E222: Why 90% of Managers Fail Before Fund 3

Speaker 1 Today, I chat with Conrad Chang, who is the managing partner and co-founder at Ensemble VC, bringing a rare perspective with experience as both an institutional limited partner and a two-time venture capitalist.

Speaker 1 At UTIMCO, he oversaw a $4 billion venture portfolio within the $81.5 billion endowment, guiding investments across diverse asset classes and regions.

Speaker 1 Previously, Conrad invested in multiple unicorns at Norwest Venture Partners and Bain Capital Ventures, earning recognition as a top fund investor.

Speaker 1 Surprisingly, the shift from tier one VC firms to allocator is a rare shift. We have a unique vantage point.
What do you think GPs should know about LPs that's not intuitive being in the GPC?

Speaker 2 When you're a GP,

Speaker 2 you're so focused on putting one foot in front of the other. And what I mean by that is you're singularly focused on

Speaker 2 investing in one company at a time. And so, in some ways,

Speaker 2 you don't have the context of seeing the forest, I think, from the trees. And that analogy kind of can mean a bunch of different things.

Speaker 2 One,

Speaker 2 I think one of the takeaways from being in that seat

Speaker 2 is

Speaker 2 being a great investor

Speaker 2 is

Speaker 2 necessary, but not sufficient to being a great fund manager.

Speaker 2 So,

Speaker 2 you can have invested in great companies, but when you go

Speaker 2 and decide to set on this journey of building a fund, starting a company, right, that happens to be a venture firm, you know, you're, you know, you're trying to build something durable.

Speaker 2 You're building a team. You're obviously

Speaker 2 fundraising, finding great LPs that

Speaker 2 believe in your mission. A single investment can be at

Speaker 2 you know, five to seven years, but when you're building a fund, you know, it's a minimum of 12 years, effectively, 10 to 12 years. So the time horizon is longer.

Speaker 2 To be a great fund manager, you have to do so much more, right? You have to think about portfolio construction, right?

Speaker 2 Not just a single investment, but what that looks like in a collection of investments.

Speaker 2 And even before you're investing, you're thinking about how to build a great partnership, right? Not

Speaker 2 for year one or for year two,

Speaker 2 but for year five, six, year 10, 12, right, for fund two, three, four, five.

Speaker 2 And so you're actually doing a lot of

Speaker 2 like

Speaker 2 reflection, I think, before you go out to go, you know,

Speaker 2 start a fund. Like, you really have to believe that the world may not need another venture firm, but the world needs your

Speaker 2 venture fund.

Speaker 1 I like that framing, which is the GP is a business, and some businesses get stuck in the short term, a little myopic, serving the next customer, if you think about the portfolio company as a customer.

Speaker 1 And some businesses are focused on the long term, which is how do we build more franchises? How do we be more strategic with our time, our money, and our resources? And obviously, you need both.

Speaker 1 If you're just strategic, you're in the Ivy Towers, you're not really getting anything done.

Speaker 1 So for GPs that are so focused on just making the next investment, what would be your one main piece of advice?

Speaker 2 It's easy, I think, to give advice. I think it's very difficult to live this.
So I don't think we're immune from

Speaker 2 trying to balance between short-term and I think

Speaker 2 long-term goals.

Speaker 2 I think your LPs can actually play an important role in that.

Speaker 2 Given the other managers that they've invested in, that may be

Speaker 2 much further out. The advice I give

Speaker 2 GPs that are thinking about this or struggling with it, I think, one,

Speaker 2 LPs are more than just,

Speaker 2 all money is more than just green, right? In that standpoint, right? I think your LPs,

Speaker 2 besides

Speaker 2 helping you give you the capital to go and back great teams, they're also there to provide this very counsel of how to think about short-term and long-term. And long-term is really about durability.

Speaker 2 I've been in venture since

Speaker 2 2009 when I was at Bank Capital Ventures, which was not frankly a great time to be in VC, right? I mean, it was right after the financial crisis.

Speaker 2 You know, I was worried that I, you know, I was concerned that, hey, I may not even have a job. I mean, just candidly, right?

Speaker 2 And I think the lesson there is, you know, venture is some ways about survival, right? And I don't mean it in like

Speaker 2 you know, I mean it in a very serious way in that because venture is across multiple cycles, you want to play long ball and you want to think about durability because you want to be around long enough

Speaker 2 to

Speaker 2 successfully kind of build that franchise.

Speaker 2 And I think there's an interesting data point. I may get the specific numbers wrong, but I heard Josh Koppelman talk about, I think he looked at the numbers, he looked at the average VC from 1980 to

Speaker 2 2000, right? Just kind of an arbitrary data point.

Speaker 2 I think it was like something like 83 or

Speaker 2 maybe it was like like 80 plus percent or 90 plus percent of the profit dollars made for the average VC was made in three years.

Speaker 2 And so if you weren't a VC during those three years, and not surprisingly, it was like 97 to 2000,

Speaker 2 right?

Speaker 2 Then, you know, there is no money to be made for you or for your LPs. And so that data point in itself suggests you want to be durable.

Speaker 2 You want to be prudent and disciplined in terms of how you invest.

Speaker 2 In that moment, it's incredibly difficult. Think about 21, 22, which is a great example of that.

Speaker 2 I think at the time, we thought we were doing the right thing, but it was difficult because I think it was almost 12 months that we didn't do a single deal.

Speaker 2 And you're not sitting on your hands during that time. It's super frustrating because you're meeting companies.
The rounds are getting done by

Speaker 2 great investors.

Speaker 2 They're obviously overvalued

Speaker 2 2020 hindsight.

Speaker 2 And even at the time, and so it's really hard to look around and see all of your peers being super active and then you just sitting on your hands and everybody's looking at you like you're the crazy one.

Speaker 2 But if you have the mentality, I think, of, hey, I want to be in the business over 20 years. I want to build a successful franchise, not just a, you know, I want to build a firm, not a fund.

Speaker 2 then you know you kind of have to put your big boy and big girl pants on

Speaker 2 and sometimes kind of sit it out or be very thoughtful about when to deploy or how to deploy.

Speaker 1 It's a bit of a paradox in that all venture is driven by these extreme power laws. So there's two things you could do.
You could be extremely lucky, which of course is just not a real strategy.

Speaker 1 Or you could be sit around and wait long enough for that power lot to hit.

Speaker 1 And I think that's this asymmetry that gets unlocked by staying in the game, by having those shots on goal is one of the most underrated aspects.

Speaker 1 I was just speaking to Dan Ives from Wedbush, this famous public investor.

Speaker 1 And the analogy that he gave is in order to be a great public investor in the tech space, you have to be kind of average most of the time, 280 to 300.

Speaker 1 And once in a while, you hit this Jeff Bezos like 1,000 X home run.

Speaker 1 There's actually, there's power law-like dynamics in the public markets, not just in the private markets.

Speaker 1 If you had invested early in Apple as a public company or Meta or Tesla, you would have these phenomenal returns.

Speaker 1 So I think there's this paradox in that in order to hit these extreme outcomes, you do have to stay in the game.

Speaker 1 The way that you stay in the game is doing the work and also things like the boring things, portfolio construction, sizing, and just being in the game is such an underrated aspect.

Speaker 1 And it goes from when you're starting your first fund first to everything's against you.

Speaker 2 You don't have the track record you don't have the lp relationships institutional lps aren't taking a look at you and by fund three everything's going for you but those four or five years is where 90 of managers at a minimum fail a hundred percent and i think here's a i think a good example of it you always hear you know um you can be too early like you can be on time you can be you can you know be late to a sector you can be too early in a sector right so when i was at norwest

Speaker 2 um you know they're

Speaker 2 AR VR, right, was a big thing. And, you know, and like, it didn't quite live up to expectations.
Folks were, you know, I think largely too early. You know, for us,

Speaker 2 when we were investing out, you know, we did our first,

Speaker 2 you know, I would say pilot fund, we invested in a company called Icon.

Speaker 2 So this is

Speaker 2 2019.

Speaker 2 And ICON, for those of you who may not be familiar with,

Speaker 2 is is a robotics company that does 3D printing. So they 3D print homes,

Speaker 2 wrapped up a project with Lennar, the nation's largest home builder, building 100 homes. But they also

Speaker 2 build for

Speaker 2 the DOD. So if you think you can build structures that are concrete and print them, you can obviously do this in a conflict zone, build walls that are bulletproof, and so on and so on.

Speaker 2 And so when we invested in 2019,

Speaker 2 defense was not really a thing, right? Certainly, there might have been dual use. And in many ways, it was almost

Speaker 2 like a knock on a company, right, selling into the U.S. government.
And

Speaker 2 it was taboo, right?

Speaker 2 I mean, people are locking themselves in buildings, if you remember, through that experience, and then recognizing over time, you know, where I think really high-quality people, right, people vote with their feet, where they were

Speaker 2 saw opportunities and saw need to go build businesses, you know, that allowed us us to go make

Speaker 2 a super impactful investment in our current fund. We were, you know, in the series A of Sauronic.

Speaker 2 And then that kind of, you know, ended up, you know, further, I think, educating us, further seeing, you know, really talented people, you know, moving in to fill this great need. Right.

Speaker 2 And now it's like, you know, now it's like obvious, right? There's, you know, these defense tech companies, but we followed Saronic with Chaos.

Speaker 2 You know, we invested in a purely software company early this year called Manifest, where the the two founders were ex-Palantir. The durability aspect of it, kind of back to the original question, is

Speaker 2 you have to play longball because you don't necessarily know when the exact right time is,

Speaker 2 but there are certain processes that you can do, which is

Speaker 2 seeing where high-quality talent is flowing, which founding teams are

Speaker 2 the biggest talent magnets. That's kind of our specialty with our data platform.

Speaker 2 But

Speaker 2 if you're playing longball, then you can kind of make those bets

Speaker 2 and you can kind of let the world kind of catch up in some ways to where you're investing or where these high-quality founders

Speaker 2 are building companies.

Speaker 1 I think oftentimes you hear these factors like talent, market size, traction.

Speaker 1 All these are positive. And you obviously want all of them.
But where would you stack rank the flow of talent as a leading indicator of success? Is that that more important than the market size?

Speaker 1 Is that more important than the traction? How would you stack rank that?

Speaker 2 You know, I think it can depend on the stage, but even I think across stages,

Speaker 2 like it's kind of an easy question for us because it's a little bit on the nose, but we call ourselves ensemble for a reason. Well, it's a double entendre, I suppose.

Speaker 2 So it was about us building a great team. But the initial idea of calling ourselves ensemble was really recognizing that it's all about the team.
And that's really important.

Speaker 2 And I'll make the distinction between

Speaker 2 it's all about the founder or founders versus it's all about the team. I think it's an important distinction.
And some people kind of

Speaker 2 put everything in one bucket. The reality of it is, it takes a village to go create an outcome.
And I had the good fortune of

Speaker 2 being a seed investor in Casper.

Speaker 2 I was an early investor in Udemy. And so I kind of saw what it means to

Speaker 2 really require a village to go create the outcome. And that extends beyond just the founders.
And so for us, the most important thing

Speaker 2 is the team. And so when we

Speaker 2 look at a potential investment or we're tracking a bunch of different companies, I think there's a lot of signal, not just in the founders and where they came from, but how they think about who is their first hire.

Speaker 2 So is it an engineer? Is it someone on the sales side? Is it go-to-market?

Speaker 2 Because that speaks volume to, it's a reflection about how they think they're going, you know, how they're going to build the company. And it's also a reflection of

Speaker 2 themselves, right?

Speaker 2 Of trying to find folks that are complementary, right? Or the type of company that they're building, very product engineering-focused versus very go-to-market-focused.

Speaker 2 And it also speaks volume of like, how do they find this person?

Speaker 2 Is it someone that they had known for a long time? Right. Is it someone that they had worked with before?

Speaker 2 Or is it, you know, they put a job posting out.

Speaker 2 I'm not saying one is really good, you know, necessarily good or bad, but I think that dynamic of who's your first hire, you know, who's your first sales hire, who's your first product engineering hire, how do you sequence that?

Speaker 2 Right. What does that team look like? How are they complementary? There's so much,

Speaker 2 there's so much of a story that tells. You know, some of it

Speaker 2 you can measure

Speaker 2 with data. And others know, you get context for meeting the founders.
And so, what we like to do before we invest is we actually like to go on site, you know, not always, but in most cases,

Speaker 2 we like to go to their office, we like to go, you know, meet the founders, and we like to go meet other folks on the team, right, very organically.

Speaker 2 And that just

Speaker 2 speaks volumes to the true reflection of a company, and I'd say particularly at their early stage.

Speaker 1 Going back to your time time at UTIMCO at University of Texas Endowment, as I mentioned, you went from the GP seat at Bain and Norwest, Bain Capital Ventures in Norwest to UTIMCO.

Speaker 1 What were some of the lessons you learned right away, which is like, holy crap,

Speaker 1 this is why these LPs liked us, these LPs didn't like us. In other words, from the LP perspective, what is something that became immediately obvious that is not obvious to most GPs today?

Speaker 2 This is one that is a little bit counterintuitive, right? Think about a sports team or something in some ways, right? Like you want to find the best absolute people like in their position, right?

Speaker 2 So, you know, you look at shooting percentage or whatever it is, right?

Speaker 2 And

Speaker 2 each individual person

Speaker 2 who's highly confident is going to make a great team, right? The reality of it, I think, on the, it doesn't quite translate on, I'd say, on the venture side.

Speaker 2 And what I mean by that is the single most important factor that I observed when I was in the seat at UTIMCO

Speaker 2 was trust

Speaker 2 as the number one factor

Speaker 2 for a successful partnership.

Speaker 2 So we go back, and I love the fact that you asked that question about the short-term and long-term trade-offs.

Speaker 2 If your goal is to go build durability, right, and success, like repeatable success, then trust is 100%

Speaker 2 the most important factor. And what I mean by trust is, you know, I think it starts with the partnership,

Speaker 2 you know, who you decide to go in business with.

Speaker 2 In this case, it's, you know,

Speaker 2 Colin West, who I know since, you know, 2013, right? When we were both kind of junior VCs, you know, just having moved to the Bay Area, you know, Colin was a friend of mine. My other co-founder, Gopi,

Speaker 2 you know, Colin had Gopi, Colin and Gopi had worked together, you know, for four or five years, you know, prior to us, you know, really formalizing what ensemble is today.

Speaker 2 And that trust factor again starts with the partnership. You're not going to be in the same room

Speaker 2 all the time. You're going to 100% disagree on things.

Speaker 2 And the question is, how do you react to that in the moment?

Speaker 2 Do you let your ego get in the way?

Speaker 2 draw a line in the sand and then defend it to the death right so you know great for your ego but bad for the firm right i've seen situations like that where, you know, and I argue kind of the bigger the bigger the organization, the harder it is to go is to do what's right for the organization.

Speaker 2 You have so many different personalities,

Speaker 2 um, but then that trust starts to extend to the folks that you hire, right?

Speaker 2 Um, and you know, meaning you want to give them as much rope as you can, and um, and you kind of like let them earn that trust and you give them, you know, more and more rope.

Speaker 2 And then it also extends to your LPs,

Speaker 2 right?

Speaker 2 right um you know how you communicate what you know what you share right and in even more cases right your lp is not going to be in the room um you know they'll make the investment you know you can catch up with them in annual meetings newsletters you know like even over text right but the reality of it is that that lp is entrusting you um you know with dollars that are eventually going to go fund scholarships right and they're not going to be in the same room and you know how do they have that that level of trust that's going to extend beyond the life of

Speaker 2 this fund and certainly into the next?

Speaker 1 This term trust

Speaker 1 is a term many LPs use.

Speaker 1 And many LPs like you who are at the University of Texas will say it's even more important than returns.

Speaker 1 Let's double-click and define exactly what it means to have trust with your LP. I know it sounds extremely obvious, but what are some examples? And more importantly, what are some trade-offs?

Speaker 2 So what is the skin the game for gp to have a trusting relationship with their lps people will always think about you know the lp world as so as so um distinct right but i think having been in all these different seats there's actually way more similarities of the relationship between say a founder and a gp um than an lp and a gp i i actually like i think it's it's super consistent And so an example of that is when you meet with the founder, how you got introduced to that founder, right?

Speaker 2 Or how the founder gets introduced to that VC.

Speaker 2 And I think it's the same

Speaker 2 when it comes to

Speaker 2 the beginning or the commencement of an LP relationship,

Speaker 2 which is, I think, in the ideal case, you're being introduced by other GPs,

Speaker 2 right?

Speaker 2 That maybe that P is an investor in. And that GP

Speaker 2 knows you very well over

Speaker 2 not three months, but over ideally years.

Speaker 2 And they can speak to that credibility and that trust factor. So I kind of define this as trust by proxy.

Speaker 2 Trust is something that

Speaker 2 you cannot, or very, very difficult in most cases to establish

Speaker 2 in any way outside of time.

Speaker 2 We're a number of interactions.

Speaker 2 And the way sometimes to shortcut that is what I call trust by proxy.

Speaker 2 So you have a mutual connection that has deep relationships with

Speaker 2 both other sides. It can kind of bridge that.

Speaker 2 Not in a perfect way,

Speaker 2 but in a way that can help kind of build that relationship.

Speaker 2 So that's one.

Speaker 2 What's the nature of

Speaker 2 the commencement of that relationship?

Speaker 2 Ideally, you want something through

Speaker 2 trust by proxy through warm introduction.

Speaker 2 Because it sets off the relationship. It's not a transaction.

Speaker 2 What it does is it catalyzes it in a

Speaker 2 relationship-building exercise.

Speaker 2 Um, and I, and I would really credit, like, um, you know, you know, my experience at Utimco, but also one of our recent hires, um, you know, Caroline, um, who joined us from Vista.

Speaker 2 And it's really this mentality of treating your LPs as a true partner, right? So, again, I kind of mentioned this earlier about beyond capital, and that's like everybody kind of says that, right?

Speaker 2 But what does that actually mean? You know, what it means is that

Speaker 2 it's two-way street, right? For the LP,

Speaker 2 you know, they obviously want a financial return, but they're also looking to educate themselves on specific areas that you may be investing in.

Speaker 2 By the way, they're not just running a venture portfolio, right? And even though I was running a venture at UTIMCO, I was also doing

Speaker 2 technology investments with buyout managers.

Speaker 2 And so sometimes the GP is so narrowly focused on kind of like

Speaker 2 their world and then forgetting that the LP,

Speaker 2 venture is important in many ways, like the alpha driver in their portfolio. But they're managing a public portfolio, they're managing a private equity portfolio.

Speaker 2 And what you're doing, actually, if you're investing in defense or investing in AI,

Speaker 2 it's going to affect the other portions of the book. And so what we do, and I think a lot of the managers do, is, or certainly the best ones,

Speaker 2 we'll take a step back and help educate their LPs on

Speaker 2 certain areas that they may be interested in. Our last annual meeting,

Speaker 2 before Saranic became such, in many ways, on People's Radar, Dino Mavrukas, who's the CEO and one of the co-founders, came and spoke at our annual meeting.

Speaker 2 And this was like

Speaker 2 2024.

Speaker 2 And

Speaker 2 so, like, it kind of helped educate, I think, folks on, you know, what does it mean to, you know, what does it mean to, you know, to think about shipbuilding in the U.S., right?

Speaker 2 What is the challenge that the U.S. has relative to China, right? Which has the biggest, you know, over 200 times the capacity of the U.S.
in shipbuilding.

Speaker 2 And then I'd say the street goes the other way when we're investing, you know, like an example. Real examples, we're investing in a fintech company

Speaker 2 that was basically doing

Speaker 2 like cross-border payments.

Speaker 2 And

Speaker 2 one of our LPs, actually,

Speaker 2 a multifamily office base in Houston, actually owned a lot of these different kinds of businesses that would be affected by it.

Speaker 2 And they made an introduction to one of their

Speaker 2 businesses that was not venture-backed.

Speaker 2 And we were able to have a conversation with them to help us understand

Speaker 2 what are the implications of cross-border payments, specifically between certain corridors.

Speaker 2 what does that look like you know how is their business performing um because ultimately you know the venture-backed business if it's successful is going to kill that business right and so how do they think about you know that threat uh and so again it goes it goes back to you know thinking about building a firm you know uh with durability long ball um having a deep partnership with their lp and what that means tactically is like you know this sounds crazy but like talking to your lps right like making sure that there there is you know active two-way communication sometimes it's one way in the sense that you are sending probably more information than they're reacting

Speaker 1 but you have to over communicate you know with your LPs one of the reasons I'm so excited about a conversation is because you had that two different tier one VC seats you had the tier one LP seat you're the customer you are the buyer and you you were in the room having these conversations and i think one of the things that gps when they hear you want a trusted relationship, they think, sure, great in theory.

Speaker 1 But in reality, how does that look? If you think about it from this construct of a partnership, which I love the framing, I have my business partner, Curtis.

Speaker 1 We sit down, we not only talk about business, once in a while, we'll talk about, you know, we are both now married. We talk about our wives, we talk about our families.

Speaker 1 Tell me where your analogy ends, and maybe tell me the nuance in what it means to build a trusted relationship.

Speaker 2 Yeah,

Speaker 2 that's a great question.

Speaker 2 The first way to answer that, again, going back to the analogy of, well,

Speaker 2 what does a founder-GP relationship look like?

Speaker 2 So all those questions that you asked, how would you answer that with your own founders?

Speaker 2 And so if you take that lens,

Speaker 2 I think, one, it's hard to treat everybody equally, right? Like, let's say everybody in your cap team, if you're the founder, right?

Speaker 2 Very, very difficult to treat everybody practically, right yeah it doesn't work right um

Speaker 2 but that doesn't mean that the founder does not communicate with even the you know 0.1 percent owner on the cap table right so how do they do that they do it in ways where they over communicate but they do it in a more scalable way right so they're constantly sending updates right maybe it's a monthly update or a quarterly update right um they're giving

Speaker 2 They're giving the opportunity for even their small folks in the cap table to be heard and to be seen,

Speaker 2 And that analogy again extends to the LP side where you may have some folks that aren't on your LPAC, maybe individual investors,

Speaker 2 but they should still

Speaker 2 be in the loop and updated. And then more importantly,

Speaker 2 you should reach out to them if

Speaker 2 one of them has a connection that's quite valuable.

Speaker 2 LPs and then GP, all they want to do is be helpful.

Speaker 2 They don't want to be viewed as just money.

Speaker 2 And sometimes it's only five days out of the 365 days in a day where that LP can be helpful. But in those five days,

Speaker 2 it can be extremely valuable for the GP.

Speaker 2 And so I think it's

Speaker 2 taking the initiative to reach out to your LPs, keep them updated,

Speaker 2 but also make sure that you're seeking their advice when you know that they have

Speaker 2 a much better knowledge base.

Speaker 2 Like in my Temco days, you're raising a continuation fund, right? Or you're thinking about,

Speaker 2 you know, getting intel on a specific LP, maybe in Europe, that wants to come in and they may have context, right? So I think it's leveraging their unique knowledge base,

Speaker 2 you know, to help you make, you know, better decisions. And then, you know, where does the analogy, you know, end?

Speaker 2 I actually do think it's really important to, you know, think about not just the professional nature of the relationship, but also personal one.

Speaker 2 Again, I go back to the founder GP thing, right?

Speaker 2 like it it absolutely extends you know beyond just you know a board meeting or like hey did you hire the vp of sales that i interviewed you know two weeks ago right it's hey i know you're about to have a kid you know that that's super exciting right that you know you must be thinking about a bunch of different things kind of how to you know how to balance that right hey um you know i know you're going through you know you know

Speaker 2 like a family you know personal thing right like just acknowledging it um and saying hey like you know it makes sense for you know, spend time on that or something. Right.

Speaker 2 Like we're all human, right? Like, just like the struggles of a founder who's starting a company going from zero to one, it's the same for, you know, fund managers, right?

Speaker 2 Or, you know, having to let go a partner or whatever it is. Not all your LPs are going to be equipped to be that coach,

Speaker 2 but you'll know the, you know, the few that.

Speaker 2 you have a very deep, you know, personal connection with where it's okay,

Speaker 2 I think, to share some of this, right? And you have to be thoughtful, like, about, you know, what it makes sense to share.

Speaker 2 And so it's never like, I'm going to share everything or I'm going to share nothing, right? That's not the framework, right? The framework is like, there's something in between.

Speaker 2 And I think a lot of folks take the mentality of one or the other, right? And it's probably somewhere in between. And I would probably say it's probably a little bit more towards being open.

Speaker 2 Again, it's not to everybody who's an LP in your fund. You know, I think it's to a handful of folks that they may not even be your biggest check, but ones ones that

Speaker 2 you have a relationship with, that you can be open with.

Speaker 2 Because the reality of it is everybody's aligned, right? So your LP is in your fund for, again, at least 12 years.

Speaker 2 Whether or not they decide to come in the next fund or not, you have to earn that. But

Speaker 2 if they're in your fund,

Speaker 2 it's a marriage for.

Speaker 2 12 years minimum.

Speaker 1 These are the conversations not many people have, certainly not through podcasts, but I think this is where the relationship alpha is, like where the truth lies.

Speaker 1 One of the most prevalent memes in asset allocation today is that LPs are choosing to back fewer managers and more led behind fewer arrows, to use the Google analogy.

Speaker 1 So there's this pressure to cut managers. How do managers balance the desire to have a trusted, long-term, sustainable relationship with LPs while also,

Speaker 1 you know, at the same time where in the market, LPs are looking to chop managers. And how do you thread that needle? What are some best practices?

Speaker 2 That's obviously, I think, top of mind for folks.

Speaker 2 There's no silver bullet on any of this.

Speaker 2 My perspective on this, and it's, you know, I kind of put my old UTEMCO hat on, but also, you know, the ensemble hat at the same time.

Speaker 2 And the way I would answer this is:

Speaker 2 it it is what it is, right? Meaning, like, if you have an issue, whether it's performance or within the organization,

Speaker 2 like

Speaker 2 it's happened, right? It's the reality of it.

Speaker 2 And it's not the fact that

Speaker 2 something like this surfaced, because that happens to every firm, right?

Speaker 2 It's really the question of how do you address it and then how do you communicate it.

Speaker 2 And I think, like,

Speaker 2 the, you know, I think the advice that I would give myself and I give others is, you know, I think understanding the, like, one, I think the gravity of what it is, right?

Speaker 2 And so you obviously don't want to communicate like every little thing, right,

Speaker 2 to

Speaker 2 your LPs,

Speaker 2 not because you're not trying, you know, you want to avoid being transparent, but two,

Speaker 2 like you want them engaged on the things that are the most important.

Speaker 2 Right. And if they have, you know, if they're managing, you know, I think Utemco had, I think it was like 16 Corvette VC managers and then some other, you know, legacy ones.

Speaker 2 If everybody is like, you know, every time, you know, I stub my toe or something, right? And I'm communicating that,

Speaker 2 the LP doesn't know when to engage on the things that are more important.

Speaker 2 So there is a threshold of importance,

Speaker 2 right? And as an example, right, like, you know,

Speaker 2 there's probably a lot of, you know, even at a small firm, there can be turnover at at the junior level, right? So like, do I communicate that? Do I not? Right.

Speaker 2 You know, I don't, I'm not sure that that meets kind kind of the threshold, right? But if it's someone more senior, then obviously like that affects

Speaker 2 economics, it affects

Speaker 2 maybe some strategy things. So that may be something to communicate

Speaker 2 with your LPs.

Speaker 2 And then tactically, what you may want to do,

Speaker 2 just like a founder manages his or her board, you may want to have this conversation

Speaker 2 one-on-one initially with the LPs that you have a very good relationship with,

Speaker 2 that you have this level of trust, right? And see how they react.

Speaker 2 And then, you know, and then bring them into the circle of trust, or they're already in the circle of trust.

Speaker 2 And as you need to communicate that with other folks, they can help facilitate that or certainly give you advice.

Speaker 2 Meaning, it's a serious issue for the firm, and

Speaker 2 you think it's like

Speaker 2 the most important thing going on in your life and in the world globally.

Speaker 2 Because it's the first time you've come up with it, you've run across this.

Speaker 2 The reality of it is, you know, for the LPs that have been been in the business a long time they see this this is actually a more common issue right and so they can actually give you counsel on you know how how serious this actually is and you know what to do in this situation again you think about a founder right who you know is in a situation of like hey you know i had this co-founder right when you want more for your business start with northwest registered agent you could build your complete business identity in just 10 clicks and 10 minutes Everything you need to launch and protect your business is all in one place.

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Speaker 2 It's not working out. Oh my God, like I'm like stressing out about this.
I don't know what to do. Like, this could kill the business.

Speaker 2 The reality of it is, if you look at, if you're a GP and you've invested over many, many companies across cycles,

Speaker 2 like you, this has happened more than a few times, right? And in your broad portfolio. And so you can actually have the data

Speaker 2 and the

Speaker 2 case studies to suggest, hey, this is kind of how you might want to manage this.

Speaker 2 Just like GPs have a portfolio of founders,

Speaker 2 the best LPs also have a portfolio of VCs that they can pull from and draw experiences from.

Speaker 2 I think that's probably like selectively, I think, seeking counsel with the folks that you trust very, very deeply.

Speaker 1 To summarize, one is you don't want to be like the girl who cried wolf. You don't have to send

Speaker 1 every day and you're going to seem like you're not able to regulate your own emotions.

Speaker 1 But you do want more

Speaker 1 transparency. So probably the default human benchmark of communication is probably lower than the ideal one.

Speaker 1 So for some reason, GPs on average are way below their kind of optimal level of communication.

Speaker 1 And also, you want to make sure that your communication and the narrative narrative that you're putting out, even if it's transparent, that you explain it in the right way.

Speaker 1 And you might want to test that in a couple trusted circles before you kind of blast it out to 150 LPs.

Speaker 2 Yeah, absolutely. I go back to, you know,

Speaker 2 what are the best practices that you would give a founder on communication?

Speaker 2 Right.

Speaker 2 And, you know, it should be similar to how you communicate with your LPs. It really really shouldn't be that different, right? I mean, there's a little bit of nuance to it.

Speaker 2 But at the end of the day, you want your founder to not text you on every little thing that is an issue that comes up in the business.

Speaker 2 Surface the ones that are relevant maybe on a quarterly basis.

Speaker 2 You'd like to have that discussion one-on-one prior to the board meeting, right? If it really warrants it.

Speaker 2 And you also want that founder to have a plan of action, right, in advance,

Speaker 2 ask you, hey, what do I do in this pro for this problem, but say, here's the problem. This is my course of action.

Speaker 2 You know, am I missing something, right? What is your feedback on the course of action that I'm planning to pursue?

Speaker 1 One of these

Speaker 1 things that I've been thinking about is this concept of rooting things. So rooting investment thesis.
So everybody might make the same buy decision to buy Bitcoin.

Speaker 1 But if I spent a year thinking about why, when it goes up and down, I'm not going to sell. So it's great if you bought Bitcoin at $100.

Speaker 1 If it goes up to $200,000 and then goes down to $140,000 and you sold, then you gave up the other, you know, $120,000, the other, you know, the thousand X.

Speaker 1 And I think this rootedness also applies to relationships and LPs.

Speaker 1 If you assume that on a long enough time horizon, and I've literally talked to Jonathan Gray from Blackstone, Cliff Asness from AQR about this very topic, if Cliff Asness and Jonathan Gray have had issues in their franchise, I guarantee with enough time, any GP on this planet will have those issues.

Speaker 1 And the way that they handled it also by over-communicating, meeting with the LPs, but I would also add kind of the subtext of what they were saying is they built this trust also over time ahead of that.

Speaker 1 So if you think about it as the trust and the relationship as a tree trunk, you could strengthen the roots of that tree trunk through trust ahead of the crisis.

Speaker 1 Because just, and no one wants to be transactionalized. And if you're only talking to your LPs when you need them or when there's a crisis, it's not going to feel good for them.

Speaker 1 And you're likely on that chopping block that we talked about.

Speaker 1 But if you build that relationship ahead of time, not only will they maybe not take capital from you, if there's a good market opportunity, the smart LPs, the very top, top quartile LPs might even double down on you and allow you to actually, you know,

Speaker 1 build your alpha and build your franchise during difficult times.

Speaker 2 It's easy to sometimes say these things. This is very hard to do in practice.
So it's not like, oh,

Speaker 2 there's an instruction manual, you do this, and you do this at this cadence. I think it's just if you just think about it as a priority for the firm,

Speaker 2 then

Speaker 2 it'll naturally kind of follow

Speaker 2 some of the things that you do.

Speaker 2 It's an aspiration, I guess, in some ways, right? You kind of have to aspire. to build partnerships with your LPs, even if some of those don't look like that today.

Speaker 2 And then the second thing I'd say, and look,

Speaker 2 I was guilty as this, guilty of this when I was at UTIMCO as well, right? Like,

Speaker 2 I'm not casting stones

Speaker 2 on anybody here,

Speaker 2 but you may over-communicate. You may do everything

Speaker 2 to try to establish a great relationship with your LP, but that LP may just not reciprocate. That's going to happen.

Speaker 2 That's okay.

Speaker 2 But I think, again, if you're thinking about playing long ball and durability,

Speaker 2 you just kind of have to go the extra effort to recognize that, hey,

Speaker 2 they're managing a bunch of stuff, not just your fund and not just venture.

Speaker 2 And so, you may be sending them all this, you know, all these different materials, you know, asking to catch up when you visit, you know, wherever they're based, and they may not, you know, get back to you.

Speaker 2 That's okay, right? I think making the effort, you know, making sure that you're thinking of them is in itself, I think,

Speaker 2 what it means to be a good, you know, a good partner.

Speaker 2 Say all this stuff and I think some people's reaction is like, well, I tried that, right? But I'm not getting any love back. And that's happened to us also.

Speaker 2 But every now and then, you know, you'll get a note and say, hey, you know, like we, you know, one of the things that we pride ourselves on since we, since we started was we will write a mid-year letter, right?

Speaker 2 Like,

Speaker 2 and it's, you know, the first one, it was a, you know, it took like months to write it because we never wrote one of these before. It actually wasn't that, it was like okay when I go back and read it.

Speaker 2 But we've made it, we've made the effort to write a mid-year letter every single year.

Speaker 2 And then, you know, what's the greatest feeling in the world is when someone that you reached out to multiple times doesn't respond.

Speaker 2 But on this latest one, you know, they say, hey, like, you know, great, great mid-year letter. I really enjoyed reading it.
Right. And so like

Speaker 2 it's, it's, you kind of have to, you get credit for being active and being thoughtful and

Speaker 2 being consistent.

Speaker 2 You'll get feedback occasionally, probably not as much as you would like.

Speaker 2 But

Speaker 2 you should make sure that you're always acting like you're thinking of them.

Speaker 2 I think that's kind of like an

Speaker 2 principle to think about.

Speaker 1 So Rahul Mugdal, he's one of the greatest fundraisers alive, if not the greatest. He's raised $99 billion.

Speaker 1 And he tells a story on the podcast I did with him in that he talked to one of a $1.2 billion foundation.

Speaker 1 The CIO told him that just that past year, he got 934 voicemails, not calls, but voicemails from managers, not in his portfolio, and not even talking to him about investing, about how he should invest.

Speaker 1 And this is just this very, I guess, visceral way of showing how busy LPs are, how overwhelmed they are. It truly is oftentimes not you.

Speaker 1 It's them, not you.

Speaker 1 Did you find, you were at UTEMCO, which in many ways is

Speaker 1 today, I think it has 60, maybe 70 billion. It's an endowment.
It's one of, if not the most kind of coveted LPs in the world. Tell me about your lived experience as a LP at such a prominent endowment.

Speaker 2 So I joined,

Speaker 2 you know, right a little bit before

Speaker 2 the new CIO, Britt Harris, joined. Britt was actually in our office, I don't know, like a month ago.

Speaker 2 And he had come, you know, from TRS, which is the Teachers Retirement System of Texas. And so

Speaker 2 I think one of the things that I really give Britt a lot of credit is,

Speaker 2 I think, further institutionalizing what was already a great endowment.

Speaker 2 And what I mean by that is

Speaker 2 the way that you operate a $2 billion endowment versus a $60 or $70 billion endowment

Speaker 2 intuitively has to be different. One of the exciting things about UTIMCO is that

Speaker 2 the size of the endowment grew very, very dramatically

Speaker 2 over the last, I don't know, 20, 30 years.

Speaker 2 And there's a lot of history to it.

Speaker 2 But some of it,

Speaker 2 being in Texas, this was money coming from the Permian Basin.

Speaker 2 just some random historical context there. And so UTIMCO had this really amazing opportunity and task of

Speaker 2 not being short on cash and cash inflows, but making sure that it was being invested

Speaker 2 at scale,

Speaker 2 but in a very thoughtful and strategic way.

Speaker 2 And to do it, I'd say relatively quickly.

Speaker 2 And

Speaker 2 as that endowment, I think, grew,

Speaker 2 I think the UTIMCO board, I think, rightly recognized the need to really institutionalize and really help evolve the endowment from a smaller endowment to one that frankly rivals the size of a pension fund.

Speaker 2 I think UTIMCO is like number one or number two, depending on how you know it's

Speaker 2 how you measure it. But effectively, it's like one of the, you know, it's like the largest endowment in the world.
And so, you know, when I was there,

Speaker 2 it was kind of thinking about

Speaker 2 what processes that we want to apply across UTEMCO

Speaker 2 to bring

Speaker 2 an additional level of rigor, but also

Speaker 2 a way to invest more repeatedly and consistently.

Speaker 2 And what that tends to mean is, I think, formalizing the investment process,

Speaker 2 how opportunities got surfaced.

Speaker 2 As the organization grew, making sure that everybody in different parts of the organization

Speaker 2 were informed on

Speaker 2 what was coming down the pipeline.

Speaker 2 Again, an endowment is not just venture, right? Not everybody who sits around the table is equally versed in what that means, how to invest. Not everybody's heard of Sequoia, right?

Speaker 2 And so making sure that there is a mechanism in place

Speaker 2 to

Speaker 2 get everybody on the same page

Speaker 2 and in some ways kind of standardize that process. You know, at the time, you know,

Speaker 2 whenever you put new process in place, you know, and you're learning and you're figuring things out and doing something new, like there are moments where it's not that fun. Right.

Speaker 2 But now that

Speaker 2 I'm in the CDET Ensemble,

Speaker 2 co-founded the firm,

Speaker 2 it's really important to put process in place, right?

Speaker 2 So you're not collecting a bunch of shiny objects for one thing, right? And then two,

Speaker 2 you can have repeatability in your performance, right? And the grandest scale, it's an endowment. Like the endowment is going to live, you know, beyond me, beyond you, beyond my kids,

Speaker 2 everybody's kids for generations. That's the hope.

Speaker 2 And so the time horizon is almost infinite. And so we have to, you know, in order to fund my scholarship, and then maybe my kids will go to UT on a full ride too.

Speaker 2 You have to create create like repeatability,

Speaker 2 consistency.

Speaker 2 And that was kind of an important lesson that we applied to Ensemble. So we're, you know, I kind of bucket ourselves as an emerging manager, right? But when we've,

Speaker 2 you know, put together Ensemble, we always had the mentality, again, of being aspirationally like institutional, right? And so taking some of the lessons.

Speaker 2 you know, not from like, you know, True Ventures Fund one, but from True Ventures Fund five, right? And saying, well, you know, how do we look more like them? How do we avoid,

Speaker 2 you know, maybe some hard lessons? And so how do we make ourselves institutional?

Speaker 1 Vinode Koso popularized a zero million dollar business versus zero billion dollar business, how they function from day one.

Speaker 1 And you did see a simulation of dozens, if not hundreds of funds, venture funds at UTIMCO, including some of the best funds in the world.

Speaker 1 What were some practices that the very top GPs or the GPs that made it, let's just define it in the outcome.

Speaker 1 What did they do from the very beginning that was different from the ones that were even second or third quartile?

Speaker 2 The best managers were the ones that could give you a sense of what they were looking at, how they saw the world in a given moment.

Speaker 2 So that goes back to over-communicating and transparency.

Speaker 2 So I'd say that's kind of

Speaker 2 the outcome of it was knowing kind of where folks were spending time, how they kind of thought about the world.

Speaker 2 You may not, you know, agree with it or, you know, you may have questions about it, but you had a sense of like who they were and like how they were thinking about things.

Speaker 2 I think the second thing that

Speaker 2 the best managers did was I think go out of their way to

Speaker 2 make sure that you knew what they were thinking. You know, meaning that they would travel, you know, countless managers would make the effort to travel down to Austin.
Austin's a great place, right?

Speaker 2 But some of our managers were in Berlin or

Speaker 2 Tel Aviv, but they would make that trip, be very proactive about,

Speaker 2 certainly you can read it in a mid-year letter or an update, but more importantly, to build on that relationship, that personal relationship. And that takes effort.

Speaker 2 So I think the best managers did that.

Speaker 2 And then I think three, the best managers also made sure that the LP relationship was with the firm in addition to maybe having a strong, you know, like a close relationship with a specific partner.

Speaker 2 And so when I would go and visit specific managers, I'd have the opportunity to go meet with like, you know, multiple folks on the team.

Speaker 2 I'd have exposure to the whole partnership. I'd meet with folks.

Speaker 2 And that way you can kind of, the LP has a sense of,

Speaker 2 you know, how is this, how are these, you know, how is this partnership functioning? Are folks on the same page?

Speaker 2 You know, how are they, you know, how are they complementary? Now, when you're diligencing

Speaker 2 them

Speaker 2 on whether or not to re-open this fund or to invest in the fund, but how they're working together after you've committed to the fund, as they're deploying the fund.

Speaker 2 But those are just, I think, some of the ways that

Speaker 2 GPs have

Speaker 2 thoughtfully, I think, worked with

Speaker 2 some of their LPAs.

Speaker 1 It's downstream of this partnership mentality.

Speaker 2 If you have a true partner, you're not going to send them a letter and you're going to make an effort to actually meet with them and again like this is a hard thing to do i'm not again it sounds like oh like you listen to this you're like oh of course like but conrad like you know i'm a solo gp right or conrad um you know there's only like three people on the team right

Speaker 2 like we had to experience all this also and you know there's some times where we probably could communicate you know communicated better could have done things better um

Speaker 2 the reality of it is like again this is aspirational right? So you have to make this a priority and kind of work towards best in class.

Speaker 2 But if you're not thinking about it, then you're not like, you know, it's like if you go to the gym, like, you know,

Speaker 2 and you're not working a specific muscle continuously, there's no expectation that like you're going to, you know,

Speaker 2 run faster when you go on the track or something. Right.
You kind of have to constantly cultivate this, even knowing that, you know,

Speaker 2 this isn't going to, like, excellence is not overnight, right? It's this mentality, and

Speaker 2 we practice this ourselves.

Speaker 2 I think a lot of the credit goes to Gopi, who's my other co-founder, who's our head of data science, head of engineering, of taking this like mentality of building software, right?

Speaker 2 Which is like, V1 is not going to be like lights out, right? V1 is probably going to be, it may be pretty crappy, right?

Speaker 2 But we're going to constantly iterate. It's not

Speaker 2 a point in time, and this is kind of it. is a constant iteration, and our aspiration is to get to like V infinite, where every version of it will continuously be better.

Speaker 2 I know for a fact, next week we're going to be better. The product's going to be better than the week before, and next year it's going to be like dramatically different.

Speaker 2 And so, we have that mentality, not just in us building product for, you know, for ensemble, but ideally in how we're managing like, you know, marketing, how we're managing, you know, managing relationships with our LPs.

Speaker 2 Like, we're nowhere, we know we're not the best. We're far from it, I think, in a lot of different ways.

Speaker 2 But we're constantly looking inward and saying, hey, what can we do better?

Speaker 2 And then having the expectation that a lot of the things we do aren't going to work and they may fail. But that's not an excuse not to constantly

Speaker 2 try new things to push the boundaries and do better.

Speaker 1 If you think about it,

Speaker 2 all

Speaker 1 venture performance or any asset class is relative. If you think of this as a relationship alpha, so you have your returns, you have your information alpha, you have this relationship alpha.

Speaker 1 A little bit goes a long way. If your peer group is never flying to maybe Austin's a little bit easier, but maybe it's North Dakota or Alaska and you're flying once a year, that goes a long way.

Speaker 1 So a little bit goes a long way as well.

Speaker 1 So let's talk about Ensemble, your fund.

Speaker 1 Mutual friend told me that you have a 12x mark on your fund one. First of all, is that true? And two is tell me about how you went about constructing fund one.

Speaker 2 Well,

Speaker 2 one, yes, like we're very proud of the performance in our fund one. It was our pilot fund.

Speaker 2 And, you know, we had the great fortune and maybe misfortune of like

Speaker 2 of having a very novel concept at the time when we raised the first fund in 2018, which was around this idea that you could bring a product engineering culture and and mindset to a venture fund.

Speaker 2 So, obviously, that means being data-driven,

Speaker 2 but really having this very different approach:

Speaker 2 in order to get better,

Speaker 2 we're going to go build software, we're going to go build product. We're not going to throw more people at it.

Speaker 2 We want to grow exponentially or step function through software versus grow linearly

Speaker 2 through

Speaker 2 people.

Speaker 2 And so, at the time,

Speaker 2 the use of software and data was

Speaker 2 not super obvious. And so it was a very difficult fund to raise, right, kind of past the hat.

Speaker 2 It was also a small fund.

Speaker 2 But we had the opportunity to go incubate this actually within Coffinfellows to really experiment, test this out.

Speaker 2 And

Speaker 2 our sole objective

Speaker 2 in that phone one was to really prove

Speaker 2 that we could use data

Speaker 2 and use software and product in a way that could significantly

Speaker 2 change how a venture firm would function and then in turn deliver better performance than

Speaker 2 the typical venture fund. So that was kind of the thesis, right? Could we radically

Speaker 2 implement more product engineering into a venture firm?

Speaker 2 Did we expect it to be like a 12x fund? And

Speaker 2 like, you know,

Speaker 2 greater than that, which we think it can given some of our positions,

Speaker 2 it outperformed our kind of wildest imagination, right?

Speaker 2 Of, you know,

Speaker 2 of

Speaker 2 very, very specifically, you know, finding great teams, right? Not just great founders, you know, early, right, through a bunch of different signal that we could measure and track.

Speaker 2 And then also use that early advantage to translate into collaboration with other funds and and then earning access right and so um that was the the thesis that we proved um we had 12 investments i think it was like five or six of the 12 ended up you know being uh ended up companies being valued over a billion right um so we had you know you know big you know zoom in that portfolio as an example um we had barot which is the robin head of indie in that portfolio um

Speaker 2 And so that was, I think, the initial

Speaker 2 proof of concept. That allowed us to go think about, you know, the natural question after that is: well, how do you scale this strategy?

Speaker 2 Can you scale this strategy?

Speaker 2 When

Speaker 2 you're writing bigger checks, can you actually earn bigger access?

Speaker 2 Can you actually collaborate with other funds?

Speaker 2 Can you have this kind of repeat hit rate in the next fund?

Speaker 2 And so that thesis around using data and product and engineering has evolved significantly

Speaker 2 since our fund won.

Speaker 2 And the best reflection of that is from

Speaker 2 the founders, we're now a team of 12.

Speaker 2 Half of the folks on the team are data scientists and engineers, and then the other half are investors and

Speaker 2 folks in operation. So people kind of say, oh, well, every fund is a data-driven fund now.
Like, I hope that's the case, right? Because I think that'll actually deliver better allocation of capital.

Speaker 2 So i want more and more folks to be data driven um but you know two like there's a spectrum of what it means to be a product engineering focused you know fund um and you know we've extended i think that software advantage into every aspect of the venture fund so not just on the sourcing side but also in the winning and value add side we've built products to help our founders you know access customers, find great people to hire, and then other functions as well.

Speaker 1 Give me a very specific example of how data helps you make better investments.

Speaker 2 The simplest way to describe it is

Speaker 2 thinking about how venture has been done

Speaker 2 since the very beginning,

Speaker 2 and the evolution of that, and maybe the minimal evolution of that, which is historically, when

Speaker 2 Venture first started, you put your firm on Sandhill Road, right? And founders, there weren't that many firms. And so founders would find out about X firm and go visit you.

Speaker 2 Over time, that's evolved to

Speaker 2 more nodes in other cities and other places.

Speaker 2 And founders don't necessarily just come to specific firms,

Speaker 2 but you basically find opportunities based on folks in your immediate network. So maybe you used to work at Stripe, or maybe you've been in a venture for X number of years,

Speaker 2 had companies went public, and so you're backing the folks that are leaving those companies, right? But it tends to be a very kind of finite network of folks.

Speaker 2 And you really don't know where to hunt. And so you're, you know, think of it almost like a random walk.
You're atop a funnel, you're meeting a bunch of folks,

Speaker 2 and very few of them end up translating into investments.

Speaker 2 And the headline of that, and I always found this really odd, is, you know, VCs would always say, hey, you know, hey, you know, and it's not you, Tim Cat, like, hey, Mr. LP,

Speaker 2 you know, I met 10,000 companies or 1,000 companies last year, right? And

Speaker 2 I made one or two investments, right, out of meeting, you know, 1,000 companies. And you're like, you know, and they're like, they're so proud because it demonstrates the rigor that they have

Speaker 2 and, you know, how high a bar that they have. The reality of it is that conversion is pretty bad.

Speaker 2 If you think of any other sales organization, right, you get fired, right? If you had to meet a thousand people and you signed up one customer.

Speaker 2 A PE firm doesn't work like that.

Speaker 2 And so the question is, well, how do you actually change that funnel very dramatically?

Speaker 2 Because the reality of it is you don't want to be spending time aimlessly meeting folks, even folks that get recommended to you, because you saw that conversion rate.

Speaker 2 The reality of it is you want to redistribute your time.

Speaker 2 right from the low value activities of first meetings to the high value activities of building the relationship finding them early, and then positioning yourself to win what is

Speaker 2 very, very competitive deals.

Speaker 2 And so it's shifting kind of what that funnel looks like from

Speaker 2 a pyramid to maybe a diamond in terms of time allocation.

Speaker 2 And so what we've done is build a platform internally we call Unity.

Speaker 2 We have offshoot products called Discovery.

Speaker 2 We have a value add product called GTM 2.0. There's multiple products that we have internally.

Speaker 2 But within Unity, what we're trying to do is dramatically change

Speaker 2 where time is spent.

Speaker 2 So if you can actually refocus all of your energy on a smaller set of opportunities that have a higher probability of generating a big outcome, not a guarantee, then you can fundamentally reallocate all of your time to diligencing these opportunities.

Speaker 2 And also winning them.

Speaker 2 And so the question is, well,

Speaker 2 what does that look like? And so for us,

Speaker 2 that means not just having a box checking exercise of, hey,

Speaker 2 we use ChatGPT or we buy a bunch of data from so-and-so that anybody can do, right?

Speaker 2 It means

Speaker 2 building things,

Speaker 2 vertically integrating, right? So building our own product internally, right? Like we don't,

Speaker 2 there's nowhere else to get kind of what we do, right? Because we've actually built all the infrastructure internally, right? Not just,

Speaker 2 you know, the application layer.

Speaker 2 And that also means fundamentally

Speaker 2 building new process in the firm, right? So how we meet as a team and how we run our process looks very, very different than what I did at Norwest and also at Bing Capital.

Speaker 2 We run it like a software company, right? Every month we know what opportunities that we're going to be focused on. We're probably 70% outbound as a result of that.

Speaker 2 And And then I'd say the latest kind of evolution of the firm is we've actually changed how we've hired.

Speaker 2 And so that's probably the biggest distinction between,

Speaker 2 you know, at least outside looking in of what it means to be a data-driven fund, is that we fundamentally re-architected what the organization looks like.

Speaker 2 So not only is my co-founder, one of my co-founders,

Speaker 2 you know,

Speaker 2 head of data science, head of engineering, right? Gopi came from IBM Watson, but we've hired, our most recent hires have been, you know, two of which have been on the engineering side.

Speaker 2 And so half of us are on the engineering and data science side.

Speaker 2 It's not a box checking exercise to say, okay, hey, you know, we have the enterprise license for ChatGPT and we've hired a data scientist.

Speaker 2 We're good to go. Like we're data-driven and we're going to have the advantage.

Speaker 2 The reality of it is like you're constantly iterating. You're constantly building new product.

Speaker 2 And

Speaker 2 the new product that we'll release at the end of the year, like we just thought about six months ago, right, or even three months ago. And so we're constantly

Speaker 2 innovating and building new things internally

Speaker 2 versus

Speaker 2 waiting for ChatGPT to release

Speaker 2 ChatGPT 5 and or doing a deep research report or something.

Speaker 2 Great. Anybody can go do that.

Speaker 2 It's fundamentally changing how your investment process is, your decision process, and then what your organization looks like.

Speaker 1 Give me some of your secret sauce. What is some data that you're looking at that narrows down your top of funnel dramatically that you look for investing at the early stage?

Speaker 2 People always ask that. I'll give you a couple of examples of it.
It's not like a Harvard business school study, right? Which is, you know,

Speaker 2 the person that's like, you know, left-handed, that went to Stanford, that, you know,

Speaker 2 came from, you know, an immigrant family is going to be like, you know, the amazing founder, right?

Speaker 2 Like, it's not formulaic formulaic like that the reality of it is there's a bunch of different signal um think of it as like stacking alphas right where each individual signal may not be that relevant but the the

Speaker 2 amalgamation of multiple signals actually drives meaningful alphas that's like point one just in terms of like philosophy the second one i think is is contextualization And that's what LLMs and what AI has really helped accelerate for us.

Speaker 2 Meaning,

Speaker 2 if if you're building a company that's in the consumer world versus building something in the healthcare world, selling to

Speaker 2 health systems, how you build that team will look dramatically different.

Speaker 2 Each team could be very, very high quality.

Speaker 2 Both founders could have come from, I don't know, like Stripe or something.

Speaker 2 But how you build that team out and what that team looks like and maybe what your co-founders will look like will look dramatically different.

Speaker 2 And it's intuitive because you go to market motion for a consumer company is very different than

Speaker 2 a healthcare AI company selling into health systems.

Speaker 2 And so because we built the infrastructure, all of our data is not just the stacking of a bunch of different signals, but it's the contextualization and knowing and understanding what a company does.

Speaker 2 So saying, hey, this is a great team.

Speaker 2 but not a great team for a consumer company.

Speaker 2 Or hey, this is actually a great team within healthcare, within the AI, and also relative to the stage, right? You have to contextualize it. So that's kind of like,

Speaker 2 I offer that as an important framework, right?

Speaker 2 And then like on the specifics, like one example that you can actually track and measure that folks kind of use intuitively,

Speaker 2 and I mentioned this earlier, is like, did people on the team work together in the past?

Speaker 2 Right.

Speaker 2 And so like, you know, what will happen in the traditional sense is you'll meet a founder and then you'll maybe meet the head of engineering and be like, oh, like, awesome.

Speaker 2 Like, oh, like, no wonder there's great chemistry that they, you know, seem to work well as a team because, oh, they had worked together for four or five years, maybe not in the last job, but you know, in a prior job at like Facebook or something.

Speaker 2 Right. So you're like, oh, that actually is great.
That makes a lot of sense. Right.

Speaker 2 There's probably less team risk there.

Speaker 2 because

Speaker 2 you know they've known each other they worked each other they kind of know everybody you know the skeletons in their closets or something, right?

Speaker 2 But it's kind of like

Speaker 2 ex-ante, right?

Speaker 2 After the fact of you meeting the founder, what we've done, and it's not the only thing we look at, and sometimes it's less important,

Speaker 2 but when founders choose to come together to work together, right, or their first, second, third hires are folks that they had worked together in the past, there's a lot of interesting signal, right?

Speaker 2 You know, where A players

Speaker 2 tend to want to work work together

Speaker 2 again

Speaker 2 because they have the context of knowing how people work in high-pressure environments, right, when the company's growing really quickly, right?

Speaker 2 Or they're hand-picking the best within a certain group.

Speaker 2 We do a fair amount of

Speaker 2 AD or like, you know, like defense investing under the broad umbrella of deep tech. And you see,

Speaker 2 you know, folks at Andrew kind of leave together in

Speaker 2 pockets. Andrew probably

Speaker 2 may not love that,

Speaker 2 but you're seeing

Speaker 2 someone who's leaving as a founder being very selective about the folks that they're bringing on to the team. Maybe an old colleague,

Speaker 2 not in the same group as this other group at Andrew.

Speaker 2 We've seen that

Speaker 2 across the board. The reality of it is you can actually measure that.

Speaker 2 The challenge is that a human just can't do that at scale.

Speaker 2 But

Speaker 2 building building a product, you can measure that one attribute, but you can also look at a thousand attributes. And you can do that across 100,000 companies.
And you can do that across

Speaker 2 30, 40, 50 million people.

Speaker 2 Because the beauty of

Speaker 2 software infrastructure is that it's infinitely customizable and it's infinitely scalable.

Speaker 2 So we don't have to go hire and build a giant team.

Speaker 2 Which is like people are linear, right? Whereas software and

Speaker 2 and data, you know, can be exponential. And it's at the very least, it's a step function.
And so that's kind of our framework of how we solve problems.

Speaker 1 Awesome. Well, this has been a fascinating conversation.
I appreciate you jumping on and looking forward to continuing this conversation live.

Speaker 2 This is great. Thanks, David.

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