1/ I recently exchanged tweets w/ @elizabethYin, @macconwell, & others on the notorious topic of OWNERSHIP.
It came up again today on a Zoom chat w/ emerging GPs.
After many conversations (over many years) w/ Institutional LPs -- ownership does matter.
Here's why:
#OpenLP
It came up again today on a Zoom chat w/ emerging GPs.
After many conversations (over many years) w/ Institutional LPs -- ownership does matter.
Here's why:
#OpenLP
2/
Start w/ the customer -- let's assume it's an institutional LP (not HNW or family office). If you ask (and listen carefully) what they care about... it's three things:
Start w/ the customer -- let's assume it's an institutional LP (not HNW or family office). If you ask (and listen carefully) what they care about... it's three things:
3/
a) Distrbution of Returns. Inst. LPs invest in funds. Those funds invest in startups. LPs have an index -- a large basket of startup investments via their existing managers. They don't want another index. Related to this, the more investments one does (high
a) Distrbution of Returns. Inst. LPs invest in funds. Those funds invest in startups. LPs have an index -- a large basket of startup investments via their existing managers. They don't want another index. Related to this, the more investments one does (high
4/
diversification), the more returns will revert to the mean. LPs don't want a mean return fund (even if it's 3x - 5x). They want the potential for an outperforming fund (10x+). As fund managers, we want startups that outperform. LPs want funds that outperform.
diversification), the more returns will revert to the mean. LPs don't want a mean return fund (even if it's 3x - 5x). They want the potential for an outperforming fund (10x+). As fund managers, we want startups that outperform. LPs want funds that outperform.
5/
b) Current Fund Return. The biggest misconception is that your current fund return is the driving factor for the LP... it is NOT. They care less about your current fund and more about your ability to drive 5-15x+ returns, multiple times, across many fund vintages.
b) Current Fund Return. The biggest misconception is that your current fund return is the driving factor for the LP... it is NOT. They care less about your current fund and more about your ability to drive 5-15x+ returns, multiple times, across many fund vintages.
6/
The goal is investing in top decline persistence... finding the best of the best managers and re-investing in those brands long-term. If your model is highly diversified and prevents your ability to deliver a 15x+ fund, you are not delivering on the LP's desired outcome.
The goal is investing in top decline persistence... finding the best of the best managers and re-investing in those brands long-term. If your model is highly diversified and prevents your ability to deliver a 15x+ fund, you are not delivering on the LP's desired outcome.
7/
c) Co-investment: Most emerging managers invest at the seed stage. They often receive pro-rata rights. Inst LPs often request co-investment rights w/ the intention of investing tens of millions in B, C, D rounds (utilizing the manager's pro rata).
c) Co-investment: Most emerging managers invest at the seed stage. They often receive pro-rata rights. Inst LPs often request co-investment rights w/ the intention of investing tens of millions in B, C, D rounds (utilizing the manager's pro rata).
8/ The smaller the seed manager's ownership, the smaller the pro rata rights down the road. This impacts co-investment potential for the LPs.
9/9
Can a diversified, low ownership model drive great returns -- yes. Is that what many inst. LPs are looking for -- no.
/end
Can a diversified, low ownership model drive great returns -- yes. Is that what many inst. LPs are looking for -- no.
/end
Wrong handle for Elizabeth -- sorry @dunkhippo33 😂
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