E222: Why 90% of Managers Fail Before Fund 3

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.

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

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

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?

When you're a GP,

you're so focused on putting one foot in front of the other.

And, you know, what I mean by that is you're singularly focused on

investing in one company at a time.

And so, in some ways,

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.

One,

I think one of the takeaways from being in that seat

is

being a great investor

is

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

So,

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

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 trying to build something durable.

You're building a team.

You're obviously

fundraising, finding great LPs that

believe in your mission.

A single investment can be at

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.

To be a great fund manager, you have to do so much more, right?

You have to think about portfolio construction, right?

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

And even before you're investing, you're thinking about how to build a great partnership,

not for year one or for year two,

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

And so you're actually doing a lot of

like

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

start a fund.

Like, you really have to believe that the world may not need another venture firm, but the world needs your

venture fund.

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.

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.

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

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

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

trying to balance between short-term and I think

long-term goals.

I think your LPs can actually play an important role in that, right?

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

much further out.

The advice I give

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

LPs are more than just,

all money is more than just green, right?

In that standpoint, right?

I think your LPs,

besides

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.

I've been in venture since

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.

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?

And I think the lesson there is, you know, venture is some ways about survival, right?

And I don't mean it in like

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

to

successfully kind of build that franchise.

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

2000, right?

Just kind of an arbitrary data point.

I think it was like something like 83 or

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.

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

right?

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.

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

In that moment, it's incredibly difficult.

Think about 21, 22, which is a great example of that.

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.

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

great investors.

They're obviously overvalued

2020 hindsight.

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.

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.

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

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

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, or you could be sit around and wait long enough for that power law to hit.

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.

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

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.

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

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

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

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

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.

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

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 a 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

um you know they're

AR VR, right, was a big thing, and you know, and like, it didn't quite live up to expectations, right?

Folks were, you know, I think largely too early.

You know, for us,

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

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

So, this is

2019.

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

is is a robotics company that does 3D printing.

So they 3D print homes,

wrapped up a project with Lennar, the nation's largest home builder, building 100 homes.

But they also

build for

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.

And so when we invested in 2019,

defense was not really a thing, right?

Certainly, there might have been dual use.

And in many ways, it was almost

like a knock on a company, right?

Selling into the U.S.

government.

And

it was taboo, right?

I mean, people are locking themselves in buildings, if you remember, through that experience.

And then recognizing over time, where I think really high-quality people, people vote with their feet, where they

saw opportunities and saw a need to go build businesses.

That allowed us us to go make

a super impactful investment in our current fund.

We were, you know, in the series A of Sauronic.

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.

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.

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

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

but there are certain proxies that you can do, which is

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

the biggest talent magnets.

That's kind of our specialty with our data platform.

But

if you're playing long ball, then you can kind of make those bets

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 are

building companies.

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

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?

Is that more important than the traction?

How would you stack rank that?

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

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.

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.

And I'll make the distinction between

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, you know, kind of put everything in one bucket.

The reality of it is, it takes a village to go create an outcome.

And, you know, I had the good fortune of

being a seed investor in Casper.

I was an early investor in Udemy.

And so I kind of saw what it means to

really require a village to go create the outcome.

And that extends beyond just the founders.

And so for us, the most important thing

is the team.

And so when we

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.

So is it an engineer?

Is it someone on the sales side?

Is it go-to-market?

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

And it's also a reflection of

themselves, right?

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.

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

Is it someone that they had known for a long time?

Right.

Is it someone that they had worked with before?

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

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?

What does that team look like?

How are they complementary?

There's so much,

there's so much of a story that tells.

You know, some of it

you can measure

with data.

And others,

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,

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.

And that just

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

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 and Norwest to UTIMCO.

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

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?

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?

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

And

each individual person

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.

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

was trust

as the number one factor

for a successful partnership.

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

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

the most important factor.

And what I mean by trust is, you know, I think it starts with the partnership,

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

In this case, it's, you know,

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,

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.

And that trust factor again starts with the partnership.

You're not going to be in the same room

all the time.

You're going to 100% disagree on things.

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

Do you let your ego get in the way?

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.

You have so many different personalities,

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

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.

And then it also extends to your LPs,

right?

right?

You know, how you communicate, what you share, right?

And in even more cases, right, your LP is not going to be in the room.

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

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 level of trust that's going to extend beyond the life of

this fund and certainly into the next?

This term trust

is a term many LPs use.

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

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?

So what is the skin the game for gp to have a trusting relationship with their lps people 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?

Or how the founder gets introduced to that VC.

And I think it's the same

when it comes to

the beginning or the commencement of an LP relationship,

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

That maybe that P is a investor in.

And that GPS you very well over,

not three months, but over ideally years.

And they can speak to that credibility and that trust factor.

So I kind of define this as trust by proxy.

Trust is something that

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

in any way outside of time.

Or a number of interactions.

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

So you have a mutual connection that has deep relationships with

both other sides.

It can kind of bridge that.

Not in a perfect way,

but in a way that can help build that relationship.

So that's one.

What's the nature of

the commencement of that relationship?

Ideally, you want something through

trust by proxy through warm introduction.

Because it sets off the relationship.

It's not a transaction.

What it does is it catalyzes it in a

relationship-building exercise.

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, 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?

But what does that actually mean?

You know, what it means is that

it's two-way street, right?

For the LP,

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.

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

technology investments with buyout managers.

And so sometimes the GP is so narrowly focused on kind of like, you know,

their world and then forgetting that the LP,

venture is important in many ways, like the alpha driver in their portfolio.

But, you know, they're managing a public portfolio, they're managing a private equity portfolio.

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

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

certain areas that they may be interested in.

Our last annual meeting,

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.

And this was like

2024.

And

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, think about shipbuilding in the U.S., right?

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.

And then I'd say the street goes the other way when we're investing in

real examples.

We're investing in a fintech company

that was basically doing

like cross-border payments.

And

one of our LPs, actually,

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

And they made an introduction to one of their

businesses that was not venture-backed.

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

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

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

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 were the customer you were 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.

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.

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.

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

Yeah,

that's a great question.

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

what does a founder-GP relationship look like?

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

And so if you take that lens,

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?

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

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

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

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

but they should still

be in the loop and updated.

And then, more importantly,

you should reach out to them

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

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

They don't want to be viewed as just money, right?

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,

it can be extremely valuable for the GP.

And so I think it's

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

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

a much better knowledge base.

Like in my Temco days, you're raising a continuation fund, right?

Or you're thinking about,

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,

you know, to help you make, you know, better decisions.

And then, you know, where does the analogy, you know, end?

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, right?

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

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

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

Right.

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?

Or, you know, having to let go of partner or whatever it is.

Not all your LPs are going to be equipped to be that coach,

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

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

I think, to share some of this, right?

And you have to be thoughtful, like, about, you know, what it makes sense to share.

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.

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.

Again, it's not to everybody who's an LP in your fund, right?

You know, I think it's to a handful of folks that they may not even be your biggest check, but ones ones that, you know, you've, you have a relationship with, um, that you can be open with.

Because the reality of it is everybody's aligned, right?

So, you know, your LP is in your fund for, again, at least 12 years, right?

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

But, you know, if they've, if they're in your fund, they're, you know, it's a, it's a, it's a marriage for

12 years minimum.

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

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.

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,

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?

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

There's no silver bullet on any of this.

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.

And the way I would answer this is,

it it is what it is, right?

Meaning, like, if you have an issue, whether it's performance or within the organization,

like

it's happened, right?

It's the reality of it.

And it's not the fact that

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

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

And I think, like,

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?

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

to

your LPs,

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

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

If everybody is like, you know, every time, you know, I stub my toe or something, right?

And I'm communicating that,

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

So there is a threshold of importance,

right?

And as an example, right, like, you know,

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.

You know, 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, you know, economics, it affects,

you know, maybe some strategy things.

So that may be something to, you know, communicate,

you know, with your LPs.

And then tactically, what you may want to do, right, just like a founder manages his or her board, you may want to have this conversation, you know, one to, you know, one-on-one initially, right, with the LPs that you have a very good relationship with, right, that you have this level of trust, right?

And see how they react.

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

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

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

you think it's like

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

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

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 how this co-founder right you know 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 the reality of it is if you look at if you're if you're a gp and you've invested over you know many many companies across you know cycles

This has happened more than a few times

in your broad portfolio.

And so you can actually have the data and the

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

Just like GPs have a portfolio of founders,

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

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

To summarize, one is you don't want to be like the girl who cried wolf.

You don't have to send

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

But you do want more transparency.

So, probably the default human benchmark of communication is probably lower than the ideal one.

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

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

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

Yeah, absolutely.

I go back to, you know,

what are the best practices that you would give a founder on communication,

right?

And you know, it should be similar to how you communicate with your LPs.

It really shouldn't be that different, right?

I mean, there's a little bit of nuance to it, but at the end of the day, you know, you want your founder to not text you on every little thing that is an issue that comes up in the business, you know, surface the ones that are relevant, you know, maybe on a quarterly basis, right?

With, you know, in this, you know, you'd like to have that discussion one-on-one prior to the board meeting, right?

If it really warrants it.

And you also want that founder to have a plan of action, right?

In advance, you know, not

ask you, hey, what do I do in this for this problem, but say, hey, here's the problem.

This is my course of action.

You know, am I missing something, right?

What is your feedback on the course of action that I'm planning to pursue?

One of these

things that I've been thinking about is this concept of rooting things.

So rooting an investment thesis.

So everybody might make the same buy decision to buy Bitcoin.

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.

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

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

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.

And the way that they handled it also by over-communicating, meeting with the LLPs, 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.

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.

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.

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

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 Cortel LPs, might even double down on you and allow you to actually, you know,

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

It's easy to sometimes say these things.

This is very hard to do in practice.

So it's not like, oh,

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,

then

it'll naturally kind of follow

some of the things that you do.

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.

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

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

Like,

I'm not casting stones

on anybody here,

but you may over-communicate.

You may do everything

to try to establish a great relationship with your LP, but that LP may just not reciprocate.

That's going to happen, right?

That's okay.

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

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

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

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.

That's okay.

Right.

I think making the effort,

making sure that you're thinking of them is in itself, I think,

what it means to be

a good partner.

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.

But every now and then, you'll get a note and say, hey,

one of the things that we pride ourselves on since we started was we'll write a mid-year letter.

And

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

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.

But on this latest one, you know, they say, hey, like, you know, great, great mid-year letter.

Right.

Really enjoyed reading it.

Right.

And so like,

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

being consistent.

Right.

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

But, you know, you should make sure that you're always acting like you're thinking of them.

Right.

I think that's kind of like an, I don't know, like one principle to think about.

So, Rahul Mugdal, he's one of the greatest fundraisers alive, if not the greatest.

He's raised $99 billion.

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

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.

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.

It's them, not you.

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

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.

So I joined,

you know, right a little bit before

the new CIO Britt Harris joined.

Britt was actually in our office, I don't know, like a month ago.

And he had come, you know, from TRS, which is the Teacher Retirement System of Texas.

And so

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

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

And what I mean by that is

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

intuitively has to be different.

One of the exciting things about UTIMCO is that

the size of the endowment grew very, very dramatically.

over

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

And there's a lot of history to it.

But, you know, some of it, you know, being in Texas was money coming from the Permian Basin, right?

Like just some random historical context there.

And so UTIMCO had this really amazing opportunity and task of

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

at scale.

but in a very thoughtful and strategic way.

And to do it, you know, I'd say relatively quickly.

And

as that endowment

grew,

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.

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

it was kind of thinking about

what processes that we want to apply across Utemco

to bring

an additional level of rigor, but also

a way to invest more repeatedly and consistently.

Right.

And, you know, what that tends to mean is like, I think, formalizing the investment process,

how opportunities got surfaced,

as the organization grew, making sure that everybody in different parts of the organization

were informed on

what was coming down the pipeline.

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?

And so making sure that there is a mechanism in place

to

get everybody on the same page

and in some ways kind of standardize that process.

At the time,

whenever you put new process in place,

and you're learning and you're figuring things out and doing something new,

there are moments where it's not that fun, right?

But now that

I'm in the CDET Ensemble,

co-founded the firm,

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

So you're not collecting a bunch of shiny objects for one thing, right?

And then, two,

you can have repeatability in your performance, right?

And the grandest scale, it's an endowment.

Like, the endowment is going to live

beyond me, beyond you, beyond my kids, everybody's kids for generations.

That's the hope, right?

And so the time horizon is almost infinite.

And so we have to, you know, in order to fund my scholarship, and then, you know, maybe my kids will go to UT on a full ride too,

you know, you have to create like repeatability, you know, consistency.

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,

you know, put together Ensemble, we always had the mentality, again, of being aspirationally like institutional, right?

And so taking some of the lessons, you know, not from like, you know, 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,

you know, maybe some hard lessons?

And so how do we make ourselves institutional?

Vinod Cosa popularized a zero million dollar business versus zero billion dollar business, how they function from day one.

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.

What were some practices that the very top GPs or the GPs that made it, let's just define it in the outcome, what did they do from the very beginning that was different from the ones that were even second or third quartile?

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.

So that goes back to over-communicating and transparency.

So I'd say that's kind of

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

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

I think the second thing that

the best managers did was,

you know, I think go out of their way to

make sure that you knew what they were thinking.

Meaning that they would travel, countless managers would make the effort to travel down to Austin.

Austin's a great place, right?

But some of our managers were in Berlin or

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

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.

So I think the best managers did that.

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.

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.

I'd have exposure to the whole partnership.

I'd meet with folks.

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

you know, how is this, how are these, you know, how is this partnership functioning?

right?

Are folks on the same page?

You know, how are they, you know, how are they complementary?

Not when you're diligencing

them

on whether or not to reopen this fund or to invest in the fund, but, you know, how they're, you know, working together, you know, after you've committed to the fund, right, as they're deploying the fund.

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

you know, GPs, I think, have, you know, like thoughtfully, I think, worked with, you know, some of their LPAs.

It's downstream of this partnership mentality.

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,

you know, there's only like three people on the team, right?

Like, we had to experience all this also.

And, you know, there's some times where we probably could

communicated better, better, could have done things better.

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, right?

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,

and you're not working a specific muscle continuously, there's no expectation that like you're going to, you know, you know, run faster when you go on the track or something, right?

You kind of have to constantly cultivate this, even knowing that

this isn't going to, like, excellence is not overnight, right?

It's this mentality, and we kind of, we practice this ourselves.

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?

Which is like, V1 is not going to be like lights out, right?

V1 is probably going to be, it may be pretty, pretty crappy, right?

But we're going going to constantly iterate.

It's not

a point in time, and this is kind of it.

This is a constant iteration.

And our aspiration is to get to like V infinite, where every version of it will continuously be better.

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.

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 LPs, like we're knowing, we know we're not the best.

We're far from it, I think, in a lot of different ways.

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

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 try to try new things, you know, to push the boundaries and do better.

If you think about it,

all

venture performance or any SCLS is relative.

If you think of this as relationship alpha, so you have your returns, you have your information alpha, you have this relationship alpha.

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.

So a little bit goes a long way as well.

So let's talk about Ensemble, your fund.

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.

Well,

one, yes, like we're very proud of the performance in our fund one.

It was our pilot fund.

And

we had the great fortune and maybe misfortune of like

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 mindset to a venture fund.

So,

obviously, that means being data-driven,

but really having this very different approach of in order to get better,

we're going to go build software, we're going to go build product, right?

We're not going to throw more people at it.

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

through through

people.

And so at the time, the use of software and data was

not super obvious.

And so it was a very difficult fund to raise, kind of past the hat.

It was also a small fund.

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

And

our sole objective in that phone one was to really prove

that we could use data

and use software and product in a way that could significantly

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

the typical venture fund.

So that was kind of the thesis, right?

Could we radically

implement more product engineering into a venture firm?

You know, did we expect it to be like a 12x fund?

And hopefully, like, you know, you know, greater than that, which we think it can given some of our positions,

it outperformed our kind of wildest imagination, right?

Of, you know,

of

very, very specifically

finding great teams, right?

Not just great founders, you know, early, right, through a bunch of different signal that we could measure and track.

And then also use that early advantage to translate into collaboration with other funds and then earning access.

And so

that was the thesis that we proved.

We had 12 investments.

I think it was like five or six of the 12

ended up companies being valued over a billion.

So we had

big, Zoom in that portfolio as an example.

We had Pero, which is the Robin Hood India in that portfolio.

And so that was, I think, the initial

proof of concept.

That allowed us to go think about, the natural question after that is, well, how do you scale this strategy?

Can you scale this strategy?

When

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

Can you actually collaborate with other funds?

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

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

since our fund won.

And the best reflection of that is from

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

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

are investors and

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.

So I want more and more folks to be data-driven.

But, you know, two, like, there's a spectrum of what it means to be a product engineering-focused

fund.

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 to help our founders access customers, find great people to hire, and then other functions as well.

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

The simplest way to describe it is

thinking about how venture has been done

since the very beginning,

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

venture first started, you put your firm on Sandhill Road,

and founders, there weren't that many firms.

And so founders would find out about X firm and go visit you.

Over time, that's evolved to

more nodes in other cities and other places.

And founders don't necessarily just come to specific firms, 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 Venture for X number of years, you know, had companies went public.

And so you're backing those folks that are leaving those companies, right?

But it tends to be a very kind of finite network of folks.

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.

And, you know, very few of them end up translating into investments.

And the headline of that, and I always found this this really odd, is, you know, VCs would always say, hey, you know, hey, you know, and now it's not you, Timco, like, hey, Mr.

LP,

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

And

I made one or two investments, right, out of meeting, you know, a thousand companies.

And you're like, you know, and they're like, they're so proud because it demonstrates the rigor that they have

and, you know, how high a bar that they have.

The reality of it is that conversion is pretty bad.

If you think of any other sales organization, you get fired

if you had to meet a thousand people and you signed up one customer or

a PE firm doesn't work like that.

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

Because the reality of it is you don't want to be spending time aimlessly meeting folks, right?

Even folks that get recommended to you, right?

Because you still have that conversion rate.

The reality of it is you want to redistribute your time

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

very, very competitive deals.

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

a pyramid to maybe a diamond in terms of like time allocation.

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

We have offshoot products called Discovery.

We have a value-add product called GTM 2.0.

There's multiple products that we have internally.

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

where time is spent.

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, right?

Then you can fundamentally reallocate all of your time to diligencing these opportunities

and also winning them.

And so the question is like, well,

what does that look like?

And so for us,

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

we use ChatGPT or we buy a bunch of data from so-and-so that anybody can do.

It means

building things, you know, vertically integrating, right?

So building our own product internally, right?

Like we don't, you know, know, there's nowhere else to get kind of what we do, right?

Because we've actually built all the infrastructure internally, right?

Not just,

you know, the application layer.

And that also means fundamentally

building a 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.

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.

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

And so that's probably the biggest distinction between,

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.

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

head of data science, head of of engineering, right?

Gopi came from IBM Watson, but we've hired, our most recent hires have been,

two of which have been on the engineering side, right?

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

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

We're good to go.

We're data driven and we're going to have the advantage.

The reality of it is like you're constantly iterating, you're constantly building new product.

And, you know,

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

innovating and building new things internally

versus

waiting for ChatGPT to release

ChatGPT 5 and you know, or doing a deep research report or something, right?

Like, great, like anybody can go do that, right?

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

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?

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,

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

came from, you know, an immigrant family is going to be like the amazing founder.

It's not formulaic like that.

The reality of it is there's a bunch of different signals.

Think of it as like stacking alphas, right?

Where each individual signal may not be that relevant, but the

amalgamation of multiple signals actually drives meaningful alphas.

So that's like point one, just in terms of like philosophy.

The second one, I think, is contextualization.

And that's what LLMs and what AI has really helped accelerate for us.

Meaning,

if you're building a company that's in the consumer world versus building something in the healthcare world, selling to health systems, how you build that team will look dramatically different.

Each team could be very, very high quality.

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

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, right?

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

a healthcare AI company selling into health systems, right?

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, right?

So saying, hey, this is a great team,

but not a great team for a consumer company.

Or, hey, this is actually a great team within healthcare, within the AI, and also relative to the stage.

You have to contextualize it.

So, that's kind of like,

I offer that as an important framework.

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

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

Right.

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.

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.

Right.

So you're like, oh, that actually is great.

That makes a lot of sense.

Right.

There's probably less team risk there

because

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

But it's kind of, it's like,

you know, ex ante, right?

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,

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?

You know, where A players, you know, tend to want to work together

again

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

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

We do a fair amount of

AND or like, you know, like defense investing under the broad umbrella of deep tech.

And you see,

you know, folks at Andrew kind of leave together in

pockets.

Andrew probably

may not love that, right?

But you're seeing

someone who's leaving as a founder being very selective about the folks that they're bringing on to the team, right?

Maybe an old colleague,

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

Like, we've seen that

across the board.

The reality of it is like you can actually measure that, right?

The challenge is that a human just can't do that at scale, right?

But

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

30, 40, 50 million people.

Because the beauty of

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

So we don't have to go hire and build a giant team, right?

Which is like people are linear, right?

Whereas software and, you know, 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.

Awesome.

Well, this has been a fascinating conversation.

I appreciate you jumping on and looking forward to continuing this conversation live.

This is great.

Thanks, David.

Thanks for listening to my conversation.

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