E251: Why 95% of Funds Don’t Pass LP Diligence w/Alex Edelson

Speaker 1 welcome back for a third time, record third time.

Speaker 2 Good to have you back.

Speaker 1 Thanks so much. Great to be here.

Speaker 2 How are seed funds using AI to improve their businesses today?

Speaker 1 Yeah, in a lot of ways. So in sourcing, they're using it, for example, like scanning their networks to identify potential future founders.
In diligence, like before an initial call with the founder,

Speaker 1 they're using these to score founder quality. They're using AI to learn a market.

Speaker 1 In operations, obviously like recording meetings, keeping notes for networking, for capturing metrics from founder updates about portfolio companies and non-portfolio companies.

Speaker 1 They're certainly using it in email and investment memos, fundraising decks. And recently, I'm starting seeing funds where it's like AI-driven sourcing, picking, winning portfolio construction.

Speaker 1 So I'm sure there will be more of that over time. And I guess like one of the questions here is like,

Speaker 1 you know,

Speaker 1 what's the real impact? Like, does it make GPs more efficient? Yeah.

Speaker 1 I'm not sure how much of a competitive advantage it is because it's generally available to everyone. And I think like, I still think VC is an artisanal game.
It's about relationships

Speaker 1 with founders and VCs and building a brand and a flywheel in those communities. But

Speaker 1 I think everybody's using it or should be using it. I think we're like approaching a time when like maybe AI will just be doing venture.

Speaker 2 How are the top seed funds using AI to improve their diligence process specifically?

Speaker 1 Some folks like use it to like score founders and they provide their thoughts on what a great founder looks like and then they kind of run founder profiles through like fun like through like an algorithm using AI.

Speaker 1 I've seen that.

Speaker 1 But I think it's a lot of like market research.

Speaker 1 Maybe you used to read research reports and talk to industry experts and now you're more likely to just use AI to

Speaker 1 get to get your arms around a space where you're considering investing.

Speaker 2 So in between our last couple of chats,

Speaker 2 you've grown your prominence in the industry. You've gotten to some of the top C funds in the world.

Speaker 2 How would you explain your right to win and what makes a GP choose you versus the next LP?

Speaker 1 That's a great question.

Speaker 1 It's a big part of what I'm doing with Slipstream.

Speaker 1 When I started this,

Speaker 1 one observation I had was that I didn't see great,

Speaker 1 I didn't see many LPs who learned venture at like a top-performing venture firm like QED.

Speaker 4 And

Speaker 1 I also noticed that like

Speaker 1 our beliefs about which funds were the best didn't always correspond to other LPs' opinions and

Speaker 1 didn't always correspond to like the GP's abilities to fundraise. And that

Speaker 1 felt like an opportunity to me. I also had developed strong opinions at QED about like, what's a good LP? What's a great LP? What are the types of LPs that we engage? Why do we engage them?

Speaker 1 Why do we like, when do we engage them? About what? Like during a fund, while we're deploying a fund,

Speaker 1 what are the folks who are really helpful? What do we value in picking LPs?

Speaker 1 And so when I started Slipstream, I had a sense for the LP landscape and the different types of LPs that invest in early stage venture funds and some ideas for how to do it.

Speaker 1 Like VCs with operating backgrounds, like venture-backed operating backgrounds often say things like, I'm just the VC that I wanted to work with as in when I was an operator.

Speaker 1 That's kind of how I feel. Like I can be the LP I wanted to work with a QED or we wanted to work with a QED.

Speaker 1 And there's like a deference and a trust and a responsiveness and a transparency that I think helps build a brand and relationships with GPs and sort of a brand in the community of GPs.

Speaker 1 But there's another dimension that's really important. And that's like.

Speaker 1 talking to people in a constructive way, like talking to GPs in a constructive way, like from the beginning and pushing on them, almost thinking about like, what is the best version of this fund we can come up with together?

Speaker 1 Like, one thing I observed was that some people approach initial, some VCs approach initial calls, initial calls with founders

Speaker 1 with the goal in mind of like helping that founder figure out the biggest and best opportunity for them. Like, what's the biggest and best version of the company they're considering investing in?

Speaker 1 Whether or not it's a fit for the VC. And if you can help that founder find that,

Speaker 1 that founder will be so grateful, will say great things about you, will remember you, will value you, even if you did invest.

Speaker 4 And

Speaker 1 I kind of view my job as the same way. It's like, how do we help folks build the best versions of the venture funds and firms that they're working on?

Speaker 1 And when a conversation moves in that direction quickly, I feel like it builds a relationship. It's constructive.
It's not just like, oh, I need the standard information that all LPs need.

Speaker 1 It's like, let me like push on the edges here. And like, why do, what, what do you think about this other way of doing it?

Speaker 1 And what do you think about these concerns that, like, I think many people would have about some component of your strategy? And we just, I think, go deeper, faster in many cases. So

Speaker 1 that's a way that I, that we also win is because hopefully we prove to folks that we can add value in unique ways when it comes to deploying their fund and building their firm.

Speaker 1 Some of it's related to return, some of it's just like tactical operational stuff from like being the COO at QED.

Speaker 4 And

Speaker 1 I think over time, hopefully, I'd like to think we've built a reputation over time as a group you can go to early in your process.

Speaker 1 We are a thought partner for you as you think about your strategy, your portfolio construction, how to construct your LP base.

Speaker 1 And then we get, we often get so involved in the process that

Speaker 1 we sort of earn our right to win through that.

Speaker 1 There's a second component too. So like the second component to me is like, we are a relatively small

Speaker 4 And

Speaker 1 when people want to work with us, they should be able to find room for us.

Speaker 4 And

Speaker 1 that's a really important part of our strategy.

Speaker 2 It reminds me how Palantir used to get business. They would pitch against competitors and the competitors would say, we could do A, B, C, or D.

Speaker 2 And Palantir would actually send an engineering team on site to that company over the weekend to do a sprint and to solve one of their problems.

Speaker 2 So they deployed the strategy of selling, which is provide value versus talk about how you could provide value, value. Show results versus talk about how you could show results.

Speaker 2 It's a very undervalued way to sell and to show that you will be a good partner.

Speaker 1 This would be the first time anyone has ever compared us to Palantir. I'm not sure I deserve that,

Speaker 1 but I appreciate that.

Speaker 2 What do you believe today that you didn't believe a year ago when we last chatted?

Speaker 1 I love funds that target high ownership relative to the size. of their fund.
That sometimes means more concentrated funds.

Speaker 1 But I would say it is increasingly difficult to invest in funds that have like fewer than 20 companies. Or 20 is arbitrary, but like somewhere around there, like fewer than 15, fewer than 20.

Speaker 1 We have done some. We have not done many.

Speaker 1 But the bar is very high for us to do that right now, probably higher than it was historically.

Speaker 1 And in particular, like

Speaker 1 deep tech is an area that feels like it might benefit from more shots, that seems like it might benefit from more shots on goal.

Speaker 1 And out of all sectors, deep tech is one where we're comfortable with a bit less ownership relative to fund size. The wins can be so big

Speaker 1 and having a few more shots on goal in those cases does feel a little more comfortable.

Speaker 1 It's not like a far deviation from the strategy we've always had. It's just a slight preference for a few more portfolio companies.

Speaker 1 Like 25 to 35 is a great place to be for us, and we can do funds that have more.

Speaker 1 These are typically funds that... are still getting good ownership relative to fund size, but maybe slightly lower than we historically preferred, especially in deep tech.

Speaker 2 You started by saying that you had a different thesis on what you thought was a good GP from other LPs. How does your view on what makes a good GP differ from the market?

Speaker 1 It's so interesting because when you talk to other LPs who are focused on these early stage or small venture funds, they might say that they're looking for similar things.

Speaker 1 And they'll say, oh, we're looking for these three things. And someone else says, well, we have a, we have four criteria in our framework.
And they kind of sound the same.

Speaker 1 And you're like, well, then it seems like you all should be investing in the same funds. And then you look at their portfolios and they have invested in no overlapping funds.

Speaker 1 And so, what's interesting to me is like a lot of this is actually about the application of these frameworks. Like, it's not like I'm looking for something

Speaker 1 that

Speaker 1 other people aren't, or that I could easily list in a framework.

Speaker 1 It's like, no, I'm looking for people who wear glasses and were very and they're very unique because they wear glasses, they've had to struggle with you know, eyewear or something, and they've overcome this obstacle in their life.

Speaker 1 Something like, no, it's not, it's not like so clear. Sometimes it's like a sense you have, sometimes it's that like

Speaker 1 you have a deep network of founders and VCs who are going to real talk you. And so the references that we're getting might just be different than the references that other folks are getting.

Speaker 1 We're all looking for the same thing. Let's say there was another group looking for the same thing as we are, but we have different network.
And we might compare notes. This happens actually.

Speaker 1 This happens not infrequently. Where I'm looking at the same fund manager as another LP.
We've both done a bunch of references. Plenty of our references are actually overlapping.

Speaker 1 Like we've talked to the same founders or VCs, and we get very different feedback.

Speaker 4 And

Speaker 1 often mine is a little

Speaker 1 maybe more constructive. Whereas someone might say like, oh, it's all positive feedback.
I'm like, oh, that's so interesting. Like mine was not all positive feedback.

Speaker 1 And well, I still might invest anyway, but it does feel like part of it is just like getting real talk from people who actually know about things that matter, like that relate to like increasing the odds of a fund outperforming.

Speaker 1 And so I'd love to say there are certain things we're looking for that are different, but there, there are so many different kinds of LPs. Like some folks have similar,

Speaker 1 they're looking for similar things, but then we don't get to the same answers. I'll add one more thing.
Like, I think some things might turn people off that don't turn me off.

Speaker 1 And some things might get people excited that don't get me excited. And I think that is in part because

Speaker 1 my time at QED

Speaker 1 really helps in a lot of ways. And this is one of them.
And what I saw there was like, there can be a bit of a messiness on certain dimensions

Speaker 1 um on the path to generating great returns and sometimes it's not like oh it doesn't look institutional if you're behind the scenes or it doesn't it's it's not it's not as clean maybe from a process perspective but the reality is like

Speaker 1 i saw what it looks like to win at a very high level over multiple funds for a very long time and and that kind of informed

Speaker 1 my way of thinking about early stage venture. And I have a comfort with some things that others don't as a result.

Speaker 1 And some things just like, don't bother me that might stand out to certain LPs and worry them that don't worry me.

Speaker 1 Or what I'm trying to pinpoint, which is hard to is like, I think I left that experience with a sense for what it takes to increase the odds of outperforming an early stage venture.

Speaker 1 It is based on one way of doing it. QBD's way is not the only way.
There are other models that have done really well, but it gave me kind of like instincts and an intuition about

Speaker 1 what a great venture fund looks like. And it's not always a clean, perfect pitch.
It's not always,

Speaker 1 it's not always the portfolio construction someone comes up with at the start of their fundraise. It's, you know, and that

Speaker 1 also gives me confidence to invest in funds that some others may not because I have sort of deeply held beliefs about what a great venture firm looks like, even if on the surface it like comes through a bad or unpolished pitch, or there are kind of other

Speaker 1 things that show up to folks as yellow flags.

Speaker 2 To use an analogy, this is like front of the house, back of the house, and the restaurant. If people go into a restaurant, it's a beautiful ambiance.

Speaker 2 you have a great waiter, a great hostess, and the food is great, but in the back of the house, you go and there's chaos in the kitchen.

Speaker 2 If people knew what was in the kitchen, they wouldn't necessarily love the experience, but you actually know that not only do you not mind what's in the kitchen, you actually realize that that could be the source of alzheimer.

Speaker 1 That's a way to think about it. Like, it's not like a total mess.
And I certainly don't mean to suggest that QED is a mess by any stretch.

Speaker 1 Like it's an institutional, extremely successful venture firm. Like I don't mean to suggest that.
It's just like you get a sense for what like actually matters and how things,

Speaker 1 how the things that matter actually happen. Like, how did you source that? How did you win that? What does actually matter? I think about it

Speaker 1 as two main criteria. One is

Speaker 1 this VC needs to be getting in front of great founders very early, be able to identify them and convince them to work with that VC and work with them after they invest.

Speaker 1 That gets to, can we build a portfolio? Do you think this VC has increased odds of building a portfolio of very strong companies?

Speaker 1 And then the second is like, if they have a portfolio of very strong companies is there a portfolio construction such that that fund can significantly outperform

Speaker 1 and most of the difficult stuff is in like the first bucket and

Speaker 1 yeah like a lot of it is like are these people getting in front of great founders at or before inception how are they doing it why are they doing it are they doing it in a way that's repeatable and sustainable like over time this is gonna this is likely to continue and from a picking perspective it's like what evidence do we have to believe that they're picking great founders and that, like, the majority of great founders they're meeting or they have an opportunity to invest, they're investing and like they're making the right decisions.

Speaker 1 Um, and then from a winning and sort of value-add perspective, which I see is related, like, are there sustainable reasons why the best founders are going to work with these folks?

Speaker 1 Sometimes the VC is the only

Speaker 1 term sheet on the table, but the founder still needs to pick them. And more often, there are others, and they need to win in a somewhat or very competitive process.

Speaker 1 And you want to see sort of like sustainable competitive advantages when it comes to winning that are often related to adding value. I mean, QED is like a clear example of this.

Speaker 1 Like, who in 2007 or 8 was investing in FinTech, who had anywhere near the operating experience or domain expertise in FinTech as the QED team?

Speaker 1 We're like, they were I mean, it includes one of the two Capital One co-founders. Any founder should in FinTech should want to talk to them.

Speaker 1 You can see why they would have an advantage when it comes to picking and winning and helping companies after they invest. And so that's like a good example, but there are so many today.

Speaker 2 There are so many now.

Speaker 2 You mentioned that you'll run one set of diligence against with the same GP as another LP, and you'll even have the same references as the other LP, and you'll get qualitatively a different feedback from the market than the other LP.

Speaker 2 Where would you advise LPs that are trying to get more of this real talk?

Speaker 1 How can they uncover references and how do they get references that tell them the the truth it's such a good question i even talked to other lps about it because when this happens the immediate the like the conversation quickly turns to like hold on what why did how did someone tell you

Speaker 1 what how did you get that out of them basically like what what happened what did you say i've had that conversation with some very experienced lps where it's like but what were the questions you said and like how did you start the call and do you think your personality might be why people well yeah yeah so like so i think there are two

Speaker 1 i think there are two main things maybe three One is like, often these are just people I know. I've known them for a long time.
And we've helped each other for a long time.

Speaker 1 And they're going to be real with me because our relationship

Speaker 1 is personal and

Speaker 1 is long term. And

Speaker 1 hopefully they would feel like they need to do that. It's like I would do that for them.

Speaker 1 The second thing is probably related to

Speaker 1 yeah, personality conversation style. Just like how you have conversations with folks and being warm and open and transparent and

Speaker 1 disarming. And then the

Speaker 1 maybe there's a third thing, like my prior career is like as a lawyer.

Speaker 1 And I was mostly doing trial level litigation and for seven years. And

Speaker 1 I do sometimes

Speaker 1 feel that

Speaker 1 like, you know, you're kind of deposing someone. It's like you're sort sort of having the conversation go to a place that

Speaker 1 is more likely to lead to real stuff and

Speaker 1 asking questions in a certain way.

Speaker 2 It's interesting because a lot of people might think people are not active LPs. They might think it's a reference, it's a check of the box.

Speaker 2 But in many ways, this is the source of alpha because it uncovers somebody's past behavior, which is essentially their future behavior. How important are these references?

Speaker 2 How much are they an advantage to you?

Speaker 1 I mean, they are at the center of this work because

Speaker 1 you either don't have much of a track record or you do, but it's from so long ago, this is a question about how relevant it is. And so

Speaker 1 you always need to know, like, how did this happen? Like,

Speaker 1 how did you meet these people? What have they done with you? What constructive feedback do you have? You want to understand the round dynamics. You want to understand

Speaker 1 why they picked these folks, who else is on the cap table, how they compare to those folks, how they compare to other folks who didn't get in, but were trying to.

Speaker 1 and what kind of companies they send to these founders or to the GPs. And

Speaker 1 it comes to life.

Speaker 1 The VC comes to life in the references. Somebody needs to be at a certain,

Speaker 1 cross a certain threshold for any LP to be willing to spend the time to do references. But at that point, it's so reference driven.

Speaker 2 That is the diligence in many ways. Once you check the boxes, they have no criminal background.

Speaker 2 Once you check the kind of yes, no boxes, the references are essentially diligence prior to having an extensive track.

Speaker 1 The work you, that I would do before deciding to do references screens out like 95% of funds. So, like, we're not doing references on that many funds.

Speaker 1 Um, but yes, the references would typically drive the investment decision. It's just that we can screen out most of it before we get to that point.

Speaker 1 You often have a very good sense for what the references are going to be like. You still need to do them, but often before I do that, them, it's like,

Speaker 1 I think I get how this one works. I understand what this is.
And that doesn't mean I'm assuming the references will all be good.

Speaker 1 I just kind of like have strong feelings about what they are likely to be. And it is often true.

Speaker 1 I'm rarely

Speaker 1 very surprised in references. There are certainly times when I think I'm going to do an investment.

Speaker 1 When I think we're going to make an investment, we do references and then we don't get there.

Speaker 1 But

Speaker 2 there are rarely like big surprises and references i haven't had that or at least i can't recall when you want more for your business start with northwest registered agent the company that helps you build your complete business identity from the ground up northwest gives you access to thousands of free guides tools and legal forms to help you launch grow and protect your business all in one place Your business identity isn't just your name or logo.

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Speaker 2 How do you screen out the other 95%?

Speaker 1 Well, it's like back to the first two things I mentioned. It's like this portfolio of construction is not a fit for us.
That's like a sort of easy objective one.

Speaker 1 Or like, we're just not seeing increased odds of like kind of building a portfolio of great companies from like a sourcing picking winning.

Speaker 2 So by the time you're on your reference process, you've essentially ascertained that if these, if this fact pattern were true, you're likely to invest.

Speaker 2 And now you have to ascertain whether what this person has been telling you is true.

Speaker 1 Yes, that's a lot of it. It's also just fishing for other things.
It's fishing for,

Speaker 1 I mean, you're kind of always looking for like reasons not to invest because like then it's then it's easy. You're just like, well, I'm not investing.
That's easy.

Speaker 1 What's hard is like when it all looks great and you're like, oh my, I might need to do this one. Like.
exciting and kind of scary. It's like, man, the bar is high.

Speaker 1 If we're going to do one, like that's a big deal. And

Speaker 1 yeah, sometimes it's like, like, man, I've tried to figure out why to not invest in this and I can't find enough reasons. So I think we need to do this one.
Sometimes it almost feels that way.

Speaker 1 Like I'm really trying to disprove this.

Speaker 2 I think one of the biggest disconnects in the venture market for GPs is that the average GP

Speaker 2 is so incredibly unique and in the top 1% or top 0.1% sometimes of society that they oftentimes fail to grasp the the context within which they're operating and how average being so excellent is in that space.

Speaker 2 Tell me today, we're obviously in a bear market in terms of emerging managers and being able to raise capital. I think that's uncontroversial to say.

Speaker 2 What does it take and what's the bar for an emerging manager to raise today?

Speaker 1 It's high, but you know, and you can say it's a bear market and like you're right. But I feel like it's almost always a bear market for an emerging manager.

Speaker 1 The odds are always against an emerging manager. It's so hard to convince people when you have a limited track record.

Speaker 4 And

Speaker 1 especially in an asset class that has such dispersion

Speaker 1 of returns and where manager selection is so critical, people definitely don't want to get it wrong. The price of getting it wrong is high.
Like the cost of getting wrong is high. And so,

Speaker 1 yeah, I mean, I guess I kind of go back to

Speaker 1 the framework I have. Like,

Speaker 1 just let's step back. What's the answer? The answer should be, like, we think this can significantly outperform our investments in all other asset classes.
Like, what does that mean?

Speaker 1 Um, for us, like, from a practical standpoint, like, do we see a plausible path to like a five to 10x bond here?

Speaker 1 Um, like, obviously, that is extremely successful.

Speaker 2 It's the asymmetry, right? So, if you take away, if you look at the median return in venture, it's poor. It's actually slightly below private equity.

Speaker 2 But if you put in that asymmetry, that 10, 20, 30x fund, then it starts, the mean is actually pretty good. So the average return, not the median return.

Speaker 2 So what that means is every shot on goal that you have has to have some chance of that asymmetry, or else you should be investing into private equity.

Speaker 1 To me, like we all need to have an answer for how investing in venture, how the returns

Speaker 1 you can reasonably expect from

Speaker 1 a venture fund you're considering can justify the illiquidity and the risk you're taking by investing.

Speaker 1 And And to me, that means like it needs to be able to significantly outperform other asset classes. What does that mean? Like top quartile, top decile, it's really like it feels like it's top decile.

Speaker 4 And

Speaker 1 so the bar is very high.

Speaker 4 And

Speaker 1 who can do that? Like, you have to be in great companies and you have to have strong portfolio construction.

Speaker 1 You have to have enough ownership in your best companies to generate great returns at the fund level. And so, yeah, that's what we're looking for.

Speaker 1 And I think the challenge is like

Speaker 1 LPs see a lot of GPs, but GPs may not see the pitches of a lot of other GPs.

Speaker 1 And so sometimes it's hard to have like a relative, have like a good benchmark for like how they compare from a pitch or differentiation perspective.

Speaker 1 Like they may be talking to each other and seeing each other in the market, but that doesn't mean they see how they're positioning their firms or all the ways that they're trying to increase their odds of outperforming.

Speaker 2 Said another way, a rule of thumb is before an LP underwrites investment or leads investment in GP, it's good for them to have one year of experience.

Speaker 2 It doesn't sound like that long, but in one year, they might get 20 pitches a week. So they might see a thousand managers across asset classes, but they see a thousand managers before they actually

Speaker 2 get a voice or get a chance to say what good looks like. How many pitches has a GP seen on average?

Speaker 2 Maybe they've been at some kind of conference where somebody's pitching in front of a crowd, but they don't have that much context.

Speaker 2 So there's this disconnect between LPs' understanding of the market and what good looks looks like and GP's understanding of their peers.

Speaker 1 That's right. And I don't,

Speaker 1 I don't know how many pitches it takes to like calibrate, but I'd say way more than 20. I'd say like

Speaker 1 200,

Speaker 1 100, 200, 300, something like that, like to really kind of hone in on.

Speaker 2 And at least 50 to get like the first level, the obvious no's, right? So you have the fine-tuning. The first 50 is like, okay, this is clearly not even in the bounds.
We're not going to do diligence.

Speaker 2 And then maybe another 250 to zero in in on like, okay, this is a top decall potentially versus this is slightly better than average.

Speaker 1 And I don't know exactly where the numbers are. They're probably different for everyone.
And it's in part based on like

Speaker 1 their experience before doing this. But yeah, I mean, it's,

Speaker 1 it's easy to go down the rabbit hole on funds early on that like a couple hundred funds into. You're like, I would, I can't believe I spent time on that.
That was non-investable.

Speaker 1 Yeah, I don't know where the number, what the numbers are, but they're pretty high. They're pretty high.

Speaker 2 And it's not an an IQ thing, or it's not even an EQ thing. It's a rep thing.

Speaker 1 So

Speaker 2 two people with the same IQ and EQ, one person has seen 15 funds, one person has seen 300 funds, that person with 300 funds is just going to make fundamentally better decisions.

Speaker 1 It's all, it's all. IQ, it's EQ.
It's, it's seeing a lot. I mean, the challenge, one part of this that's so fun is like

Speaker 1 the venture ecosystem is evolving and

Speaker 1 it's not just a pattern matching like it's changing like who's uniquely positioned to win is like evolving and what worked well 10 or 15 years ago, like, might not work well now.

Speaker 1 The people who won when might won then might not win now.

Speaker 1 It's, it's a,

Speaker 1 as an LP, I mean, you're constantly thinking about that too. Just like what's going on in the market in these different sectors and who's uniquely positioned right now to do well in a fund right now.

Speaker 2 And you're so early on as a fun of fund, but you've already attracted some of the very top lps in the world we share a lot of these relationships

Speaker 2 how have you been able to bring in some of the top lps so early and what are some of your best practices for lp relationship building

Speaker 1 oh man thank you for that um

Speaker 1 yeah i mean i feel

Speaker 1 really fortunate to have like some sophisticated institutions and multifamily offices and single family offices.

Speaker 1 I don't know that I have all the answers. Like, I don't think there's a silver bullet here.
I view this as a very long process. It's a personal process.
It's a relationship and trust-based process.

Speaker 1 Ideally, like, I'm meeting folks through someone who knows us well and whom the LP perceives as signal. It really is personal.
Like,

Speaker 1 it's I'm balanced. It's like, let me tell you the reasons why you invest.
Let me tell you the reasons why you should not invest with us. Like,

Speaker 1 that's actually a really interesting the personal component in particular is a really interesting aspect of this. We work very closely with some of our LPs and

Speaker 1 the relationships are like, it's almost like becomes a friendship more than a business relationship, even though it started in a business setting. But we're talking all the time.

Speaker 1 We're texting all the time.

Speaker 1 We're doing a lot together.

Speaker 4 And

Speaker 1 they're very like personally important relationships to me too, even though they didn't start in that setting. So that has actually been a surprise.

Speaker 1 Like it's just naturally become very personal with many of them.

Speaker 1 It's like a great joy in this work that I didn't really expect. It's been a lot of fun.

Speaker 2 It's kind of like brother-in-arms. You start out being in a unit in the army and you go through these trying times together.
Those end up being even closer than your very close relationships.

Speaker 2 It's a paradox of sort is that.

Speaker 2 if you do something you see somebody's value you work together even if you might have different preferences or you like different teams you're from different parts of the country, you some somehow that that working together

Speaker 2 bonds you to your partners, to your LPs and other people that you work with professionally.

Speaker 2 Observing you from the background, it seems like you build relationships with GPs similarly to how you build relationships with LPs.

Speaker 2 How are you building relationships with LPs when it comes to

Speaker 2 before they invest? Talk to me about the life cycle of the relationship with an LP, starting with when you first meet them to when they invest.

Speaker 1 It's real talk about kind of why venture, not why venture, like real feedback on their current portfolio strategy, how they're thinking about

Speaker 1 the evolution of their venture book.

Speaker 1 It's doing what we say, it's helping them think through internal questions, it's helping them think through investment decisions, it's helping them. It's sort of like building a real partnership.

Speaker 1 Where like sometimes people are talking about how to

Speaker 1 how to pursue a strategy change or how to build a venture program internally. And, like, I'm just kind of like a thought partner out here for a bit.

Speaker 1 And when it gets to a point where it's appropriate and makes sense,

Speaker 1 maybe I'll be in the conversation in the early days. Like, I'm just a thought partner.
And sometimes, for some folks, like, Slipstream's not the right fit. Like, I'm not just pushing Slipstream.

Speaker 1 And I think that does build credibility. Like, it's not for everyone.
The strategy is not for everyone. We are not for everyone.
And so

Speaker 1 I think over time, over time, you just

Speaker 1 show credibility and you demonstrate that you're a person they can trust and who has good information, who is in the flow, who has like deep analysis,

Speaker 1 who's making decisions that they find compelling.

Speaker 4 And

Speaker 1 hopefully, someone who they could see themselves partnering with for a long time. But I don't know that there's like some magic bullet here.

Speaker 1 It's not like, oh, well, every three months we send this email. And then the next three months, it's not like that.
It's on a case-by-case basis. It's relationship-driven.

Speaker 1 It's tailored to what's on their mind and how they're thinking about their strategy and their portfolio.

Speaker 2 You've referenced anti-selling, which is a common thing around tall funds, which is telling people what you need to believe in order to invest, in this case, in Slipstream.

Speaker 2 Tell me about anti-selling and

Speaker 2 how have you used anti-selling, and what are some of the benefits to funds that use anti-selling?

Speaker 1 I love that question. This was something I

Speaker 1 sort of saw at a very high level with Nigel at QED. Like he is a very compelling, analytical,

Speaker 1 high EQ, thoughtful person.

Speaker 3 And

Speaker 1 that's one thing he does very naturally. And it's very compelling.
And I saw it. And I think I just working so closely with him kind of like naturally picked that up to some extent.

Speaker 1 But it's also, you know,

Speaker 2 anti-selling could be reframed as prioritization of your information. If it's not a fit for them, then it's not a fit for you.

Speaker 2 So it's not a sales tactic and that you're not trying to convert everybody through anti-selling. It's a way of prioritizing your time and your relationships.

Speaker 1 Has that ever backfired or what's the best practices there? Okay, so first of all, to the premise of the question, like, I agree with the premise. That's how I use it.

Speaker 1 I don't actually use it to try to convince people. It's like a filtering mechanism for all of us so that we all get the right outcome.

Speaker 1 Like it's not, it's not a win for me if someone comes into our font. Let's say we get like some big LP and then they realize after they're in, like, well, this isn't a good fit for them.

Speaker 1 And then they don't re-op. Like, that's not a win.
I'd rather have someone who've used this as a long-term fit and who really understands what they're investing in. So I think, and

Speaker 1 I think the story, I think it's, you know, you should ask Nigel this, but like, I think the way he used it really effectively was in hiring. It's like trying to find the right fits.

Speaker 1 Like, you know, this is a great place for you if you're this type of person, you like these types of challenges.

Speaker 1 And this may not be a great fit for you if you, you know, would respond in certain ways to certain situations or you wouldn't like certain aspects of this job, basically.

Speaker 1 And that's like important from a hiring perspective, of course. Like, you want the right company fit.
You don't want like high turnover, quick turnover. And so

Speaker 1 for me, like, it's helpful. And for GPs, I think it's helpful in a lot of ways.
It's helpful when they're fundraising. It's helpful when they're trying to convince a founder to work with them or

Speaker 1 filter them out, right?

Speaker 1 But like, what are the best practices for doing it? Like,

Speaker 1 I think I would say, like, you don't want to go too negative. Like, you want to, you, it allows you to frame the negatives in ways that you want to frame the negatives.

Speaker 1 Now, in reality, like, I'm a, I'm,

Speaker 1 I'm pretty direct. So I'm not like, I wouldn't say I'm like so calculating or strategic about it.
Like, I, I really do want to talk about the

Speaker 1 sort of both sides of the coin in an even-handed, incredible way?

Speaker 2 How would you use anti-selling that actually has a trade-off? And how would you use it as a way to actually filter through LPs?

Speaker 1 Or how have you used it? It's a very long-term,

Speaker 1 it's very liquid, illiquid investment. It takes a long time to generate meaningful DPI, and it's not the right fit for some folks.
That's one example. And I want people to understand

Speaker 1 the likely timing of capital calls and capital distributions. Sometimes that does weed people out.

Speaker 1 Like, I think I have certainly, there are some people who I have spoken that way to, and they've decided it's not the right fit. And that's, that's, that's a good thing for us, too.

Speaker 1 It may not feel like a short-term win, and maybe it's not a short-term win, but like, it's, it's a long-term win.

Speaker 2 What are you most excited about as an LP and seed funds today? And what do you see on the frontier over the next five to ten years?

Speaker 1 From an investing perspective,

Speaker 1 what I'm, what gets me very excited is like

Speaker 1 two things.

Speaker 1 I love

Speaker 1 being early in a process with a GP. I love working on their portfolio construction, their fundraising process, constructing their LP base, putting their materials together.
That's a lot of fun for me.

Speaker 1 I'm excited about that. I really enjoy that.

Speaker 1 We do that a lot. I think

Speaker 1 it helps build our brand. I think it helps.
I'd like to think it helps the GPs. It's also just like a lot of fun, personally, for me.
I really do enjoy that.

Speaker 1 Another thing I'm excited about is like, I think we're seeing innovation around how to get to great talent before it's consensus.

Speaker 1 And I like that.

Speaker 1 Sometimes it's going, it's working with younger founders. Sometimes it's working with founders who are

Speaker 1 employed at another company and have not committed starting a company of their own. That gets me excited.
I think like, you know, some things we'll see coming up is like

Speaker 1 increasing involvement of AI in all aspects of

Speaker 1 investing. I think we'll see it more over time.
And it will pose, it'll create very interesting opportunities and

Speaker 1 create some interesting questions for LPs who need to be able to evaluate which venture firms have

Speaker 1 increased odds of generating great returns.

Speaker 2 Thanks so much for jumping on and appreciate you, appreciate your friendship and looking forward to catching up live.

Speaker 1 Yeah, likewise. Thanks again for having me and it's always fun to be on with you.

Speaker 2 That's it for today's episode of How I Invest.

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