Thread by @wintmead

1/ Recently
@oper8rio @SapphireVC and @accoladeprtnrs had a conversation regarding the due diligence process for emerging managers (EMs), mainly around what’s important in the due diligence (DD) process, as well as how LPs make investment decisions #openLP

2/ Similar to venture capitalists (VCs), most LPs ascribe to pattern recognition and evaluate managers based on several consistent criteria, including team, strategy, and track record #openLP

3/ Other concepts & processes that are exceptionally important to LPs are portfolio construction, references, and understanding WHY a particular VC is the right fit for the investment strategy #openLP

4/ Similar to how a VC thinks about founder/market fit, an LP thinks about VC/strategy fit; specifically, the LP tries to understand whether the background of the VC combined with the investment strategy sets up the VC for persistent performance #openLP

5/ Data on EMs is difficult to find; so LPs collect data on these managers through an extended period of multiple interactions, and this compilation of data eventually will be analyzed as part of the fund DD process #openLP

6/ Example of quantitative DD includes evaluating the track record especially valuations and performance (operating metrics) of the portfolio companies; established LPs will be able to benchmark the performance of EMs vis-a-vis other managers they’ve engaged with #openLP

7/ Concept of a #blurryvisionpool is also helpful to understand. #blurryvisionpool helps LPs evaluate your investment strategy through (1) early deals in fund, and/or (2) SPVs and/or co-investments where LPs can engage with EMs and experience an EM’s dealmaking first hand #openLP

8/ Qualitatively, LPs will also be conducting references during the course of DD, overweighting off-sheet references. As well, VC is fundamentally a people business, so a long term relationship over time helps build conviction where data might be slim #openLP

9/ The combination by an LP of pattern recognition + quantitative benchmarking + qualitative assessment especially from understanding how VCs have performed at past roles is particularly helpful for building investment CONVICTION into an EM #openLP

10/ If the VC is a first-time fund, then the LP may go into a more comprehensive DD process, which iterates on the processes above to form a more complete picture on the risk of the emerging VC. If an LP passes after this process, the next fund process may be lighter #openLP

11/ The DD process may include other quantitative analyses (e.g. on market if VC is specialized), more qualitative assessment (from a wider set of references), and operational DD. The LP uses the research for an investment memo (+ report) to bring to investment committee #openLP