A quick summary of considerations / thoughts for LPs investing in VC today. *Not Investment Advice* - Smaller funds provide higher return potential, but come with much more volatility (as a whole). - Emerging Managers typically have the best alignment (smaller funds, hungry-to-succeed GPs, fees) but many have to go through a steep learning curves regarding operational governance, culture building, portfolio management, and LP relations). -Beware of overweighting performance benchmarks as they often don’t go granular enough across fund sizes/types and sample sizes can be limited. -Understand a manager’s valuation methodology. Careful review of marks may reveal an overally aggresive or conservative valuation policy. Know the marks of the top companies when assessing track records. -Track records offer headlines. What you are looking for is the repeatability of outperformance, which need to factor in fund size changes, team changes, competitive shifts, and details around the "how" of past winners as it relates to potential systems the GP has for sourcing, picking, and winning. -Median performance will not be enough. PE buyout is better if you are generating median returns. -VC cannot be characterized as a good or bad asset class but a “Depends” asset class. It depends on the LP's ability to find and gain access to managers with the highest probability of outperformance. This isn’t easy and takes time. It's why I've spoken about the 90/10 issue in VC. While VC for many investors is often only 10% of a portfolio, it can easily take 90% of your time to appropriately build relationships, diligence managers, and make sense of evolving dynamics. -For new LPs, starting with directs is usually not the way to go; Adverse selection runs rampant, and you do not want to be the last call to invest after everyone else has passed (yes, there are times this works, but history hasn’t been kind). Most emerging LPs should probably start with funds to learn / de-risk. -While it was gone in 2021, The J-curve is back. Expect the first 2-3 years of a fund to show negative net returns as times between rounds increase (mark-ups), deployment has slowed, and graduation rates of companies for the next round have decreased. -Technology breakthroughs like AI follow patterns where investment activity and excitement outpaces infrastructure and adoption. The top AI companies will be some of the most valuable companies of the future, but the vast majority will underperform significantly. During the Internet hype, for every Amazon/Google, there was an eToys or Webvan. -Liquidity is a real problem, but two potential outlets are coming - 1) VC GP-led secondaries are rising in prominence, and 2) Rate environment should start to unlock organic IPO / M&A activity as multiples start expanding. - The market is definitely a Tale of Two Cities. Strong funds/companies are well oversubscribed, but VERY hard for everyone else. The oversubscribed camp is<10%
oren zeev
4mo
An excellent list Samir. A small nuanced comment to your valuation comment - methodology matters, but intellectual honesty and motivation of GP matter a lot more. Because one can inflate numbers with any methodology given enough motivation and intellectual dishonesty. The general rule is that the more confidence a manager has in their ability to raise the next fund, the less motivation there is to inflate numbers. And the general rule about integrity is that the more open and transparent the manager has been in the past, the more likely they are to be intellectually honest today.
Juliana Uto
4mo
This is a great summary. Thanks for sharing. I also like to assess how much of the GP's own money is in the fund. Higher personal investment from GPs is a good test for aligned incentives.
Raviv Sapir
4mo
Great summary, thanks for sharing your learnings Samir Kaji I would add: building relationships with GPs requires significant time and trust, especially in a market where competition for access is fierce. Consider participating in small, early-stage funds to gain access to GPs, and prioritize building relationships with those who align with your long-term goals rather than chasing short-term performance. Having a dedicated mandate for emerging managers as an early backer could become highly valuable in the future in terns of future access.
Avik Ashar
4mo
Great points here, however I feel that too much capital concentration in a few funds is messing up both returns (pushing them downwards) and overcapitalizing bad companies and keeping them alive for longer than they deserve, especially because of a wink wink nod nod cartel between some of the larger funds (you invest in X, I invest in Y, prop both of them up)
Peter Walker
4mo
Really great perspectives - my kingdom for a line break! 🙏
Joan W.
4mo
Liquidity is a real problem, but two potential outlets are coming - 1) VC GP-led secondaries are rising in prominence, and 2) Rate environment should start to unlock organic IPO / M&A activity as multiples start expanding. 👍
Himanshu Periwal
4mo
Pure gold - thanks for sharing Samir! These are panning out exactly like you mentioned in India too - the focus on liquidity, emergence of secondaries, unlocking of IPOs! Good times ahead 👍
Excellent content, thank you for sharing.
Samir Kaji thanks for another post with some awesome perspective. We've been talking a lot lately about the challenges associated with using performance as a criteria in evaluating managers, especially in funds that are relatively immature. I think we've discussed this before, but in your opinion at what age does a fund have sufficient maturity for the performance to be meaningful? Also, one of my new pet peeves is when managers use an "early win" to tout that their fund is already marked up as part of their marketing of that fund - "the fund is already marked at 1.2x and you can still get in at cost in our final close" -- pretty meaningless, especially because the markup of the fund is usually based on a very small percent of total committed capital having been called.