Earnest Sweat 00:03
Welcome to Swimming with Alligators, the VC podcast from the LP perspective, with your hosts Alexa Binns and Ernest. Are you ready? Let’s dive in. Welcome back to Swimming with Allocators. It’s DDQ time, so it’s time for us to discuss, debate, and question. It’s where Alexa and I underwrite the entire venture industry, and so we had some fun for today. So football’s back; that’ll be relevant later. IPO season opened, I guess, and somehow LPs we’re hearing are still not writing checks, so I brought a few games and questions to Alexa that she has not seen today. She has not seen this. This is real. We have no producer, which you probably should, to be able to validate this. But you have to trust me. And then this is just a reminder for these DDQ episodes. We take all questions or feedback and recommendations, so you can send your questions at contact@swimmingwithallocators.com or just reach out to us on LinkedIn or if you have our emails. Alexa, are you ready to dive in?

Alexa Binns 01:18
Okay.

Earnest Sweat 01:20
That was a little hesitant, but all right. First, we’ll start with discuss the first D, and I wanted to bring up first discussion of IPOs, and if unless you’ve been under a rock, this summer we had SpaceX come out, and it was priced in June of June 11 th at 135, became trading on june 12, and it raised about $75 billion. It’s not a mistake. Billion dollars, the largest IPO ever. The first day it closed at 2.1 trillion, and obviously because it’s IPO, insiders have a lockup period depending on 180 days or 365 days. But since the listing, the pricing has slipped, and I don’t know when you’re going to be hearing this, but it’s probably still slipped off the peak of $2. Sorry, $211 of the price. So, with all of this happening, I’ve been talking to a lot of different people and then the ecosystem, both GPs and LPs. And I’ve heard a lot of different things, Alexa. So one, GPs have been saying that the SpaceX event didn’t restart LP activity because we’re not really seeing any distribution, and that a lot of managers haven’t given distribution guidance if they even have that stock. Also, conservative CIOs are still you know going to brand names. I’ve heard from a number of foundations and and institutional LPs, and they’re still feeling kind of hesitant, and there’s just like this, I don’t know, movement to consensus, and there is actually I’ve heard from some early stage GPs that that 300 to $500 million outcome is becoming rarer and rarer. It’s like it’s actually a unicorn. because a lot of acquiring companies have gotten smart. Instead of offering a purchase price of 300 to 500 million, it’s a lot cheaper just to give the founders a carve out of 1520, 50 million. So, what does that all tell us? It’s like, oh, LPs aren’t re-upping on a headline. They’re not going to re-up until there’s a wire. So, my discussion today is like, what actually is going to move capital to emerging managers in 2027, if that’s even a year, what do you think?

Alexa Binns 04:24
Yeah, I think when we started doing this podcast, it was all about the denominator effect, where people weren’t able to deploy more into venture because they were overweighted and they hadn’t seen any returns. I think the GPs are getting out ahead of themselves by sort of assuming that they can book the liquidity, and so they’ll be returning. Maybe they’ve got an opportunity fund now. Maybe they’re finally coming out for their next fund. Maybe you’re new. Manager talking to a new LP, and so like we have the confidence as VCs to be like we we can start counting the money. This must mean there’s room now for new bets. You know the problem is solved, and what we’ve heard from a couple of the LPs on the show is that it’s not that easy. There is the timing issue that you describe. That like in some cases you’ve got you’re locked up. In some cases these people might actually decide to hold the stock that they’ve managed to get at a great price. Right? You’re not necessarily selling that the minute that you get it distributed to you. If that’s if that’s an option, if they’re giving it to you in the form of stock, and and similarly, like we were in the red as an asset class, so like I also really liked Trisha Babson Babson University’s point that like this capital when it flows back in, it’s flowing back into the full pot. It’s not just hers to redeploy.

Earnest Sweat 06:07
Yeah, yeah, and I think that’s something that’s hard for GPs to understand. But when you have so much capital being raised over a 1015-year period, with limited, like liquidity events, like much more limited liquidity events, it’s going to take time for that to shake out back in the ecosystem, and so again, it. it’s. I think what’s going to be needed is multiple exits, but then also, I think even the conversation about where the capital goes to after that has not reached the nuance that it should. There’s usually just kind of pitting like established brands versus not established brands, and I think it’s it’s it’s a little bit. There’s more layers to that because there are some established brands who are having real questions of like should they exist, both from internally as well as from the marketplace of founders and LPs,

Alexa Binns 08:14
That’s funny. This question about liquidity unlocking more slots for managers was also something I wanted to discuss because we hadn’t gotten a chance to talk about it. I took some notes at Advancing PC, which is an emerging manager conference where LPs present. They judge some pitches. They’re available to answer questions, and wanted to share three of my favorite points from different LPs who presented,

Earnest Sweat 08:42
okay,

Alexa Binns 08:43
and maybe maybe that sparks your memory of some things you’ve also been hearing, kind of off the cuff. So Courtney at Recast Capital said that nonstop talking is pretty obnoxious, and that unless you’re saying something super engaging. Let’s have a conversation, and I thought that was like such a sharp shooter straight way of explaining like what it’s like being on the other end of these like receiving these issues.

Earnest Sweat 09:16
Is it? Do they mean just in person or online too?

Alexa Binns 09:21
I’m. I mean, I’m imagining that she probably takes plenty of online pitches. I mean, Zoom pitches as well.

Earnest Sweat 09:27
Oh no, I meant like someone constantly talking to the ether and posting.

Alexa Binns 09:33
Oh, this was in the context of fundraising. Ah, okay. So this is like how to handle your first meeting with an NLP. Yeah.

Earnest Sweat 09:40
Okay. Okay. Cool. All right. What’s number two?

Alexa Binns 09:42
Giada at San Francisco Employees Retirement System on the question of how do you differentiate? Like how do you know what your differentiation even is? She suggested you ask a friend why you invested in me, and um. What a healthy, smart way to go about this, rather than sort of back backing into what you think LPs want. It’s like really figuring out what your superpower is, because like, why did your friends trust you with their capital? And then third, final one, Aaron at 50 South Capital. What a gem! He made a great point about. I love Arron. I know he’s great.

Earnest Sweat 10:23
He should. Aaron also called you out. You should be on the show. Continue.

Alexa Binns 10:28
We can’t all control our compliance team. So he made the point that all GPs are impressive with these incredible past successes, but he considers his job to be figuring out the subset that has like insane future potential.

Earnest Sweat 10:48
Those are those three good points. If you could ask a follow up question to any of those, which one would you ask? Like which question, and what would your follow up question be?

Alexa Binns 11:08
I think it’s fascinating how to judge future potential.

Earnest Sweat 11:11
Yeah, yeah, best, yeah. And I don’t feel like we’re in a market right now that is really digging into that, like what does that look like? What are the right signals for that? Other than like your past success, I think you know we’ve heard this over a number of our conversations, but this idea of being a founder magnet is something that I’m hearing from and from smart LPs in different ways. Like, are you just hearing about you all the time? Where you just kind of like it’s kind of like the concept of like that that’s been put in movies where it’s like oh if you say if you say blue car then all you’ll do is see blue cars all day and this concept of people just becoming a part of the ecosystem and how fast it happens and how you become a node really fast, and so I think some of the best allocators are going to start to notice who becomes these nodes really fast.

Alexa Binns 12:33
Another thing it makes me think of is how GVs often will forget to brag about themselves, they just want to talk about their strategy, and if they are talking about themselves, it’s probably backward leading. Like they think that the point is like traction. They think the point is like what are the superstar things I’ve done in the past. But maybe you need to be talking about your superstar qualities, future,

Earnest Sweat 13:04
yeah, yeah, or what you’re doing in the present. I think this idea of like being able-it’s-it’s a lot of times when you try to make your differentiation legible, which is a word that now I just hear all the time to LP. and founders, when you’re breaking it down, it can sound like everything that’s been on every VC website

Alexa Binns 14:17
I wonder if there is a parallel. There’s a lot of data that shows that female founders get asked more questions about their existing traction for their business, and are not really given the opportunity to present the big vision. And I wonder for any female GPs listening. Maybe we need to be more thoughtful about whatever questions we’re receiving from potential allocators, making sure we also talk with a sort of forward thinking. You know, if you’re not asked a question. About the big idea or like how you’re going to have a big impact, you need to find a way to slide into talking about that, or else you don’t get a chance.

Earnest Sweat 15:09
Yeah, yeah, I think they are clever. You have to be authentic to who you are, but I think there are clever ways to when you don’t feel like you’re being asked a question that’s essential to your strategy and who you are, and also might be a sticking point that you think could make the allocator more interested. It’s your responsibility to figure a way out to do that, and so you know sometimes that’s asking questions to them. Yeah, GPs, you can actually ask questions to LPs. Trust me, we’ve been doing it, And so, yeah, you have to find your own ways to do that. So the next one, the discussion point that I wanted to talk about was one: take it in a victory lap. There is an episode 82 about a year ago. I know you all remember it. Two brilliant podcasters predicted what would happen, and we’re starting to see it. So, those two people said that LPs who went direct will eventually drift back to Fund of Funds, but only the ones that offer more than just a basket, right? Of like different things. So I can’t remember which of us said that, but let’s just both take the victory lap. It’s starting to happen, and the reason why I wanted to bring that up is because I’m hearing from more and more fund of funds that the interest from institutional foundations and endowments and and family offices are pinging top tier fund of funds, and and even public pensions are are are as well, and the funny thing though is the LPU told me this also said that they were curious if that is a signal to you know a very a frothy market like a peak of a market because that happened in 2020 and 2021 again, and I say maybe, but that’s why you shouldn’t time the market. And if it helps emerging managers, I’ll take it. But these, I think, are the importance of funds to funds. Since we’ve been doing this show, we’ve seen the pendulum swing on people going to do more directing, and I think yeah, we’ll see the big names of Hugging Face, SpaceX, and Anthropic, and OpenAI, and da da da da. But there are hundreds and 1000s of other companies that people invest in directly that will never see the light of day of an IPO or a liquidity event, and so the argument was we don’t want to do fee on fees. There’s not much diversity in kind of like there’s so many party rounds anyway. Now I can just invest directly into these companies.

Alexa Binns 18:41
Yes, I think the interest in fund of funds is actually a consensus around the barbell approach that so many of our guests talk about. So if you’re going to do, we see all the capital is going to a few names in venture. You can kind of do that directly. Actually, there’s room. They’re willing to take conversations with new LPs. The thing that has also become consensus is having some play on the really early stage venture, and so I think that’s where consensus has finally kind of like come around that you don’t that venture now is multiple asset classes, and so if you’re going to have a small little bucket or sliver for the early stage emerging manager part of the barbell approach, if that’s what you’re going to be adopting, then yeah, you’re going to go talk to the fund of funds.

Alexa Binns 21:28
All right, next we’re jumping into the debate section of our DDQ podcast. Ernest, hypothetically, you learn that your GP just did a huge check into the latest round of Insert AI Lab, like OpenAI at 1.2 trillion. How do you feel about this move?

Earnest Sweat 21:49
Why couldn’t I get in at 900 million? Would be the question. Also, what is your strategy? Are you like if I’m not an institutional allocator that’s invested in Thrive, then I probably have a problem with that. But yeah, I’m probably not too happy about that right now. But also could be wrong, right? I know in our last, I feel like our last DDQ. You had me rank which investments to do, and I don’t agree with anything that I said there. I would definitely take it. So this thing changes all the time. So yeah, that’s probably my response. Did you have a follow up? Because I have comments. No, I feel

Alexa Binns 22:44
I feel exactly the same way. I mean, I guess the devil’s advocate side is kind of like, let’s get some lotto tickets. They’re not all going to go to zero. Some of these are going to be the companies of which the universe is built. So I should take it at any price, which I guess is the logic of the JPY. You’re supposed to have some exposure, so I guess it just depends on what I already had exposure to, how frustrated or how pumped I am.

Earnest Sweat 23:12
This is going to be a question that one of our audience members asked me, but I’ll just bring it here because it’s kind of within the discussion, and that question essentially was like, is AI doom scroll real? Like, you know, it is all of the, hey, we’ve seen some crazy like the Blair Witch project of AI that’s going on, and it has not, it has not stopped any interest. I will tell you that, both nationally and internationally, of people wanting to get into said companies.

Alexa Binns 23:53
Yeah,

Earnest Sweat 23:54
and it’s actually made me. I’m sure you all can find any think piece about kind of like what’s going on AI, but I’m sure I said this on the show before. But I think you should. Its equivalent in history is actually the space race, where people are thinking about not only being the first in progression, but like there’s also some game theory involved too. Is that even if we agree to standards here, will everyone and every nation agree to standards? And I think the play is there’s also a fight for open weight models in America and American based ones. And so if you’re a coalition of people who have already kind of the market share, it probably makes sense for you to then come together in this one aspect, so that you can own the. Hey, we’ll provide those open weight models for everybody.

Alexa Binns 24:54
Yeah, I think because these bets are so big. I felt much smarter than myself. Dan at Dessens was explaining at his AGM that you know they think of themselves as indirect AI exposure, so that if one of these goes to zero, you want some diversification, and they’re not, their bets are not there. Their bets are not in these small names. As an LP, I guess I do want to have both, right? Like you, you want to have some GPs who are valuation sensitive, and are investing in companies that are not just like marked to the last round, but are marked based on anything else.

Earnest Sweat 25:50
Yes, but I’m actually actively challenging in my head that if AI goes bad, will any? Do we have a bigger issue? Like it’s like no, 100% 100%

Alexa Binns 26:10
Like the house of cards, we’re yes, 100%

Earnest Sweat 26:14
It’s like we won’t have any water, we won’t have any autonomy, and all our information will be used against us. I don’t totally believe in that, right? I’m just saying if if we play this out in that in that pushback, I think there’s there’s two

Alexa Binns 26:29
ways that AI goes bad in this case, like the scenario of just Armageddon and like they find a way to literally just send us all a version of COBIT that none of us wake up one day, or just a one failed IPO could tank our economy for a decade.

Alexa Binns 34:46
Okay, in our final segment, questions. These are questions we’ve received from the audience, or people have called us to ask for our advice. Um. Question number one from the audience: Is there a tactic? Or was there a milestone moment, something that started to get momentum going for people to actually close? You’ve had first conversations with 100 potential LPs. What are those other tactics that we should be implementing?

Earnest Sweat 35:17
Oh, this is a great question. Well, I want to plug that both of us will be at Ray’s GP day, and my panel is actually on how do you continue to build momentum. So I would suggest all of you try to go to that. But if you’ve been speaking to a lot of people, I’m getting more and more. I’ve heard this from LPS and believe this, but you have to raise before you start raising, and it’s critical based on whatever size of your fund and strategy that you align with anchors that can put you into business. And so, I would spend most of your pre-raise time on finding the right anchors and selling them on why you should do this together, and they be seen as like the silent partner. And so, once from friends who have been very successful at fundraising, once having an anchor, then you’re able to go to all the other people who want to see that momentum of other people closing. Because when you’re starting out, nobody is incentivized to actually participate before the final close. So that’s the answer and a plug.

Earnest Sweat 36:44
What is your favorite new AI workflow? I’ll let you go first.

Alexa Binns 36:49
Oh, interesting. I get asked for lots of LP intros, and the most awesome thing I have done for myself lately is make sure there’s a really good record of what LPs have told me they’re looking for and what they aren’t, so I can quickly sort of assess for myself if I get requests. Often it’s like I heard an X episode. Would you introduce me? And now I don’t have to go back and remember. Should I introduce you? I’ve got a nice workflow in place that says yes, happy to. Or you know what? The last time we exchanged emails, they told me this, and so I actually know it’s already not a great fit, not a good use of your time or their time, and I don’t have to feel bad about

Earnest Sweat 38:12
Okay.

Alexa Binns 39:32
And the final question I got from an acquaintance was, you know, would you be interested in co-hosting this event with me, and very intrigued to hear your answer since Ernest and I host events together. The vision was very glossy, like insert fancy activity, skeet shooting. I don’t know. Horseback riding. Curious your response.

Earnest Sweat 40:08
We are open to doing different things, but we want them to be authentic to who we are, and I think what’s really worked well for us are these eight to 12 person dinners where everyone can connect, and we can have a thoughtful conversation that can go in a lot of different directions. But you know, we create an environment where there can be manufactured serendipity because there’s like interest, and you know, there’s a different variety of different people who all have similar kinds of interests, and so that’s, I think you know, other things might take away from it. And I also think people, now that we’re five, six years out of five years out of COVID, I think we’ve gotten over the just doing things for the heck of it, and what’s more important is how can you intentionally gather people? And I’m actually reading a book about that right now, which is my last question that people have sent me is like, what’s a piece of advice or content? Sorry, a book or piece of content that people should, you know, consume. And my recommendation would be the Art of Gathering by Priya Parker. Really, really good. That it really talks about how you think about bringing people together, be intentional, when to be exclusive, and so that’s that’s my answer to that one.