Alexa Binns 00:00
Welcome to swimming with allocators, the VC podcast, from the LP perspective, with your hosts, Alexa bins and earnest. Are you ready? Let’s dive in. Welcome to Meghan Reynolds. You have probably read her tweet or her LinkedIn posts on this topic of this podcast, she’s the partner at altimeter, in charge of all capital formation and talent strategies, formerly managing partner at TPG and VP at Goldman Sachs, and she’s going to talk with us today about some practical tips on capital formation, integrating public and private market insights, as well as navigating the current BC liquidity challenges. Thank you, Meghan,

Meghan Reynolds 00:44
Thank you for having me. I’m so happy to be here. So happy to be spending this morning with you all and your listeners

Alexa Binns 00:53
well as your team mistook this for an actual allocator swim. Hopefully you’re not disappointed that all we’re doing is asking you to chat.

Meghan Reynolds 01:06
Very relieved, very relieved. Yes, my team saw this on my calendar and did think that I was going to swim laps with a lot of LPs this morning in some sort of allocator group swim. So no

Earnest Sweat 01:29
great, but great idea. We’re looking for a sponsor for that

Alexa Binns 01:36
Jumping in, if you don’t mind, we love to sort of ask people how they got to where they are today. Do you mind giving us a brief background on your Goldman Sachs and TPG time?

Meghan Reynolds 01:47
Sure. Yeah, absolutely. So I think I’m, you know, somewhat unique in someone of my vintage. I guess that’s a kind way of saying that I’m old, that I have spent nearly my entire career in capital formation, fund raising, alternative investment, client service, investor relation, sales in some respect. So that’s coming up on 25 years, and that was not by design. I studied accounting, finance and undergrad. I had no idea what I wanted to do coming out of school, except I knew I was very intellectually curious and really wanted to have some financial stability in my life. And found my way to Goldman Sachs in a very lucky turn of events, and in an even luckier turn of events, I was placed randomly in a small, little boutique group within their asset management division that was just emerging, called the private equity group, and that was a private equity fund of funds and emerging secondaries business that was raising capital from institutions to invest in this new emerging asset class, and I was meant to be an investor. I worked on some operations related to those funds to start and very quickly, was asked to work on a fund raise about six months in, and never left that side of the business. I stepped into what turned out to be a great role for me, because it was very multifaceted. It was you had to be very deep inside markets and investing and analysis, but applying that to raising capital. So working with various people, you had to be a good communicator. You had to be a great listener. Great listener. You had to, you know, be willing to speak, build relationships, all of these different, you know, it was a really well rounded skill set. Let’s put it that way, that also let me travel all over the world and meet really interesting people and learn and just learn a ton at a time when that asset class went from an average of probably less than 2% of institutional portfolios to what is it today? I don’t know the actual figure, but probably 2015, to 20 on average. And so really have been able to ride that wave of growth of, you know, private equity, which is obviously so much more than private equity today, private credit, private real estate, all the strategy sub strategies within private equity, like venture and buy out and special situations. I’ve seen it all. I was recruited to join TPG when TPG had grown to be about $ 40 billion in assets and had raised six. Massive buyout like buyout funds that had grown to be quite massive, they just raised a $20 billion fund, and only with about four people that had ever done anything related to client work, fundraising, Investor Relations, and we’ll talk about this a little bit. But that works until it doesn’t like it works when you have great performance and people will, you know, will fund you without great communication or any really refined sales process or coverage. But it doesn’t work in in perpetuity, and certainly not if performance is challenged. And so I came in and was probably three of us started on the same day, just rough justice, but was probably higher number five or six or seven on that team that today, you know, TPG is public company, and 200 plus billion in assets, and 50 60, people on that team. I ended up running that team with a partner of mine, and we grew we, you know, tripled the firm’s assets in the 10 years that I was there. And it was a really fun ride. And and joined altimeter about three years ago. I was ready for a change. Was really craving another entrepreneurial ride, and had been lucky to get an of exposure to everything that was going on in venture markets, and was truly again, that intellectual curiosity was just so captivated by everything happening in technology, as well as just the evolution of VC classes as and tech as its own sub asset class, if you will. So sub strategy was going through its own boom and bust, and I think that that attracts me to where my experiences add value and altimeter and Brad are just really, really Brad Gerstner, who runs the firm. So applying my my skill sets here and and having more fun than I’ve ever had, that’s

Earnest Sweat 07:08
awesome. And Meghan, before we get into what you’re currently working on, I’m curious. You know, so many people are, you know, have some hesitation about capital formation, fund raising, and intimidated by it? Was there any kind of one or two experiences that kind of made you maybe not at ease but feel more comfortable in, like, taking this on, or was it kind of just a natural skill set that you felt like you really aligned with that function?

Meghan Reynolds 07:39
You know, I was really lucky being at Goldman Sachs when I started the role, because they were already pretty far along in this kind of defining and nobody called it capital formation. Then it didn’t really have a name, and I’m so happy that it has a name today. Literally no one knew what to call me. I was just part of the investment team, but I didn’t really do investing like that was just how it worked in the beginning, and then it rolled into product management. But I was really lucky that I was within an organization that had a lot of institutional clarity around what needed to be done to service investors well. And they had that, not because it existed just in this private equity group, but from a very well established asset management organization that had a model to follow from other asset classes like public equity and fixed income and hedge funds. And so there were these clearly defined roles that would be played, like there was a sales group, and then there. We knew we needed to service investors through investor relations. We needed it. We needed to provide the strategy for our funds. We need it. We knew we needed to do all the materials. We ran our own annual meeting, we ran campaigns. So I was very lucky today in starting there that I was able to learn in a place that already had a framework for capital formation, I think a lot of firms and people don’t have exposure to that early, and especially deal people that are starting investment organizations. They’re ideal people, yeah and so that the organization around that means is intimidating, doesn’t they really know what it means or how to even start to organize around that. And so I was lucky to have that exposure early, that that role definition was very clear to me pretty early on, and TPG didn’t really have a definition for it. They called it fundraising. They didn’t really have a definition for it, either, but they brought it. And a bunch of people actually, my partner and I that ended up running the group, both came from Goldman and knew right away, okay, you need sales coverage, you need product, you need investor relations, you need like we came in and there’s a reason they hired people out of the banks, yeah, and placement agents, because there was a very clear de we knew what kind of organization you needed to build to service investors

Alexa Binns 10:23
For those people that this isn’t a natural skill set, any practical tips or recommendations on you know how they can, how they can be more like You? Oh,

Meghan Reynolds 10:36
gosh. Well, I’d say first and foremost do not underestimate the time that you need to spend on the capital formation part of the business. The beautiful thing that the organization that I come that I came from, recognized is that this is a critical and valuable piece of the business, because there is no business without your

Speaker 2 11:10
capital. Yeah, none at all. And

Meghan Reynolds 11:13
I still see people underestimate it. I still see people underpay for it. I think you know, the two organizations that I work at where I started my career, that was the front of the firm, and they compensated you accordingly. And they, you know, they really treated you as, you know, just right alongside the deal people in terms of level of stature, importance, respect and a lot of focus was given to that piece of the business. And the leaders of the business focused on it like they spent time on it. And so those emerging deep people study it, study how to build relationships. Study how the great asset management leaders like Steve Schwartzman or David Bonnerman, may he rest in peace. My former co-head of TPG, who passed away this week, Jim Coulter, David Rubenstein, they, they were you one at one time, and they were really refined capital formation executives at the end of the day alongside a great investment judgment. And so just like you would study great deal makers, I challenge you to study what those great business builders have done in terms of building relationships, in terms of servicing investors. So that’s first and foremost, my like, my one tip, and then I could, we could go into lots of other tips, and just like the different parts of the business and the different parts of the role, at any time, you want to dive into that a little deeper.

12:52
Well,

Earnest Sweat 12:54
I think, to your point, it made me think of, I’m starting to see a trend of even, you know, first time fund managers. Maybe they’re spinning out of their established fund, but the first hire they make is somebody who’s a COO who has covered capital formation before at another place. And so you’re starting to see people instill that and see how important that is. I was watching a video of you the other day because where you were saying that you have to always be fundraising, and so having that mentality of, like, always having these long term relationships, you’re even seeing it in venture which is, you know, historically, been a cottage industry becoming more and more institutionalized. So I think that’s aligned with, like, people realizing, if they’re if they don’t have that skill they need, the first person they bring on needs to have that skill.

Meghan Reynolds 13:44
Yes, or there’s great service providers that can help. I mean, there’s, there can be this negative connotation around placement agents, because, especially in venture, there’s this feeling that a, you know, oh, if you need a placement agent, then you’re not. You’re perhaps saying that you know you need help when you have relationships or you have capital that’s already starting. But sometimes what those service providers can do is really teach you what great looks like if you can’t afford it yourself. Like they have relationship coverage, and they have people that just help you with your marketing strategy. And now, sitting in an organization where we have access to because altimeter has a public business and a private business, we have access to cap intro for the public business at the banks. And I had never, we TPG had had a hedge fund, but I had never really, I wasn’t, you know, I wasn’t focused on the business, building that piece of the business as much so coming here and realizing what cap intro provides to emerging hedge funds and establishing hedge funds. It was a complete eye opener. What a lucky industry that they have a service that will be provided to you. Well, they will tell you how to build your pitch book. They will teach you. They will point you to the investors that are actively allocating. They will help you refine your pitch. They’ll give you advice on how to communicate in an ongoing way. They’ll teach you what great looks like. Private Markets do not have that. And it’s very, very difficult in what is probably a more competitive business today, just in terms of the number of emerging managers. And so it’s really, really a struggle, particularly just given the number of funds out there you really have to navigate it on your own. And I’m glad that some of my work has contributed to that kind of next generation of amazing managers, hopefully in helping teach what good really looks like. And then maybe the last thing I’d say on that is just, you know, and this is to the emerging manager, like, don’t underestimate how important it is. I think that people believe that if you deliver great returns, it’ll all just follow. And that did work at one point when people were growing the asset class, and this is when I say I was lucky. You know, there were five firms doing what we’re doing, there were 10 firms doing what we’re doing, like there are 5000 firms doing what you’re doing today and competing for attention, that is an impossible place to be. I mean, you’re like, I was sitting to someone the other day, like trying to think of markets that have as much competition, like just a product where you have 5000 choices and umpteen choices, if you think about how you might allocate between different strategies within alts and your experience needs to be more than returns if you’re an investor like the investor experience matters a lot the client experience of what it is like to interact with you, what it is like to receive information from you, like that is part of your differentiation. And just like if you were, you know any business like client service is so critical the client experience like and I just see it underestimated, but the great ones know that it matters, and the great ones you know really understand that that defines your business in just just as much as your returns can define it.

Alexa Binns 17:55
Yeah, that’s like, that’s a very helpful reminder that you aren’t you? There’s only a select few who can truly just deliver returns and not expect people to have any information along the way. This is you got to bring, you got to bring your investors along on the road and another thing I’ve been hearing from placement agents is they have their pick too right now. And so it’s an interesting flip flop, where, in the past, if you were a VC, maybe you thought, oh, would I want to use these guys? Would I not? And the placement agents, at this point, actually only want to represent the folks. They believe they can really help raise and so it’s, it’s a, I think, helpful conversation to just go have a conversation with a placement agent or two, to get a little bit of a reality check on where you fit, compared to the other things they’re out there pitching,

Meghan Reynolds 18:55
Yes, great advice. I think it is. I mean, sadly, I think about the emerging manager landscape, yeah. And my advice is, think twice. Yep, what are you really going to bring that’s different and special that will if scale is what you’re trying to achieve, it all depends on your goals, but if scale of some sort is what you’re trying to achieve, you really need to think hard about achieving that. And people will do it anyway, obviously. I was talking to my friend Rudy, and we were talking about, you know, that it’s basically at this point, it’s like, going to Hollywood. Yes, it’s like, you’re competing against unbelievable talent and people who have all done amazing things and like, there’s established talent that has already made it that they’re going to get. So they’re just gonna get the repeat roles, and they’re gonna get the big, you know, the big contracts, and they’ve got an agent that’s doing it for them, and you’re coming in and you’re amazing, you know, triple threat, but you’re trying to break it like it is that or restaurant in New York. I mean, this is that net, that level, and there are people that are just bold and convicted and that talented that they will break in and they will be successful. But it is during 2020 2021, it got really easy to start a fund, yeah, yeah. And now that that’s just my advice to people like just really think about the market that you’re entering living

Alexa Binns 20:43
in. LA, I came up with a reality show concept called go home. You get the chance to appear before a slate of judges. One will give you an agent contract for modeling or singing or acting, whatever.
Meghan Reynolds 21:25
And then there’s the people that are like, You know what? I’m not going home. I’m gonna prove it to you, and bless them all, well, you heard it here for first I would watch that show, yeah, there’s a, there’s a venture capital version of that. Just go home. Go join someone else that’s doing it already. Go join a big platform that will help you build your track record. Go, you know, and also, just like, think about this. This is not a get rich, like, quick, this is a 20 year,

Earnest Sweat 22:03
very slow.

Meghan Reynolds 22:04
In the words of, oh god, what’s that? Jerry Maguire, it’s a 20 year, you know, pride, swallowing siege, it is. It’s that hard, and it still is, by the way, for me today, like altogether has, yeah, an incredible track record. Brad is a legendary investor, and it’s hard, yeah, to build new relationships, yeah?

Speaker 2 22:27
And no, that’s so good

Alexa Binns 22:30
to hear for folks listening. You know, this is not personal, actually. This is just statistic, and

Earnest Sweat 22:38
it’s just the market, just the market right now, although Meghan, now you’re going to make me think, like, all right, am I John Hamm like, like, I’m just waiting on my mad man. But I see your point. Like, you actually need to know why you should exist. We hear that all the time in all our interviews like, Do you know why you should have the right to exist and how to sustain because even the best and the most storied firms are, you know, it’s difficult and it’s more competitive, and from that competitive perspective. How do you think GP and LP relationships are going to like change over the next decade? I think

Meghan Reynolds 23:30
it will definitely. We’re entering a new regime, and I think that this has happened in decades, or maybe you know kind of you’ve gone through these kind of five to 10 year phases of the industry, and I think that buyout went through it already, earlier, and ventures are going through it now. Buyout went through a lot around the financial crisis, like buyout had the big boom in the early 2000s went through the financial crisis. That’s when all the buyout firms hired capital formation teams. That’s when you saw firms go away. You saw, you know, there were tons of middle market firms emerging. They refined their process like I think ventures, the big got bigger, and there’s and more specialized firms emerged. I think that ventures going through that right now, and it’s in its next phase. It’s in that phase. And I think the challenge is that people have very many allocators. Most institutional allocators have large venture growth technology exposure already. Yeah, yeah. And there’s not. There’s no wave to ride in terms of fresh new capital emerging that people of the last 10 years got to ride. They had lucky timing, because they had time to build a track record like there is no huge fresh wave coming for most institutional allocators, again, and everything I say is, is a sweeping generalization. There are always exceptions, everything from wide, like breaking in and all of that stuff, even what I put on Twitter, that’s just one perspective, but it is. There are always. There are always, you know, I just met somebody this week that’s building a new venture program, and it’s a large institutional pension, but it is few and far between. And so what does that mean? I would say there is, there’s something that happens in this phase, then a couple of things. One, there’s consistency that emerges between how firms communicate with their investors, because the standards start to emerge. And the same thing happened in the buyout. So there was no standard reporting. There was very little information. That is now, again, you have to compete for capital. So the LPS have all the leverage, and so they’re going to demand, like, a certain level of transparency, a certain level of communication, a certain amount of institutionalization around your process, very clear about timelines. You can’t stuff people by saying you’re coming back after a year with a capital raise or, you know, do things that are really off piece, because it’s just you’re now working within a framework. And again, there could be exceptions, and there always are exceptions for phenomenal cases and firms and things like that, but this is what happens in this phase. And so I think there’s more consistency around the levels of communication, transparency, I think there’s more institutionalization of process. And so what does that mean? That means in this phase, because it’s so competitive, you really have to be more creative in how you build solutions for people and really understand what each individual investor needs. We met with an investor last week that we were, you know, talking about expanding our relationship, and we’re listening. We’re saying, You know what? What’s really important to them is training their team, and what if we could help them understand venture as an asset class like maybe that helps them build a relationship. So I’m talking mainly now about the big institutional side of the business. Maybe it’s separate. I think separate accounts will emerge. I think that there are unique co-investment structures. Again, this is where it gets creative. It’s not just that I’m raising a fund, and that’s it, and it’s two and 20, and that’s with a step up, and that’s the end to go like there are unique funds, structures, solutions, relationships that emerge, that help people find a way to capital. And then I think there’s this whole other piece that’s a really interesting part of market that’s happening in the next 10 years, the long relationship with the emergence of the retail LP, yeah, and that is actually a wave of fresh capital coming into the asset class, and I’m very fascinated by how it’s going to unfold. And that’s private markets generally. That’s not just venture that is private markets generally, and that is something that’s unfolding real time. Secondaries, liquid solutions, bank platforms, have been around for a while, but they’ve really been limited to certain wire houses and certain structures and super ultra high net worth. And I think that I. With the returns that have happened in private markets, with the lack of institutional capital at the ready, and with the returns that are like with just the returns that are happening now in private markets and companies staying private longer, I think that there’s this effort underway to realize that, unless you’re an ultra high net worth individual or an institution, you’ve completely missed out on this entire category of investing for the last 20 plus years, where all the best like, where some of the best returns have happened, like alternatives have outperformed Traditional markets. And so how can we translate that to a more retail oriented best investor and, and we’re seeing bits and pieces of that emerge. There’s some really interesting products out there, and that is gonna that’s my prediction of the next 10 years. 10 years from now, I think it will be a more pervasive asset class and we will need to adapt our organizations to account for that. Now

Earnest Sweat 31:06
We’re going to take a quick break to speak with our sponsor. Now we have the pleasure of having our guest today, Luis Rebello. Luis serves as the director in the technology banking practice at Silicon Valley Bank, focusing on venture capital backed technology startups in Florida. He provides strategic advice, banking services, including debt financing, to these companies. With that, I want to just welcome you, Luis, to swing with allocators. Thanks for being here. Thanks for coming to Miami. I love Miami, especially during the winter. You spoke about a little bit, but just like the importance of having the local knowledge and understanding of this, this ecosystem, to actually succeed in being a great service provider, could you talk a little bit about, like, what are the what other people might get wrong if they’re just like, you know, throwing a team together here, yeah,

Luiz Rabelo 32:03
yeah, I think Florida, like any large state, right? I’ll make a comparison between California or Texas. Yeah, they’ve launched Florida in particular, geographically challenging places to cover from that service without respect in but even as an investor, I think Florida has the sub cultures right, both culturally, but also just regions that are vastly different from each other. And so I think being on the ground allows you to really get into the fabric of the community, understand the local challenges, but also kind of the regional preferences and language that dominates, or the second language that comes into play. And particularly in Southeast Florida, where you have this element, like a gateway city, right? You have three international airports, airports, and then you have people coming, going from all over the world, but particularly, I’d say the Northeastern US, South America, Central and then Europe.

Earnest Sweat 33:09
Yes, Western

Luiz Rabelo 33:10
Europe especially. So I think Miami brings many people together in relation. Very interesting, right? And so this is like the fourth corner of the country, the venture hadn’t yet quit, tech FD hadn’t yet quit, doesn’t deal with you, yeah. So it was only fair, though, right? Yeah. So I think the dynamic here presents a few challenges, that if you’re not on the ground, and if you don’t get to know the people, you don’t think of yourself in the community, you’re never really part of it. It never really becomes a part of you, yeah, you know. And so there’s an exchange that has to happen. And I think it takes a few years to really, you know, decide that you’re going to call home or that, that this is where you want to be on the term, yeah. So I made that same year ago, and I think over the years, I’ve gotten to know many people that also have red Amon before it is a state of migrants. Yes, the migration, but especially foreign migrants. And I think that’s a unique feature to Miami. It’s a major city. It’s a major city where I heard with a stat, and don’t quote me on this, but probably about 60% of the red lady to foreign born. And I think a lot of those people choose to perceive their happiness by way of entrepreneurship. We specifically, in SVB focus on the category of venture, absolutely. And so I think Miami, South Florida, Florida, presents a unique set of features and also opportunities.

Earnest Sweat 34:46
Yeah, just hearing about how you speak about the entire community, it is like a melting pot that is going to have a lot of innovation, different perspectives, and uniquely in a way, I’ve respected it with Miami. In South Florida overall, not trying to be Silicon Valley, right? Like, I think that’s the problem a lot of ecosystems have, is we want to be the Silicon Valley of the east or whatever. that place is unique. You’re unique too. Be whatever you are. What challenges and opportunities do you see for investors who are looking at Florida startups now?

Luiz Rabelo 35:40
Yeah, I tend to focus a lot on the opportunities, yeah, but being aware of the challenges and how to navigate is extremely important. So I think first of all, you indicate you touched on it. I think it’s understanding the conflicting narratives. Yeah, getting the community, understanding the facts and realizing that there’s a different side of that. I think there is a tremendous opportunity to realize that the profile here is unique to any other major city in the US because of the demographics. And if you, if you want to draw parallels to like any workers, members of go do so, which is a New York of 100 years ago, 100 years 50 years ago, when a lot of immigrants were landing more absolutely right, and they were starting new businesses, and they were first generation Americans, I think if you made those parallels, and you extrapolate that forward, anything? Wow, there’s so much potential. Because every major American city that has had such a big influence of migrants is there, within the 1020 year period, maybe even if you go back to the 60s, I think there’s also essentially a development expansion opportunity. And I think Miami, South Florida, is experiencing that today. And so I think while it presents a challenge of understanding a different shade or flavor of culture, yes, right, I think it also presents an opportunity to expand your horizons and work with founders that think very much globally, in a way, right? They’re not just thinking, Well, let me just do the US, and that’s enough. It’s like, No, it’s not enough because, you know, I was born, or my parents were born a foreign country. I speak that language. Why not, you know, scale to Brazil. Why not scale to Europe at the same time to upscale in the US. Why not hire someone from a foreign background that has a second, third language, right? And I think, why not have a remote team that’s developing software in Colombia, where, you know, we have many people, Ukraine, Eastern Europe, and so I think the founding here bring that dynamic to the world of venture I think Other challenges include that the concept of, you know, access to workers, particularly software engineers. Yes, our ecosystem would not build on the backbone of, I must say, world renowned universities like Stanford in the Bay Area, or MIT and Boston, or other universities you have in New York. We’ve had some of our home drug universities, which, you know, we think are great, yeah, but they may lack specific skill sets, or they may lack specializations that venture the world of tech on to see, I think there’s opportunity to invest in that. We’ve seen many universities open remote campuses here, okay, and I could probably list five or six that are offering courses locally. So that’s, that’s a, I think, foundation point right of supply needing demand, sort of say. But I think there is a challenge where we, if you want to hire locals, you have to be more flexible. You have to be willing to convince someone why this is a good place to live, right? But I don’t see it as an impediment, not at all as a matter of fact, I’ve seen many boundaries successfully navigate that challenge and still raise capital to scale their businesses, especially in this remote world. Yeah, you know, you don’t have borders, domestic orders, exactly. So I think that that’s another dynamic. So talent, access to capital, is an interesting topic that you could probably spend some time on, because I think historically I was able to hold up capital. Yes, yes. You see in the Jets, the yachts,

Earnest Sweat 39:45
real estate, the

Luiz Rabelo 39:48
family offices here, but they may not have looked in their own backyard as a place to invest in the past, but I think recently, not recently, I’m gonna say 10 years. Yeah, we have to think very hard. Long term for this business, right? But I’d say probably in the last five to 10 years, more and more investors are looking in this region as a source of opportunity. So I’ve seen a lot more of that happening. I think that’s where SVB has been a strong advocate and player, where not only do we provide business services like banking and LinkedIn, but we also serve as the connector in the ecosystem. We provide events, events like this one this week, right, that allows people to come together, network and form natural relationships. So that’s something I think, that helps navigate those challenges that help create an opportunity for the state.

Alexa Binns 41:02
Since you’ve seen this, this idea of sort of institutionalizing your reporting and streamlining your reporting, since you’ve seen that across these other asset classes, I’m curious. Do you think venture actually has access to this information, or is part of the reporting problem built into the style of betting like I’m curious, when you think about what information we have available to report. Can we meet institutional investors expectations if they have sort of a I don’t know, or is that? Is that maybe me just making excuses on behalf of ventures?

Meghan Reynolds 41:56
This is a great question, and this is something that I debate with people a lot who push back on me on the transparency point, because it comes down to the founder relationship and the Companies and what is confidential and what’s not, and what’s proprietary and what’s not, and I think that it’s going to have to start from its going to start at the top and trickle down. And so it really starts with founders and how they treat their clients like their investors. Yeah, and I think that there’s a whole class to be given to founders on what good investor relations looks like, because it’s shockingly bad. I’ve sat on board. I’ve been like, I’ve been lucky enough to have enough exposure to that that it’s hard and I get it. You’re starting like an early stage business. You’ve got so many things like, it’s impossible and you’re just trying to survive, and the last thing you’re going to do is, like, make pretty information for your investors and get back to them on a quarterly basis when you’ve got, like you’re working 20 hours a day, just grinding like I get it, there are so many challenges you can’t solve it all, but I think it’s just like, what it’s what people value and what it’s what investors demand at the outset of when they’re raising capital from founders, I don’t think if you’re at the seed and super early stage level, that there’s going to be this huge need for like, operating metrics that are disclosed to all of your underlying investors. Yeah, I think it’s much more straightforward than that. It is what is going on at the company.

Meghan Reynolds 44:07
You know, they,

Meghan Reynolds 44:09
like investors, get it. They know there’s limitations. They’re not, you know, they’re not totally immune to what you’re where you’re going through as a fund manager, but it’s, it’s really taking the time to give a enough of like anecdotes to give them a sense of, really, is it going well or is it not going well? Is it? And look, there’s a lot of trust in that. That is a leap of faith for your investors. I’ve seen it. People have trouble internally, like, people won’t even communicate what’s going on in their companies to other people on their own teams, because they’re so afraid of upsetting the founder, because of the leaks and there’s competition, like, and that’s a problem. Like, if you don’t trust your own team to keep it confidential, and then you have to trust yours. Investors to keep it confidential. And I think we just really need to think about, like, what is actually confidential, yes, and what is just basic standard information. And so there wasn’t a good answer in that. That was a winding road. But I think like, it doesn’t all have to look and look like a spreadsheet of operating metrics. Let’s put it that way.

Earnest Sweat 45:24
No, I think you’re getting to the point of trust and transparency. And I was talking a couple months ago with a friend who is in capital formation and has worked in venture firms as well as hedge funds, and her point of view after leaving a venture fund was, you know, things have to change, where they’re more like hedge funds, with transparency and just, it’s not the metrics, but like, what’s going on? What have you learned? How are you going to change your strategy based on it? And, you know, being in this business for a decade, I’ve seen that, like, there’s a level of humility in being vulnerable that I would say, on average, our industry hasn’t taken and maybe that’s going to be a differentiated factor for those who are comfortable enough to do that, to have trust of like, hey, we Know the risk of our asset class, but I’m actively learning and showing conviction,

Meghan Reynolds 46:27
and that is so important. As they think about committing your LPs, think about committing to your next fund, they have to have a true sense of how things are going, even though not a lot has happened, they have to know how you’re learning, how you’re evolving. And all of this can be this. There are different ways. I do think there will be some consistency that emerges the in the buyout end of the spectrum, there’s something called the institutional limited partners Association, who basically set standards, hard standards around oh 809, 2010, that just got laid out, they don’t really apply to venture because if you’re a great venture Manager, you can say, I’m good, just take your capital. No, you. I know firms that say, sorry, you asked too many questions. You’re out. We kicked you out. We kicked our LP out because they asked a lot of questions. Horrifying to me,

47:28
horrifying that

Earnest Sweat 47:30
might explain, would you treat

47:33
Do you like it? Is

Meghan Reynolds 47:34
How do you treat your partners? They’re just they just need to know

Alexa Binns 47:39
you’re lucky to be included. Meghan,

Speaker 3 47:44
you’re lucky. Yeah, you’re like, and like, hey, Taylor Swift, getting rid of a crew member.

Meghan Reynolds 47:52
I get Yeah, and I guess

Alexa Binns 47:54
a little high drama. So nothing,

Meghan Reynolds 47:56
yeah, no, thanks. You’re out. We have a waiting list, and if you know, you can be on it like that. Okay, that’s that’s one that is just, is that really how you want to be? Imagine being on the other side of that, like they think that this goes to reporting and transparency. Every one of the 95 plus percent of the people that are invested in your funds will have someone else that they need to report to yes about what’s going on in your business, and they are your advocate. They are your champions. They are the one that’s going to like and you need to feel what they feel, and be so grateful for their support and help them do their job. Yeah, it’s not just pitching a principle of a business, and you get and you’re going to get capital, and that’s the end, like it’s that’s why I say the person that’s asking those questions, that story adventure firm, that’s an endowment employee, that has a board that they like they are hired and fired on this job, and to say, like, No, we can’t answer those questions, you’re kicked out, is that’s fair. That’s, I don’t know. It’s just a little to me, it’s just a little harsh. But look, I also get that institutional fundraising can be very frustrating, like the institutional allocator process can be very exhausting sometimes and doesn’t always feel like it’s a process for the sake of process, which can be frustrating sometimes.

Earnest Sweat 49:35
Meghan, do you have advice for somebody going through that institutional LP process for the first time is, would you do you have any tactics on how to even kind of, I don’t know, characterize the market and certain types of going to pension fund versus an endowment versus a sovereign wealth fund, and things that they should know and can. Consider

Meghan Reynolds 50:04
there every investor. Not all investors are created equal, but there are definitely consistencies by Channel and understand the meaning of pen like exactly how you said, pensions, endowments, sovereigns, individuals. There are patterns that emerge. And I think one way to go about it is kind of solve for the most complex first, if you’re really going out and going to all, probably the most complex from in, from a process standpoint, from an informational data Room, materials standpoint, is the, probably the consultant community, that I would say, probably the consultant community or the pension community, just in terms of information that required, that is required. So look, I would, I would maybe start there and ask friends and or LPS that you know just or at like, call a consultant that you’ve had conversations with and say, Hey, I know I’m not in your process, but I would really appreciate understanding what your process looks like so I can know what great institutional capital raising looks like as I build my own business. Can you share your DDQ or your data room questions, because I don’t even know what people expect to be in a data room. I have a hard time like they’re going to take initial meetings and ask that question at the meeting, which I think is helpful. And a lot of those groups do have emerging manager businesses where they are supporting emerging managers so they will be inclined, I think they would be inclined to be helpful in that regard. And maybe a shout out to ILPA to put that out there for VC managers, like what the expectation for what institutional diligence looks like. Alexa Binns 52:29
we also would recommend people to follow you on social media, etc. You shared recently some of the insights that you put together for your AGM on VC power law. And I think we’d be very lucky to get to hear from you on what some of these things are that you’re pulling together for your own, your own el piece.

Meghan Reynolds 52:52
Oh, yeah, absolutely. Well, we can talk about some of that I am really frustrated about at the moment about, I think broadly, the LP per like, generally what I hear from LPS in the questions that they ask, in the way that they analyze portfolios and track records and venture relative to how the asset class actually works in practice. And by the way, there’s plenty of very sophisticated LPS that I work with that do understand how it works in practice and again, but there’s, let’s just say, I’ve encountered a lot in my journey that seem to be putting a lot of emphasis on success, which are things that aren’t necessarily what drives success in venture so what do I mean by that? So power law, I think mostly people now are very familiar with the power law concept, which is just kind of in Adventure fund applied. It means that a very small number of deals will drive the return like will drive returns of the fund, the very small number of deals drive returns for the entire asset class, and in a small number of funds drive the outsized returns, and those funds get the outsized returns from a very small number of deals. And so what if you’re thinking about VC as a power law business. I would imagine in the seat you’re looking at that and saying, Have you had access to power law deals? Have you been able to do that? Or what is your and because most VC managers, or most VC LPs, are looking for outsized returns, 3x plus and. And if you look at the underlying data, the only way you receive 3x plus funds is power law. If you have access to the power law deals, that’s it. Like the top quartile is not 3x or 25% of funds are getting 3x plus. It’s like the top decile is getting 3x plus. So the whole question is like, Do you have a shot at getting access to power law deals, and that’s the emerging GP of saying, like, do I have a shot at that or and if not, then what is my mission? And what am I delivering? Because it’s not going to be the 3x plus. Because if you look at the whole asset class, it’s very clear what’s required for the 3x plus and so, and I don’t necessarily hear that being the question or the analysis that’s being done by most people. You know, it’s, I think, and by the way, what, what that means for all the funds, and we did this whole analysis with steps stone, who’s an amazing partner on data. Follow them, and get access to their data. It is incredible. Be they have their green screen, green spring business that they acquired has been investing in venture and is one of the great fund of funds for 25 years plus. And so they just have access to tons of deal information, but their secondary business feeds all of that. If you look underneath the hood, the loss ratios within venture funds. So it’s not only just you had access to that, yeah, but you lost lots of capital along the way. And other great voices in the industry, Fred Wilson, Mark and Jason, like everybody’s reinforcing this. Yes, to get a 3x plus fund, you’re going to underperform on 75% of what you do. Yes, and you just got to hit it right and weigh your capital right on the really big stuff. That’s what’s going to drive success. And so if I’m an LP, I’m sitting there thinking like, do you have access to the potential big, big outcomes? Can you get access to those power law deals, and I’m not focused on the fact that you lost capital and underperform in 75% of what you do, but like, are you expecting capital appropriately from your winners? Yeah, and I can’t tell you the number of conversations that I have about consistency of returns on loss ratio, and again, it’s I understand. This is what boards look at. This is what their investment committees look at. They, you know, they don’t want to see a one hit. But as now that I’ve been sitting in the asset,

Alexa Binns 57:44
What do you want to see?

Earnest Sweat 57:47
Yeah, it’s like, why you’re in, and

Meghan Reynolds 57:50
there’s our investor Day Two years ago, we talked about, there’s a paper out of Harvard a few years ago that showed that if you have access, if you’ve had access to and had a big power law winner, that the likely have you, likelihood of you having another power law winner goes up, I don’t know. I forget the data, 10x Yeah, or something like that. And so if you’ve hit it, you’re probably going to hit it. Chances are you’re going to hit it again. And the more that you’ve hit it, like it keeps going up and up and up in your early years of success. And there’s obviously so many reasons for that, like you’ve now got logos, founders know you backed a great one, but it is also your judgment around portfolio management, and did you weigh capital appropriately? And what did you do with your reserves? Did you put it to your winners and not the lose? And not the losers? So I would just really, and I do think it’s happening, but I would love to see more consistency around the evaluation of venture different than I think what you have is a lot of allocators that maybe have managed private assets. And it’s a big leap to think about buyouts and mid growth, which is really like small market buyouts, totally different lead than venture, and they haven’t spent the time to understand the nuances of that. Ask lessons as we move into retail and family out like no one’s done the work on that. And so I think it would be, and it’s so different from every other piece of investing. So, you know, I’m trying to carry the flag on that one, and not from me again, this is not for my own benefit, although, look, there is some benefit to this, because altimeter has been a top decile fund in our early years. So let’s just say, without disclosing anything that perhaps our behaviors have represented that but, but there’s a lot of nuances in that, but it’s really just for the industry as a whole. I think it would make everybody’s life easier. I think it would help GPS understand it. Whether they have a shot at success, I think it would create more consistency, transparency, all of it. So that’s the flag that I’m carrying on the data side. The other one, and not to ramble, is around fund sizes, yes, and fund math. And there’s a data analysis that I would like to do, and I need to talk to the steps stone folks about it is just, you know how many 3x plus $2 billion plus funds are out there? Yeah, yeah. Can anybody Name one?

Meghan Reynolds 1:00:35
Yeah,

Meghan Reynolds 1:00:36
realized, or two or five? Like there’s just a rationalization around the size of capital for venture. Venture, because of power law and these other asset class behaviors, doesn’t scale. Growth scales. Yeah, growth scales, but venture doesn’t scale. And so, and I’m sure I can get it into heated debate about this with lots of people, but that is intimidating, but I do think that that’s also, you know, this challenge, and it is a challenge because large institutional allocators want to get lots of capital work, so people are incentivized to raise a bigger fund, so you can actually appeal to larger institution allocators. But you know, if you’re investing in series seed or A or B rounds, that are only 20 million in size, even if you 15 exit, which is nearly impossible to achieve, if you size your fund too big, it’s not going to move the needle. And power law doesn’t happen that often. So like, are you really going to three exit so that’s, that’s the other data analysis take up that maybe you’ll see from me in the new year. I

Earnest Sweat 1:01:48
I love that you’re preaching to the choir here. any love to hear any kind of parting thoughts to, you know, our two communities of GPS and LPs, anything you want to share,

Meghan Reynolds 1:02:13
maybe, you know, An ask to the LP community, I think, communicating to GPS as they meet them one what good process looks like, what they expect from a partnership, whether or not you’re going to invest, I think it’s just it’s A service to the industry that will keep getting better if they hear the feedback from you directly. And I think embracing the radical candor will help people immensely, like I think there was a talk I gave on Jason Kellogg Candice’s liquidity podcast that you know, talked about encouraging people to ask the questions at the end of the meeting, like, is this something that you’re likely to allocate to so you know that it saves the time of you know, should I be doing the follow up? Or maybe I can postpone that to next year? Or, like, What are my chances of actually getting stuff done because people are having meetings with lots of LPs. I mean, maybe put that to the LPs to say, you know, more candid feedback of this is great, but there’s no chance of going to be doing like, going to be investing in this next year, but I’m actually interested. Or, like, you know, I think you need to build out your organization and listen if your track record is just not there like you, like that will be so helpful to everyone to just kind of get that real feedback. And then to the GPS, you know that it’s that call for it’s a call for empathy. To the LP community, like red, I think I talked about it earlier, you know, really sitting, putting yourself in the seat of your investors. And that’s to the founder community. Like, think about that. The founder community, think about that your investors have investors, yeah, and they are your champions. They are on the hook. Like, and your investors. Investors knowing that company and their success will actually help the flywheel of capital come your way. And so there actually is incentive to the extent that you have success. So there is incentive to share information and take the time to try to share information with investors and yeah, those are some thoughts.

Earnest Sweat 1:04:52
Well, Meghan, thanks so much. I’ve been a follower of your content for a while, always appreciating your candidness. And intention and so thanks so much for being on the show. And can’t wait when we have live swim meets. You being the first guest on the live show, ready allocated as we have alligators swimming behind us, that

Meghan Reynolds 1:05:15
would be great. So good. I cannot wait. You heard it here first, get ready. Get your goggles. Start training like Alexis said earlier, in true, San Francisco fashion is going to be a competition absolutely. Thanks so much for being on the thank you so

Meghan Reynolds 1:05:47
much for having me for your support. I’m humbled, and I love the conversation. So thank you.

Alexa Binns 1:05:53
See you later. Allocator.