Earnest Sweat 00:03
Welcome to Swimming with Allocators, the VC podcast from the LP perspective, with your hosts Alexa Binns and Ernest. Are you ready? Let’s dive in. Our next

Alexa Binns 00:14
The guest is Alex Kirk. He is vice president at Redis, and I have been so pumped to have you on the show, Alex. As fund defense goes, this is the most differentiated approach I have seen out there, and I’m so excited to hear about what you’re doing.

Alex Kirk 00:28
Thank you. It’s great to be great to be on with you guys.

Alexa Binns 00:32
Absolutely. Before we jump into Verdi’s and what you call your approach, this sort of quant approach to selecting managers. Could we get the Alex allocator story?

Alex Kirk 00:46
Sure. So I started my institutional investing career about 10 years ago in the classic asset allocation driven endowment style model. So allocating to managers across all the alternative asset classes, and when we started, we had a public markets book that I was covering, which was split between an equity strategy and a hedge fund portfolio, and the other side of the book was a large allocation to private markets, and that included buyout, growth equity, venture, real estate, and natural resources. And what I what I really liked about this approach was one, seeing everything that was out there, but two, building strategies for each asset class, and you know, building that into a portfolio with an extremely long Time horizon, and so what I like about this was that it really allowed us to optimize for time, which is a it’s a big controllable component in compounding capital, and so I think I had a a great foundation with being able to see all that as I started my career.

Alexa Binns 01:56
The journey of the venture strategy is kind of the journey of your career, Vertis. Yes.

Alexa Binns 02:03
What unlocked that you all shifted how you were wanting to approach venture?

Alex Kirk 02:09
Yeah. So way back when, for the family office, the original approach to venture was kind of the common thinking that you need to be in the brand name VC funds to get the attractive venture returns. So we invested in venture fund of funds products that had access to these types of managers. But what we found over time was that as these firms and as these products scaled, the exposure that we were buying was much more multi-stage, often late stage, which didn’t really offer the same return profile we were looking for in an early stage allocation, and and that set us on our journey to build dedicated exposure at the earliest possible entry point, and so at a high level, what that looks like today is a highly diversified index approach across pre-seed and seed by investing in funds, often sub $50 million funds, often emerging managers, and many of which are fund ones, who are optimizing their portfolio construction for first check exposure and outlier capture, and so at scale, that’s about a fund commitment per month for us, and our strategy covers about 20 to 25% of all the seed stage companies in the U.S.

Earnest Sweat 03:40
That’s amazing coverage and scale. Before we get into kind of how you all built that out, and specifically finding the right managers and deciding that that was the right criteria, could you talk to me about having experience with so many different other asset classes? How that prepped you for how you’ve looked at venture in the past and today,

Alex Kirk 04:04
yeah. When you go back to the importance of just thinking with a really long time horizon and investing, you know how we worked across multi asset class, you know this multi asset class approach, and thinking with that long time horizon, it allowed us to see that venture was this really unique asset class that benefited from a unique investment approach that was different from what we were doing across other areas of the portfolio, and in many ways different from what others other allocators are doing in the early stage venture space.

Alexa Binns 04:42
What was the key to realizing you wanted to do this in more of an index approach? How did you come? How did the strategy come to be?

Alex Kirk 04:52
When we were building the strategy, we spent a lot of time studying the structure of assets. Classes, especially in the private markets, and you know a big takeaway was that most private market asset classes look like your classic normally distributed bell-shaped curve, meaning the you know mean and median returns are very similar, and both are typically referred to as the beta return for the asset class, and in these asset classes, the aspirational approach is to drive alpha through selection. So you know, picking the best managers to try and achieve top quartile returns. Seed stage looks much different from an asset class structure perspective, and that’s because of the power law, where you know the thick right tail of the distribution, which is you know all of the outliers and all of the massive winners. It’s driving the bulk of the return, and the biggest unlock here is that in in a power law asset class, the mean return is so much higher than the median, driven by those outliers, and in fact, the mean return is often so much greater than the median return at seed that it historically sits right around the top quartile for the asset class. So that was pretty eye-opening for us because the takeaway there is that if you back every single seed fund and every single seed company, you really get that top quartile asset class return, and the U.S. stock market. So thinking about public markets here, the U.S. stock market functions in a similar way, where something like 4% of all companies account for you know the whole return of the asset class, and the public markets solve the power law problem. You can buy the whole distribution for a few basis points, which means you own every outlier by construction. And the same concept didn’t really exist for seed stage, so we decided to build it ourselves.

Earnest Sweat 06:56
With those initial kinds of thoughts of how it’s a power law Asset class, have you? How do you all iterate on the strategy now that it feels like it’s become a power power law asset class, where there’s like specific there’s a power law to the power law, and so how has that impacted how you all think about finding new managers?

Alexa Binns 07:21
I’m picturing some of these companies wearing booster things that make you fly in the ocean.

Earnest Sweat 07:26
It’s like yeah, this is normal.

Alexa Binns 07:30
Like we are now. Some people are wearing jetpacks, so just does the strategy change?

Alex Kirk 07:37
The strategy stayed remarkably consistent since we started, and so I think what’s changed for us is kind of the scale and the process that we’ve built. And so when we first started, the goal was very much just to test our ability to access the seed market, given that we sit in Philadelphia and it’s not exactly the center of the venture world. So we had to build this sourcing pipeline and this network with you know a lot of ecosystem research and cold outreach, and we were able to get a feel for the early stage landscape over time. And you know I credit a lot to our managers, especially in the early days. We have a lot of amazing managers in the portfolio. Many were, you know, those first few commitments when we were getting started, and were so helpful for us to lean on as we were building the sourcing engine and function. And many of those managers we continue to go back to today. But I think that the sourcing work has changed as our network has expanded and we’ve become more well known as an LP in the market. So it was a lot of outbound initially. Now it’s a mix of inbound and outbound today, and so that scaling has has has changed over time for us, and you know both on that sourcing side, and also on the investing side, and also on the portfolio and data side, we’ve got over 4000 companies and something like 72 unicorns so far across 70 funds and I think 45 GP relationships since 2017. So we’ve got this pretty robust historical data set, and we’ve built a bunch of infrastructure to help us manage and sort of extract insights from that.

Earnest Sweat 09:25
You know, we have a lot of allocators that are outside that are just getting started and are outside of kind of like Silicon Valley or New York, both domestically here in the U.S. and internationally. What advice would you give them as they’re building out that ecosystem and trying to make those first investments? What other tactics would you provide? Yeah, I think it’s.

Alex Kirk 10:00
It’s really important to spend a lot of time understanding the market and the ecosystem and just the network of who’s there before deploying capital. It’s a really really distributed ecosystem. There’s you know hundreds maybe 1000s of funds in in venture, and all of them, you know, unique in some way, and and so spending a lot of time going to you know, there’s a lot of great industry events now, and you know, conferences and networking events, and and you know, many of them are are not in our backyard, so so but but reachable in you know many of the classic venture ecosystems, and so spending a lot of time in those markets and figuring out you know who the players are and meeting meeting those folks, it really helps to paint the picture for what the market looks like, and then you have a better frame when you start deploying capital, and then it compounds from there, and that you have, you know, these relationships now that you can lean on to really help build out your your strategy.

Alexa Binns 11:06
I feel like there’s an interesting tension between if you’re working in one asset class where you’re describing sort of that the median is the same as the average. You’re leaning on some of these more soft skills. You sort of have a muscle for selecting managers, and you have to turn that off then to really commit to your venture strategy. Are there some things that carry over from the more qualitative analysis in the venture strategy, or is this all quantitative driven?

Alex Kirk 11:49
No, there’s certainly a non-quantitative component for what we do. You know, at the end of the day, this is still very much a relationship-driven business, and while we take a, we have a kind of rooted in the numbers quantitative lens to how we’ve approached our portfolio and and strategy as a whole. We focus a lot with managers on process, and so I think process can be more qualitative, but for us, that’s really one of the most important things to underwrite. And we spend a lot of time with GPs, often fun ones. That’s an entry point where we really like to build relationships with managers, and we spend a lot of time thinking through processes as opposed to things like you know track record and some of these other criteria that others may spend more time on in their underwriting process. When we think about the process, it’s much more focused on understanding the portfolio construction, the sourcing function that the manager has, their network, and just really how they expect to deploy capital. We view this as the more controllable part of the early stage investing, so the results and track record are far less controllable over time, which means you know they’re just generally harder to underwrite. So we choose to focus more heavily on the process, and a lot of that process is you know speaking with the manager, getting an understanding for how they view the strategy and kind of their long term plan and all that.

Alexa Binns 13:32
There’s a concept that Aaron Gilman was telling us that sort of he’s looking forward thinking as opposed to backward looking, and it sounds like focusing on process gets you a picture of what could happen in the future.

Alex Kirk 13:47
Exactly.

Earnest Sweat 13:48
So, Alex, with a steady portfolio, I’m really intrigued by your future portfolio construction and what you look for in filling that, is it a process of hey we’re a little underweight in this strategy within seed and pre-seed, are we overweight in another, or are we just looking for you know all people who have high high potential for alpha? I’m curious because one of my mentors said as a fund manager, that it is critical for you as a GP to understand where you fit in your LP’s portfolio stack, and so I would just love to hear kind of your thinking behind as you continually like building upon the portfolio. How do you decide what you’re looking for?

Alex Kirk 14:38
We think about the portfolio holistically from this index-like coverage of the early-stage venture market, and what we try to do is not try and tip the portfolio in one direction or another. It’s too difficult for us to make those calls, and I think it invites a lot of you know consent. Or bias kind of risk, so one part of our approach that helps us really stay rooted in this you know kind of strategy and approach long term is we have a preference for generalist strategies over specialized or you know factor focused strategies. We really like the generalist approach to the portfolio because it allows us to spread our exposure across the startup market without having to make any type of bet as to you know which is the right future sector to be in, and our managers generally steer the portfolio exposure for us based on you know their read of what products are being built and where the founders are headed. It would, you know, I think instead of you know us steering that ourselves, we’ve tried to remove that as much as we can and let the portfolio really cap weight itself, just based on where the market is moving.

Earnest Sweat 15:57
The one follow up question to that is, however, I’m sure from that that strategy, if there’s like technological shifts that we’re experiencing right now with AI, you’re going to feel that as we’re going through this transition period and before this becomes a ubiquitous, just like part of technology, you’re going to feel that overweightness, right?

Alex Kirk 16:20
Yeah, that’s kind of how the cap weighting piece of this works, and so you know I think if you look historically in the portfolio, there have been shifts where, let’s say 10 years ago when we were getting started, the market looked very different. It was certainly less AI focused, and there was an AI component in the portfolio, and that’s actually showing up today in that portfolio for these companies that weren’t, you know, the core focus for many of these funds. But the generalist approach, through the generalist approach, managers were still investing in these companies and spreading their bets across kind of a wide pool, and so I actually don’t remember what it would have been about 10 years ago. What was the hot area? But today it’s obviously AI, and there’s a large portion of the portfolio going into AI. But as we think about looking ahead, we’re pretty confident that there will be a number of winners both in the AI space and in kind of these lesser known areas that will grow into being you know whatever the future winners tend to be.

Alexa Binns 17:43
If your entry point, you’re looking at sub 50 funds, fund ones. What’s the relationship over time as these GPs, some of them go on to develop more franchises? What do they cycle out?

Alex Kirk 18:02
Yeah, it’s a great question. So for us, it comes back to the whole focus on process and how that manager is set up to deploy the fund and really execute the strategy over time and kind of multiple cycles. And you know that’s something that we can underwrite as part of our diligence process, and we continue to kind of reevaluate that ahead of each fund cycle. We’re typically a continuing investor with our managers because you know we’re believers in their process, and where we do tend to cycle out is when there you know is material change to that process. So you know, like you mentioned, the manager decides to materially change the strategy, whether it’s you know things like portfolio construction or the stage focus or you know various other reasons. That does happen, and it’s often a natural process of scaling and evolving as a VC firm. So our goal is to maximize the life cycle of that original process and strategy, but we do look to maximize the relationship of all of these managers for as long as we can.

Earnest Sweat 19:14
Alex, during our prep call, you spoke a little bit about a trend or tendency of investors to kind of have to show their over preference for certain factors that have some perceived edge or predictability. In that example, you were talking about VCs having over preference for serial entrepreneurs, or even allocators having over preference for kind of you know big brand proven firms, talk to me a little. Talk to the audience a little bit about how you know how you are diligent for that, as well as how you keep yourself in check to not have those you know follow that trend.

Alex Kirk 19:58
Yeah. So something we focus on. As part of our thesis, our strategy is doing our best to remove structural biases within our venture portfolio, and that can mean a lot of things for us. Some of those are, you know, the preference for generalists over sector specialists. You know, we invest with both solo GPs, multi partner firms, fund ones, etc. We want to make sure that we’re seeing everything, or that we’re not narrowing ourselves and missing potential outliers. So, you know, said another way, we’re trying to avoid rigid pattern matching. And there’s a natural tendency in investing to pattern match, and you know we’re wired as humans to build heuristics and to look at what’s worked before and try and use that to predict what will work next. But venture is just such a unique asset class, and the whole nature of outliers is that they’re disruptive and unpredictable. And so when you take that very you know the natural instinct of pattern matching, and you try and apply it at an early stage, it can actually stop being a tool and start being a structural bias, and you can see where that leads once it’s in place. You know investors narrow down their sourcing to things that they can feel they can actually evaluate whether or not those are real patterns or signals or just noise. And so for you know I think you mentioned as a VC that’s the proven serial repeat founder with the right background, the right pedigree for an allocator that can be the manager with a strong prior fund. You know the spin out from a brand name firm, the track record that suggests some kind of repeatable edge. I think all of that feels like discipline, and nobody should be undisciplined. But you know, I think what I’m more focused on is that early stage works very differently compared to almost anything else you can allocate to, and you know, in a power law business, a very small number of these outliers drive the return for the whole asset class, and it can be extremely costly in a power law business to screen out potential outliers to the point where you know they’re not in your funnel at all, and you know, there’s lots of data out there that says things like you know, fun ones tend not to have material track records, but they generate strong performance, and you know, they they have a a meaningful share of you know finding these outliers, and the same goes for founders.

Alexa Binns 22:56
The fund one bias. If you have more detail or data you could share on why you’re excited about fun ones. So many people are nervous about them. What is it you love?

Alex Kirk 23:10
There’s this really interesting thing that happens at the fun one stage, where your surface area for luck and your surface area for skill are very unique to that fund one stage, you know. As you continue to invest and raise more funds, your surface area for luck actually decreases over time. Your surface area for skill might increase over time, but that luck component just naturally decays over time. And so, what we really like about that fund, one stage for these managers is that that’s mathematically when you’re the luckiest, and I know that luck and skill is kind of a, you know, a separate conversation in investing. But we think that that’s attractive. It offers an attractive time to be investing with managers, and we spend a lot of time focusing on you know finding these fun ones when we’re looking for new relationships in our venture portfolio, because of that component and also because it allows us to back a manager that we then have a lot of runway for you know it really maximizes the life cycle of the relationship there.

Earnest Sweat 24:18
I love that framework of skill versus luck and the surface area for it. It immediately takes my mind to why a new band or new musician has such a great first album and has difficulty with their sophomore album because they’ve been waiting their entire lives to make this one album or one movie, and and now they need to produce, and maybe they have had some success for that second album, and then you start to have an over preference, and so then you start to lose out on some luck because you’ve been now you. You have your frame of like, oh, I only can do this to be successful. So that totally makes sense. What I’m curious about is just the future of the seed market, where you see it going. On our prep call, you talked about there. You know, you’ve seen several three years on, three years off of many cycles. First question about the market: What do you feel is genuinely different about this one?

Alex Kirk 25:31
Yeah, we we do our best as it relates to how we invest, not to let the macro side of things drive decision making, but with that said, this you know AI innovation super cycle we’re in has certainly shifted the market in a number of ways, and you know I don’t I think it applies to the entire market broadly, but it’s an important subset for sure, and it feels like the speed at which companies can really scale has has accelerated, and that’s had a big impact on pricing, both for you know entry values and also for exit values. And I think that you know the biggest and most important shift has been on the exit value side, or you know on the implied exit values, so you know we’re seeing trillion dollar valuations, IPOs, you know that that has a profound impact on the investment case for these startups, and it has a downstream effect on companies that sit at valuations below that. So if you’re holding a $5 billion dollar valuation company in your portfolio, and it’s still growing and compounding tremendously as a business. I think where these other companies are being valued now, it changes your appetite a bit for continuing to hold on to these growing assets because you know you can see now what the market will allow them to grow into with some patience, whereas before you might have seen that $5 billion mark as you know a more obvious exit point. So you know, while I don’t have to make those the selling decisions, thankfully I you know I certainly recognize the sentimental shift that’s happening, you know largely because of what’s going on with AI,

Earnest Sweat 27:22
with that those characteristics of the market and how fast valuations can go up, specifically if it’s something within when within or around AI, I’m curious, what do you think is going to happen between the delineation of pre-seed and seed because I’ve been talking to a few friends who are in that market and they believe there’s a convergence that’s going to happen for a certain subset of asset classes or certain subset of company opportunities. What’s your view on it? Do you think they’ll actually just merge and be kind of one thing?

Alex Kirk 27:59
Yeah, it seems like it’s heading that way a bit. You know, the clear delineation between what was pre-seed, what was seed, it feels like it’s blended a lot more of late to anything pre-series A, and and we kind of think of it that way as well. We look at it as a kind of first institutional check stage because the naming and the framing can change over time and it does seem to be blending a bit. And so our goal with that is to just stay rooted at whatever the earliest possible entry point is. That doesn’t really change. You know, the pricing might fluctuate or the terms might change a bit, but you know I think there will still be a first check stage, whatever it’s called and whatever the terms are. I won’t pretend to know, but you know, it seems like it is blending into more of that looser term kind of stage right now.

Alexa Binns 28:57
How do you appreciate GPs having to sort of shift, given the pricing too. Like I guess there, there’s the camp that sort of says we are going to be very committed to our ownership. We’re going to be very committed to our entry price, and you can trust us that we’re not going to, you know, fall into the trap of the Zurb era, and then there’s another set of GPs who are sort of saying, the entry price is the entry price today, and these are the best companies, and you’re you’re paying us for access, so we’re we’ve got it, and this is we’re gonna win these opportunities. Do you need both in your index, or are you preferential to one or the other? If you’re trying to hit the outlier, or if you’re trying to only get those outliers, if the point of the index is to get the outliers. Are you in fact more open to these sort of like the price is the price, folks?

Alex Kirk 30:08
Yeah, it’s a great question, and I would say that both are important. And when we think about it, it again it comes back to that whole notion of process, and so we like consistency, and so there, you know, there’s there’s a balance between deploying capital as quickly as possible and deploying capital too slowly because you’re waiting because things feel expensive or you know a number of a number of reasons. So there is a blend there, and I think the balance is that we like to stay in process, and kind of the market, what’s happening in the market is the market, and it’s a bit out of anyone’s control. There’s a portion where you know I think he said something like we’re paying for access, and I think we would agree with that. We are investing. We like consistent deployment because if you’re, if you think about a typical three-year deployment window, and that’s across two years where things feel one way, and one year where things feel another way, and so let’s say you change and and you change your your process and your behavior, and now you’re spread out more over five years, those investments in years you know four and five have a shorter compounding window now, and so they have to be better picks or better better companies ultimately.

Alexa Binns 31:55
What’s so surprising about this sort of indexing approach is I don’t see other people doing it, and I consider this show a little bit of a listening tour of like, what do the LPs want? What are they hunting for? Like selling is easier if you know what people are buying. And you all initially were doing this as a single family office, and your LP colleagues came to you and said, “Hey, can you take our capital too? This is proof that this is something you know LPs are looking for. Is there like a posse? Are you guys all like the quant fund guy? Like, is there? Do you have a WhatsApp of like ex hedge fund day traders who are all doing the quant version adventure.

Alex Kirk 32:47
No.

Alexa Binns 32:49
Why? Why are they? Why do you know? It seems like this is a very backable strategy. This you know.

Alex Kirk 32:59
I think there’s there’s a gap there with just how you know the rest of the fund of funds or maybe the rest of the allocator market historically has approached things and that’s I mean that’s certainly why we approach the the the asset class the way that we did so I think what what we’re more in the minority on at times, and so a you know a WhatsApp group would be helpful. If you know being an LP and trading notes with LPs who you know kind of think about the portfolio construction and things in the way that we do. We we have you know a number of our funds tend to be on the more diversified portfolio construction approach rather than more ownership driven things like that, and I think there’s a big LP demand for you know that that more ownership driven style, and so when we know of LPs who are interested in kind of the same profile and portfolio construction that we are, we we do tend to to share things around and you know coalesce around some of these GPs because you know I think the the minority we’re in the minority in the LP world for for backing that type of portfolio construction.

Alexa Binns 34:17
My prediction is you will have copycats, Alex. They’re coming. You can interview. Alex is Alex. You can give him your money, or you can try to do what he’s doing. It sounds easier to just give him your money.

Earnest Sweat 34:33
Yeah, that’s yeah, that’s probably better. Alex, you know, you reiterated a number of times through this conversation, the importance of process when you’re diligencing fund managers, your own process. To that point, what are a few of your favorite questions or tactics to really understand the fund manager who is across the table from you? One

Alex Kirk 34:58
things that we like to do. Time with, especially with, let’s say, a fund one is thinking through their long term kind of vision and goals for you know their fund. Maybe a few fund cycles into the future. I think it really helps to understand what they see themselves doing with you know kind of their firm and their strategy over time, and a lot of managers, most most managers I think that are doing this, you know, at Seed really love the stage at which they’re investing. I mean, they’re they’re really driven by meeting founders and finding new founders and staying on kind of that forefront of, you know, the innovation curve and just being ahead of of all these new and next exciting things, and so really understanding that and seeing what motivates the GP is something we we spend time on and thinking through a relationship for you know multi fund, multiple cycles of funds, and then we’ll spend time going through the portfolio construction. That’s where we get into a little bit more of the quantitative side of the process. You know, if you picked, let’s say your fund size is 25 million, walk us kind of backwards through the math on on how that 25 million is deployed, and that that really helps to get and you know understand how the GP is thinking about portfolio construction and kind of how they arrived at the number that they arrived at for for fundraising, and you know it’s a simple kind of back of the envelope conversation, but it it teases out a lot of their thinking on things like the size of check they can write into rounds and and this and that. So it tends to be a kind of a helpful conversation.

Earnest Sweat 36:53
What my last question is is what strategies should people just stay away from within the seed market, seed venture market, this could be from the perspective of a fund manager or an allocator.

Alex Kirk 37:10
I think it’s really challenging to be investing at multiple stages. So you know, I think we’ve seen not often, but you’ll occasionally see funds that are doing some at seed, some at kind of Series A, like very multi-stage blends in deployment, and I think that’s really competitive. It personally isn’t a huge fit for us. If I don’t, it certainly can work for some. I think it’s really competitive. I think being rooted in your stage is a really important part for being able to successfully access deals and deploy capital.

Alexa Binns 37:51
Any other final thoughts on sort of things where you see yourself butting heads or having a different opinion than a typical allocator,

Alex Kirk 38:02
I think most of this has typically been you know we’re one side of the conversation versus another. I I think we’re starting to see a shift towards kind of diversification in in portfolio construction, and I think part of that is you know there’s a lot of folks now who publish you know data, CARTA things like that on on kind of the portfolio models and how the math kind of benefits you there as a fund manager, and you know, there’s a number of these firms, some in our portfolio, some just that we know or that are in the market, who have who deploy diversified portfolio construction, and they have struggled to raise over you know their early fun life and their early fun lives or their early funds are you know showing Meaningful performance and you know meaningful success, and so I think that there’s a lot of evidence now that the that you can win both ways in venture, and and so I think that is hopefully becoming a more mainstream kind of approach that’s that LPs are recognizing, and it seems like that’s becoming the case.