The Money Behind The Money: A Conversation With LPs and GPs

By Beezer Clarkson, Chris Douvos

Two LPs, a GP and a managing director from Cambridge Associates walk into a bar. Sounds like the opening to a killer gag that would be appreciated by dozens.
But wait, it wasn’t a bar, it was a lowly conference room in New York City. And rather than being protagonists in a joke, these four cats – Andy Weissman from Union Square Ventures, Theresa Hajer from Cambridge Associates, Chris Douvos from VIA Funds and Beezer Clarkson from Sapphire Ventures – were co-hosting an afternoon roundtable discussion at last week’s VentureCrushNY (graciously hosted by Ed Zimmerman, Chair of Lowenstein Sandler’s Tech Group). Along with these four co-hosts were about 20 people, mostly GPs with a few brave entrepreneurs and fellow LPs mixed in. Our topic was “The Outlook for LPs in Venture Funds”.

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A Dollar and a Dream — Redux

So it's been a bit slow on the blogging front, but I'm getting back in the saddle.  My latest is over on (link).  Chickity-check it out . . . 

A Dollar And A Dream: Making The Case For Venture Capital

Guest post written by Chris Douvos

Chris Douvos is managing director at Venture Investment Associates, a fund of funds that invests in private equity, venture capital and other funds. 

Here in Silicon Valley, we’re all about using lottery slogans with Ivy League veneer. After all, isn’t talking about “optionality” just a fancy way of saying “ya gotta be in it to win it?”  And “asymmetric payoff” is just a spiffy way of saying, “hey, you never know,” right?

That’s why I was taken aback when I got invited to give a talk at the CFA Institute’s Annual Financial Analyst’s Seminar this summer. I mean, these are the cats that studied Greek during B-School so that they could do better in Advanced Derivatives class. Meanwhile, I’ve made a career of using ten-dollar words with my five-dollar brain; what could I possibly say about what is perhaps today’s least-loved asset class: venture capital? After all, a witty intro, a hoodie and a bag of Silly Valley pixie dust can only get you so far with that crowd.

And then it hit me: the asset allocators, those exact folks who seem to be turning their backs on VC today, are the ones who bow at the altar of CAPM, the Capital Asset Pricing Model. And, as one might recall, the CAPM tells us that the portfolio that maximizes risk-adjusted return, the mythical Tangency Portfolio, is theoretically a value-weighted mix of all the assets in the world; the cool kids call this the World Wealth Portfolio (WWP).

Now here’s where it gets interesting for those of us in innovation-land: the WWP isn’t something like the S&P 500, or the MSCI All Country World Index.  It literally is ALL the assets in the world, from the biggest publicly traded company to the smallest private one.  On top of that, human capital is a vital component of the WWP.  And, indeed, small companies and human capital are specialties of the House of Venture.

But here’s the rub: notwithstanding some recent regulatory Band-Aids, the well-reported and deep-rooted dysfunction in public markets has created a great de-listing machine (thanks, Grant Thornton, for the catchy phrase), making private assets that incorporate a generous helping of human capital an even more absent (and vital) component of risk-optimized institutional investment portfolios.  In fact, the entire category of “emerging growth” companies has become an endangered species, as only the most robust or most hyped companies get to pursue IPOs nowadays. Since it takes longer for companies to become the former, they are, by definition, further along their growth trajectory to the point where their growth curves are beginning to flatten while the latter kinds of companies are doomed to disappoint, fouling the waters for everyone. Some early-stage, start-up exposure might be just what the doctor ordered for return-starved, sub-optimized portfolios. After all, bonds are priced for some grim returns, equity markets gyrate Gangnam style, and mattresses aren’t paying dividends the last time I checked.

And here’s another thought that came out of the conference: someone asked me about the effects of the supercycle of de-levering now taking place, which served as a good opportunity to remind folks that venture-backed companies tend to have little, if any debt.  Moreover, the technology companies that tend to acquire such start-ups are extremely cash-generative and relatively debt-free, making them pretty aggressive acquirers.

After all, for more than a decade, the number of start-ups acquired each year has averaged in the mid-300s, with a pretty tight standard deviation no matter the economic climate. But maybe I got too giddy in answering the question, because I said that these two factors “combined to make venture capital a goodhedge against de-levering,” engendering snickers from the audience. Well . . . using a word like “hedge” in a room of folks who spend their days trying to hedge out the most minute risks may have been ill-advised.  So maybe VC isn’t quite a hedge, but perhaps a diversifier? After all, exposure to growth octane is a pretty nifty complement to increasingly value-laden public market portfolios, no?

So maybe there is something to this crazy venture game. Of course, we feel it viscerally in the Valley; the gales of creative destruction blow continually here, except that they’re gentle eucalyptus- and redwood-scented breezes. It’s sometimes hard to explain that to the outside world, though. But walking around, one gets a palpable sense that every garage awaits its moment in the limelight.  Prototypes are being assembled and software is being written; the next great fortune seems so close that one might hardly fail to grasp it . . . all you need is a dollar and a dream.


Herodotus, Investor

It’s been a bit slow on the blogging front, but after a bit of a hiatus, I’m back. 

As you know, I’d been wandering around Silicon Valley for the past few months, meeting with people and learning about what they spend their days doing and whether I might want to do the voodoo they do.  But, of course, TS Eliot had it right when he said, “we shall not cease from exploration and the end of all our exploring will be to arrive where we started and know the place for the first time.”  And, indeed, in a sense, I’ve come full circle as I’ve joined Venture Investment Associates where I’ll be able to pursue my passion for investing in buyout, growth equity, and venture capital funds with folks who have been friends and mentors during the decade I've known them.

Of course, those of you who know VIA might cry out, “but you share a common Greek heritage with two of your partners and whenever the three of you meet, the European Central Bank will have to call an emergency meeting, as the prospect of three people of Greek lineage talking about investing will certainly unsettle financial markets!”  And, yes, I should probably apologize for the havoc that my people have wreaked.  But I actually prefer to brandish my heritage in another way. 

After all, our countryman, Herodotus, is viewed as “the father of history.”  Now, maybe it’s because I’m trying to justify my dusty history degree by saying that the subject is a great metaphor for investing, with it's emphasis on continuity and change.  After all, both history and private equity are concerned with catalysts and their effect on the status quo; at the same time, the whole process of forming investment hypotheses and testing them sounds like a Hegelian dialectic. 

And it was Herodotus who really taught us how to do history.  After all, the word history comes from the greek word historía (ἱστορία), which means “inquiry.”  And what’s really interesting is that ἱστορία in its original connotation suggested inquiry that arises from wandering around and listening while conversing with people.  Herodotus traversed the world and absorbed the stories of the locals in search of understanding.

His lessons echo in the craft of the private equity investor 2500 years later, as we travel the world, visit portfolio companies, do reference calls, and attempt to divine the motivations of our General Partners.  In moving to Silicon Valley almost four years ago, I sought to live among the people the way Herodotus did as he wandered the ancient world.  

But why is such inquiry important?  Inertia makes it easy for some to continue in tried-and-true ways, but good investors constantly cast a skeptical eye, making each new commitment as a "fresh money buy".  Indeed, Herodotus himself reminds us: "For many that were once great have become small, and those that were great in my time were small formerly. Knowing, therefore, that human prosperity never remains the same, I will investigate both alike."  

Of course, Herodotus's investigations took place during a time of great progress and burgeoning affluence for the ancient Greeks.  As the Persian Wars about which he wrote receded into memory, the Hellenes experienced a flowering of knowledge and an explosion of wealth.  And while it may seem rash to compare our era to one of the most fecund in human history, today we are enjoying similarly profound advances in the frontiers of human understanding.  Technology-enabled advances are spreading quickly across an ever-more tightly connected world portending fresh prosperity.  

And I think that's why it's a particularly exciting time to be an investor: skilled practitioners should be able to catalyze value in companies that leverage such advances.  I believe that we'll look back on this period as a golden era of investment opportunity and that's why I'm so excited about spending the rest of my career with seasoned, savvy partners whose commitment to inquiry, to ἱστορία, matches my own.

For my friend Bill . . .

My friend Bill Dietrich passed away the other day and I've been broken up ever since I heard . . . 

There's so much to say right now, but I can't quite find the words — other than to say that my life was richer for knowing him and I was always honored and humbled to be among his friends.  If you'll bear with me and read the story below, I'd be much obliged.  

I first met Bill at the Garden Court in Palo Alto in late 2001 or early 2002.  There was a riot of people over in a corner and I was drawn over by the sheer magnetism of the moment.  I don't remember exactly what everyone was talking about — it was probably some bellyaching about the then-current malaise in the business — but I remember there was this guy at the center of the clutch with a knowing smile and a sparkling eye who sported a bowtie and glasses and whenever he spoke, everyone grew quiet.  I leaned over to my buddy Du Chai and said, "who is that guy?" and he just whispered back reverently: "Dietrich."  To this day, I haven't forgotten the instant and powerful sense of recognition.  I'd never met Bill prior to that moment, but I knew him straightaway: he was a character from a Fitzgerald novel . . . not one of those main characters, flawed, vain, and imperfect, pinballing through the world.  Instead, Dietrich was someone that people talked about through the warm gauze of memories: a man of generous spirit and quick wit, a man who saw others for what they were and loved them for what they were.  A man who sheepishly and gracefully accepted their love in return:

"Do you remember that party at Deitrich's all those years ago?" Tom Buchanan asked Daisy across the vast expanse that separated them, even thought they sat but a few feet apart.  "Yes, Tom," she sighed.  A moment passed.  Then another.  And a wispy smile came across her drawn lips:  "The stars that night hung so low," she remembered, "I thought I could stretch up on my tip-toes and touch them.  And the people . . . the people.  Absolutely everyone was there and they moved so impatiently just to see all the other people who were there.  It was like watching a waltz in old Vienna-town.  And Dietrich!  Oh, dear old Dietrich!  I don't think he moved a step that night.  The party seemed to rotate around him like the planets around the sun."  Tom gazed over at Daisy and felt some of the old, forgotten feelings swelling in him again.  "That Dietrich!" he chuckled as he reached for his Gin Rickey, "Always so quick and witty . . . and, boy, did the ladies ever love him!  You should've seen him at the mixers; no girl from Bryn Mawr or Sarah Lawrence could resist his charms."  Daisy laughed now, that sweet exciting laugh that intoxicated men and infuriated women.  "Oh, Tom, let's go to Pittsburgh!  Let's go right now, this very minute!  Let's go see Dietrich and it'll be just like old times again!"  "Yes, Daisy, let's!" Tom replied, as the old excitement animated his legs and his heart and he sprang to his feet crying out to the thin wafer of a moon that winked down at them "To Dietrich's!"