our firm in a close partnership with the Kauffman Fellows Program, which is the only program of its kind whose sole mission is to identify, network, and train the future leaders of the venture industry.

And that partnership arguably gave us connections to, and access to some of the best performing fund managers in the industry. And those were really the two ways we launched the business and we built the first couple of portfolios. You're obviously incredibly talented. If it wasn't for this advantage of being at the North Carolina endowment and Rockefeller foundation, would you have been able to build the same high quality GP portfolio?

I think it would have been really difficult, you know, without those relationships with the top performing fund managers, many of whom remain in our portfolio today, without those relationships and without being able to secure sizable allocations to their funds, I think it would have been really difficult to start the firm. I think it would have been really difficult to start the firm. I think it would have been really difficult to get institutional limited partners interested in what we were doing. Um, and so it had been very difficult to launch, but you know, with those

advantages, um, and, and we built fund portfolio funds one and two, it's really like success built upon success. Um, which has put us to where we are today. You have an interesting forced ranking to your portfolio where you forced rank your funds against each other. Tell me about how that's done. David, because we believe in the power law nature of venture returns and because we believe in our deal flow quality of our access and our investment judgment.

We do believe strongly in building concentrated portfolios across all of our investment strategies. We believe building a concentrated portfolio is the best way to generate outsized performance for our investors. Building, part of the process of building concentrated portfolios is force ranking all of our fund managers every year.

And so we do go through that process every year where we force rank all of our fund managers as a collective group effort. Force ranking helps us concentrate our portfolio. It ensures that we put as much limited partner capital as we can with the best performing fund managers in the industry. It's a great model and it's yielded great returns for our investors, but it's execute. It does lead to some very challenging discussions internally and some very, very deficitions. Is this forced ranking a way to counterbalance this kind of LP buys to keep on investing into GP over and over and how does it play out?

Does that mean that a percentage of your portfolio is always being replaced? Or is it a forced ranking against potential managers? Tell me more about this forced ranking system. We're always forced ranking. We have about roughly 10 to 12 core managers in our main fund, constantly forced ranking those 10 to 12 managers. We forced rank them not only against each other, but against potential new entrants into the portfolio.

You do see some manager turnover in our funds from one fund to the next, and it's a result of this belief in concentration and this force ranking. When we identify a fund manager who we believe can consistently at the top of the industry, then that's someone that we seriously consider adding to our portfolio. But in order to add a new manager to our portfolio, it's all one for one trade. Someone has to come out of the portfolio.

And so, those are really tough decisions for us and ones we take very seriously. If I look at why managers come out of our portfolio and why new managers come in, I would say the number one reason why someone comes out of our portfolio is because we've been able to invest more of our limited partners capital with a higher performing manager in the industry. So we're, if we let our managers one through 12, if we can put more capital, more of our limited partners capital with who we consider to be one of the top two or three best performing

fund managers in our business, we're going to do that. And then if I look at replacing a manager in our portfolio, to get into our portfolio, we've got to have a really high degree of confidence that a manager can consistently form top of the industry. And that's usually a result of unique and or high quality deal flow, unique access or an ability or a right to win in competitive situations and investment judgment as demonstrated by an investment track record. And so if I look at those instances where we have brought new managers

in our portfolio and expense and expensive manager coming out, I'll look at us backing Peter Thiel at Founders Fund and his first institutional fund. Peter has unique deal flow. He has a very unique and contrarian investment perspective. He has a very compelling right to win based on who he is and his track record and his influence in the industry.

And he had a very good investment track record when we backed him. I'll look at Ben and Mark at Andreessen-Harwoods, when we backed them in their second institutional fund. They had incredibly strong deal flow based on their prior operating experience and operating success and who they were in the industry and their board seats, et cetera. They built a very unique and one kind platform, value add platform or services platform in the venture industry.

They were the first to do so, which gave them a unique right to win in special or competitive situations. And then they both had very good investment track records when we invested with them. And then finally, I would say the same about David Sachs at Kraft, which is a relatively new addition to our portfolio over the last five years or so. David has unique deal flow based on his operating experience and the fact that he's widely considered

as the best product strategist in the Valley. He has a compelling right to win based on his operating experience. And he has and had an extremely compelling personal investment track record when he raised his first fund where we were a big investor. So, you know, those are the instances in which, um, fund managers come into our portfolio, uh, at the expense of someone coming out of it, coming out of our portfolio. You're not only force ranking your funds, you're also force ranking allocation. If you mentioned founders fund, you have more allocation to founders fund. The opportunity could be, you're also for slate raking allocation.

If you mentioned founders fund, you have more allocation to founders fund. The opportunity cost of that is not just arbitrarily picking and choosing managers. It's also just more founders funds. Thank you for listening to join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe. That's right. I mean, our whole is to put as much of our limit as partner capital to work with the best performing managers in the industry.

So what would make you not want to re up with a core position? The number one reason we, we don't invest with someone who's in our core portfolio is because we're able to put more capital to work with a higher performing manager. Um, other reasons include Other reasons include team turnover. So if we see one or more good or very high quality investors leave a firm or a fund, that influences our decision to reinvest with them. If we see strategy drift within their portfolio or their investment strategy,

so, you know, fund managers who as a result of a larger fund might be investing in, in investing in sectors or geos or stages where they have no real competitive advantage. That's a red flag for us. And then finally, we're always looking at fund size increases and not those fund size increases are matched with an increase of the capabilities of the firm from an investment standpoint, an investment standpoint, and frankly, a cultural standpoint, um, in terms of writing bigger checks into companies.

And we've often seen a lag between. Fund size increases and an increase in capabilities within an investment firm. And so we're always watching that as well. And that would be another reason why we wouldn't, um, reinvest with someone. Do you have this interesting vantage point in that you've seen many funds scale, some scale effectively, some scale, not effectively. What are the best practices for fun? That's trying to really scale and maintain their edge in the market.

David is really, um, we think really building those investment capabilities ahead of an increase in fund size and very, I'm not going to say very few fund managers do it. It's hard to do. Some are able to build those capabilities in advance of an increase in fund size. For most, those capabilities lag their increase in fund size. But I'll give you an example. We have seen managers who will double the size of their fund, which means they need

to double the size of an average check or a large position in their fund, but they're just not culturally able to meet that bar. And so they end up with a portfolio of more companies with smaller positions relative to their fund size, which is a drag on returns. And so we're really watching, you know, how firms build their capabilities as they scale and do those capabilities lead the size of the fund as they grow their funds. The best ones do it well. Others, others there's, there's just lag, which makes it, which is hard. It impacts returns. Given how competitive venture is and getting into these blue chips, is it a

necessary requisite for you to have that seed portfolio in order to graduate them into core portfolio, or would you otherwise be able to access these top managers? We have found success accessing top managers, both existing top managers who are already well established. We're lucky that we have the majority of them in our portfolio, but we've also had success identifying top managers early and batting them in a meaningful way and growing in our position over time. And that's happened with Founders Fund. It's happened with Andreessen Horowitz. It's happened with YC, it's happened with Thrive, it's happened with David Sachs at Kraft, etc.

We don't necessarily look to our seed portfolio as a farm team for our core portfolio. What we're trying to identify in the seed market are really talented investors who want to continue to invest in the seed space. The symbols are for us. We realize that within that cohort, there are going to be very talented investors who are ambitious, who want to build a larger firm with more people, more AUM and invest across stages. That's not really what we're targeting in our seed portfolio.

That's the paradox. You're looking for the best seed investors that may not actually make a new core portfolio, but will continue to stay disciplined and get returns. That's right. And we have examples of seed managers who are very talented and are producing really good returns, but whose fund size simply outgrows our seed portfolio and our seed fund. Um, and, and we don't necessarily have a home for those relationships right now. Unlike some fun of funds, you also have a pretty healthy

international venture portfolio. Talk to me about your strategy when it comes to your international funds. That's a great question, David. You know, we are looking for the best returns in the venture industry around the world, full stop. And so when we invest outside the US, we fundamentally have to believe that the manager that we're investing in, in China or India or or Europe has the ability to outperform the 11th or 12th best manager in our portfolio. And that's a really, really hard part of that analysis is dependent on macro factors, which

are but most of the analysis depends on a bottoms up underwriting of quality of the investment manager from a deal flow and a right to win and an investment judgment standpoint. And so it's a combination of top down and bottoms up analysis, but I think the heavy weight is, is. So you have this also forced ranking in terms of international versus domestic funds, but certainly there are differences. What are those differences for criteria that you're looking for

an international fund versus a US fund? David, there's really no difference in our underwriting for international managers relative to US managers. It is the same kind of underwriting lens or guideline for international managers for us as US managers. You know, it's a focus on deal flow and what's driving that deal flow and what are the sourcing strategies or channels of managers using. It's looking at that access or right to win and what's driving that and what's

the reason behind their right to win. It's looking at investment judgment as demonstrated by a track record. It's looking at strategy and fund managers have generated their returns and is their go-forward strategy very consistent with their past experience of generating returns? And it's a look at the team and what the team is consistent over time and whether there are two or more good investors on the team and how the incentives are structured across the team to both motivate and retain good investors. That part of the underwriting of the analysis doesn't change. What changes is that geospecific, those geospecific factors and those change according to geography,

but it's not manager specific. What do you wish you knew before founding TrueBridge? How hard it would be to raise the first fund and the second fund. You know, before I started TrueBridge, I sat down with some good friends of mine who had started a fund of funds and they shared with me, you know, they said, if we knew now what we, if we knew then what we know now, I'm not sure we would have started our firm. And I took that with a grain of salt. Um, I've got a pretty strong work ethic.

Um, I was very comfortable believing in myself. Um, but I didn't realize how hard it would be to raise fund one and funds, funds one and two. And why was it so difficult? You know, when we launched Truebridge, the venture fund to funds market was a very, um, well-served and competitive marketplace. There were probably over 40 US-based venture-focused fund-to-funds. And so standing out in that crowded marketplace was difficult.

We were lucky that we had a partnership with the Kauffman Fellows Program that gave us a kind of a unique hook with limited partners. I'm not sure we would have started the business if we didn't have that mark, because every limited partner wanted to hear the story at that point in time. And then when we went to raise Fund2, we were raising Fund2 into the teeth of the global financial crisis.

With Fund2, it took us over a year to get to the first close on Fund2, and it took another two years to get to the final close. And so, you know, those were very, very years. A lot of people doubted, doubted venture and doubted venture returns. And it was really hard to find, you know, what really were contrarian investors at that time, who were willing to bet on innovation and willing to bet on venture and the returns of venture relative to other asset classes. Those two years improve you as a fundraiser, as an investor, or is that just really poor timing?

It was certainly unfortunatious timing, which we thought of our control. I would like to think that it certainly hardened us as, um, fundraisers. Um, and gave us, um, you know, gave us the way to keep our heads down and our nose to the grindstone and to plow through it till we got to success. It did set the foundation for what our portfolio looks like today because we, as a result of our first one or two closes in fund two, which was raised in 2010, we did have capital to commit in an environment where a lot of institutional investors were pulling back.

And we had a lot of foundations and endowments at that time who were investors and some of the best performing GPs in the industry and were asking those GPs not to call capital or not to raise their next fund. And the fact that we had capital available to commit in that environment, um, allowed us to get into some fund managers that we might not otherwise have gotten into, or it might've taken longer to get into. And so I would say the biggest benefit to us from the global financial crisis was, was having capital and really solidifying the quality of the relationships and the portfolio we have today.

Is there always this friction between easy to raise, easy to deploy? Are these kind of inverse relationships? I might think those are inverse relationships, but I think we've been through a unique period of time in the venture industry from let's call it 2012 to 2021, where we were in what was called the zero interest rate policy where it was both easy to raise capital and easy to deploy capital because venture returns were high. Your better performing venture managers were scaling their platforms. Venture backed companies were staying private longer. And as a result, providing more opportunities for private

market investors to invest. And so that was a unique period of time where it was easy to raise and easy to deploy, but I think otherwise your, your friend hold true. What investors should be accessing venture capital through fund of funds versus direct, give me some granularity to that. So because we believe in the power laws of venture returns and the fact that a handful of companies drive returns for the overall industry, as well as at the manager level, we believe it's really important to invest in the best

performing managers. You are either an institutional investor who has those relationships and are comfortable with the amount of capital you have invested with those managers and your portfolio, in which case we think investing directly makes a lot of sense. You might be an institutional investor who has access to those types of managers, but not at the scale you would like and you're having difficulty scaling your investment into those high quality managers. And we have a number of institutional investors

who invest with us simply because our portfolio looks a lot like their portfolio and we're simply giving them more access to the same managers, the same high quality managers in their portfolio. And then finally, you've got a large subset of institutional limited partners who simply don't have access to those high performing managers. And that makes investing directly in venture a little tricky.

You've got to be in the industry every day. You've got to see 80 to 90% of the deal flow to understand what good looks like. You can't come in and out of the industry. It takes a long time to build relationships to get access and when you can get access, it's usually subscale. And so for those limited partners who don't have those relationships and don't have that portfolio, the investment of time and dollars and opportunity costs

to build that portfolio is, and we think for those investors, you know, a fund of funds like ours makes a lot of sense because we can give them immediate access to the best performing managers in the industry. We have sometimes gotten pushback on kind of the double layer of fees, which investors are usually critical of fund to funds for. We overcommit each of our funds by 5% to 15%. And so our net returns, net to limited partners, returns for our first four or five funds, which are our mature funds are higher than our gross returns as a result of this

over committing practice. And so the, the effect of our fees are zero for our limited partners. And you're able to overcommit because all your capital is not called. We're able to overcommit because we invest across a four year commitment period, we get capital back early, which allows us to fund capital calls later. We have certain strategies with our core fund, either, you know, direct investments or LP secondary investments in some of our funds that allow us to return capital earlier, which funds cap capital calls later through recycling.

And so that gives us the ability to recycle capital, overcommit the funds and zero out the impact of our fees. Fund to funds is technically a double fee layer, but people don't look at it as an efficiency in terms of staff. If you're investing $10 million into the venture category, you're paying 1% management fee, that's a hundred thousand dollars a year. You're not going to get anywhere close to even one person to help you internally. And typically, you know, you would want a group of people doing

venture to do it right. I think that's right. I guess that's another very smart way to look at it. What would you like our audience to know about you about True Bridge or anything else you'd like to shine a light on? The one thing I'd like your listeners to know about True Bridge is number one, venture is all we do. It's a hundred percent of our focus. We're not distracted by what's happening in other asset classes. The one thing I'd like your listeners to know about TrueBridge is, number one, venture is all we do.

It's 100% of our focus. We're not distracted by what's happening in other asset classes. And as a result, we think we're simply broader and deeper in the asset class than many other investors are. We've been generating best in class returns for our investors for almost 20 years. All of our mature funds are generating somewhere between a 3X and a 5X TVPI or total value to pay it in capital multiple and a 3 plus X DPI or distributions to pay it in capital multiple. We believe we have one of the best networks across the venture industry which increases our insight and

our access to the best performing investment opportunities. And then finally, now we've got a team of over 14 investment professionals with over 100 cumulative years of experience investing in the top performing venture managers and the best performing venture companies in the industry, and who are solely dedicated to working hard to generate inference for our investors. So. Thank you, Mel. Look forward to, I haven't been to a UNC game

or college basketball game in North Carolina period. So I look forward to catching games sometime and hosting you in New York. Thank you, Mel. We'd love to have you anytime.