Alexa Binns 01:05
Welcome to Episode 60, which means you’re hearing a DDQ discuss, debate and answer questions from the audience, specifically just with Ernest and I, this is where we share what we’re hearing from the LP community offline, so you get the full intel on what the community is sharing with us that they’re not necessarily comfortable recording. So the format again. DDQ, very cheeky. We’re going to discuss what we’ve been hearing from LPs. Then we’re going to debate some things that we haven’t shared with each other previously, which I think is my favorite part. And then we’re answering questions from you, the community, anything to add or news?

Earnest Sweat 01:46
just welcome back. Alexa has been gone for a couple episodes that you’ll probably see in the future too, but yeah, she didn’t go anywhere. She just had a baby.

Alexa Binns 01:59
Thank you. It’s nice to be here. Let’s jump into the first discussion. The topic we wanted to talk about was, what if the current IPO drought isn’t temporary, but the new normal?

Earnest Sweat 02:16
Yeah, and we are coming. We’re recording this on a day that, I saw a few friends post about some IPOs that recently happened, but when you look in comparison to previous years, it’s still pretty sparse. And so you know this, this idea of what exits and exit strategies look like for venture? Is this a new normal, or are we just going through a dry spell? And I think because of how long companies stay public, I’m sorry, private. I’m sorry. I think it’s because of how long companies stay private. because of how long companies stay private? This is something that should be a real concern, and so we kind of have this perfect storm of companies are staying private a lot longer than they were in previous cycles, and we’ve had a lot of capital start to kind of freeze and not be deployed as fast as it was in a very, very fast deployment era, and we have an influx of new entrants in companies and verticals because, you know, we’ve had a technological shift with AI, so this has just caused a really, like, I don’t Know, cluster of, how should we think about the risk reward when it comes to our asset class?

Alexa Binns 04:31
Yeah, the fact that some of the really the gorillas in the room, like Lightspeed and Sequoia are all turning into more RIAs, allowing them to freely trade in equities and secondaries and roll ups and even provide wealth management kind of, kind of, is signal to me that it feels almost like when founders just like, add a slide. It’s AI, yeah. So if you went out to market and what you’re offering is Vc, things have been a little slow. VC has not been the trendy slash, comfortable slash. That’s not where there’s a lot of room to allocate additional dollars. So just be a VC plus, like, stick an RIA on it, and then you can easily fill some additional buckets that the investment committees are going to approve. It doesn’t feel like BC at all. And I’ve tried to make fetch happen by asking LPs, should this be his whole, a whole new category? It’s not, it’s Private Equity Act, you know, in a sense, but not like LBOs, but it’s not growth equity or venture as well. So should it be something totally new? I’ve been trying to say push and push equity buyouts, because it’s just a lot of equity going into these companies before they go public, but that’s not really catching on. But when we think about how an allocator is assessing how to deploy from their portfolio. Let’s say that they are across all asset classes, both public and private. How do you start to think about venture? Should it be kind of classic venture firms, classic growth equity firms, and now these large RIS and then, how should those be assessed? Like, what’s the dispersion of performance now? What’s the time to liquidity on all of them? And I, you know, a lot of the conversations we’ve heard on these podcasts as well, as you know, off the record with different LPs, do you really need to decide what you’re getting out of the venture ? Are you looking at getting venture alpha or coverage with venture beta? Yep,

Alexa Binns 07:38
no. I think that’s a really important distinction, particularly because you’re going to have different expected outcomes if you’re, if you’re, you know, are we actually aiming for 100x in a $25 million fund or a 2x in a $7 billion fund? The other thing this makes me think of from a historical context, I question, sorry, this the consolidation and the magnification of some of these big VC players as they metamorphosize is, will they be any good at it? So like Tiger CO two altimeters, they all tried to do these crossover funds, where they were going earlier, and that didn’t work out great. Yeah, so if you historically are an exceptional venture capitalist, and like venture capital, there’s a lot of hot air, it’s a lot like dreaming big and shooting for the moon. Are you actually the guy who should be running some of these other strategies? And obviously you’re gonna build a team around you. But it just feels almost like these are antithetical in their kind of like RAs are fiduciaries. They’re there to, like, help you avoid risk, even private equity. These guys are cost cutters. They are brutal. They are the, you know, they’re the hatchet men, and then you have the VCs, and they’re the dreamers, they’re the they’re the they’re the rock stars. So I just question that it’s the right fit for the industry, from, from just like a personality, like, like, is this what you really are great at? I

Earnest Sweat 09:28
will push back a little bit on what they’re doing. I think as you become bigger and you have more assets, you’re going to be looking more for guaranteed wins, per se, yeah. And so this is why you see a lot of the same firms all in the same companies. And so if your approach is to provide coverage of what is going on. To be the breakouts when it comes to anything around technology and emerging technology, then you are playing a different game than what’s going to be an outlier, right? You’re trying to sell coverage of consensus. And by definition, then it’s like you’re not really dreaming that big. You’re dreaming big, but you’re not really dreaming that big on finding what’s non consensus today, and then that’s going to be consensus tomorrow.

Alexa Binns 10:33
Totally it’s a known universe of pre IPO or never IPO businesses, versus what a pre seed or seed investor is looking at, which is really a Unlimited, it’s an infinite number of potential investments.

Earnest Sweat 10:49
So actually, I would flip your question on, like, are you not, instead of saying like, are you not prepared to move forward and expand into kind of like, becoming a KKR or version of that, I would say you actually they’re more prepared for that than going back to their old ways of being able to find those outliers, because you’ve had so much Success and now really defining what consensus is. Yeah, I another thing I wanted to discuss was, you know, after the pandemic and and, you know, we started having all these digital AGMs, and so now, after, I think, last year, started really strong, but now we’re fully into AGM season, and a friend of the pod, Dave is our wrote a post saying that, you know, AGMs are becoming diligence machines. It’s a place where LPS really gets a sense of the strategy and execution of a firm strategy. You know, how does it come to life? They do this by kind of talking to founders, figuring out what’s going on. And they’re not just talking to GPS. They’re trying to connect the dots. Everyone, you know, calls them something else, but, you know, they’re still AGMs. They try to make them different flavors. But AGMs are a place where you really are able to show who you are. You’re in, how your strategy comes to life. So I was, I was wondering, you know, what your thoughts were on this piece, how you think AGMs could really be leveraged, and what GPS kind of should be looking out for totally.

Alexa Binns 12:48
My favorite comment in this post was Indian wedding energy, like you’re looking for social proof. And what more social proof than getting all these people in the room who co-invest with you or follow on to show the proof is that social proof. I do have an exceptional contractor who is in industry, like in the industry, and would be an incredible resource to anybody who wants to level up their AGM. She’s not cheap. But I think there’s real competition here to get people to attend. How are you? How are you going to justify a trip? Maybe you’re linking it to a bigger event like Milken or something. But in general, I think they’re like, the expectation is to make these kinds of make these kinds of special that said, like a red flag if you clearly are out of budget or off, off, I guess brand. I don’t know how many of you all remember this, but the Silicon Valley episode, where they’re at, what used to be the baseball stadium that is Oracle. Now it’s Oracle now exactly, thank you. There was an AGM hosted there by the Rothenberg guys, and that ended up influencing what they were kind of mocking in the Silicon Valley, the HBO TV show and that was an exceptional event. You’re demoing with founders like as you’re walking through the concessions, etc, but maybe a little more flashy than, like, really required. I feel like there’s like a medium lane where people want to see like you take your job seriously and you’re putting your resources toward the right things. But these, these certainly are an opportunity to stand out. Yeah,

Earnest Sweat 14:53
I think that all GPS is low. Working to plan an AGM should think about how they really put their own taste into this typically normalized session? And you want people to leave saying that’s the best Alexa AGM ever. Or that’s the most earnest AGM ever. You want people to get a real sense of what your personality is. And then also, I think it’s and I’ve seen people like highlight founders. I’ve seen people highlight motivational speakers. I’ve seen people want to really highlight what’s the network that’s behind their firm’s strategy that really provides the secret sauce, and I’ve even heard of people using it as an opportunity to highlight their network of friends that other LPs should consider. So having another GP spotlight, and that’s really rare, and says a lot about those specific firms that do that because they’re making space for others. So I think that’s my first kind of tip for it, is to make it interesting, but in a way that really reflects your firm’s culture and who you are as a GP. The second thing I would say is like, prep your junior staff, and, you know, founders, because this, you know this, this idea of them, of LPs, grilling and asking questions, really to everyone else, is real. There. I remember being a junior VC or junior partner, and they’re definitely looking for answers, so make sure that everyone’s consistent in their statements, being genuine but consistent in their statements, and not drinking too much.

Alexa Binns 17:02
That’s hilarious. Keep your junior people on script and sober.

so next one, we move into the second theme, which is debate, where Alexa and I will present each a topic that we haven’t shared with the other and get there and get their point of view. So hopefully there be, there’ll be some healthy debate here, which is usually we usually get from an enterprise and consumer VC coming together. So I’ll start with one thing that I caught my eye over the last couple of weeks was VC labs, LP, due diligence red flag list, and everyone should check this out. But it has just a flag overview of green flags, which are great things. So it shows that emerging managers have promise and characteristics that could lead to strong performance. Yellow flags, which represent some minor issues that are common amongst first time or second time fund managers, orange flags, which signify more significant problems that require careful consideration, and then red flags for fund one and fund two managers, they represent critical issues that should be seen seriously as a serious issue. So they have this whole thing where they, you know, this is given out to the LP community and should be scored, and they suggest, you know, no one should have five penalties. And so my question, or my take on this is, although great to have as a framework. Frameworks are meant to be broken when you’re diligencing people, I will say. And you know, in the break we were talking about this a little bit, but it was more applied to GPS, but it can be applied to LPS too. We’re in an exceptions not rule business, where we’re looking for exceptional individuals that are outliers, not things that if you know assets or fund managers or businesses, that if they follow these rules, then it will definitely produce this outlier result. That’s just not how it happens. So I would say to allocators, yes, this is a great first framework, but in our business, you have to trust your gut to have this balance between art and science. What are your thoughts on this?

Alexa Binns 24:22
I love this as a resource for GPS. I think for LPS, it’s, it’s, it’s, it’s just a framework. The reason I think GPS needs to look at things like this is so that they understand which parts of their package are kind of like the ugly duckling. What makes them an ugly duckling as a GP? You know, most VCs look for software, not hardware. You know, most VCs look for a technical co-founder. You know, most VCs are only going to co-invest with you in companies that are based on the coasts, right? So I. Just knowing what’s the equivalent of like, what are these things that LPS may discount you for? You’ve got to be familiar with that perspective. So that’s why I think this list is so helpful. If you are fundraising yourself and you aren’t great at thinking like an LP,

Earnest Sweat 25:19
yeah, I would agree. I would say with moderation, though, even for GPS, because I’ve seen a lot try to use a framework like this, or utilize what they’ve heard for one or two conversations with allocators, and then have a rubric that they say, Hey, I’m Teflon. Now I am going to raise a lot of money. And that’s just not the case always, because there’s always exceptions as well, of like, maybe they’re already overweight in what you do. And so I push people not to look to, you know, get the answers to the test, but to create their own answers. This is not a whole process of being a fund manager, building something from scratch, fundraising is not a standardized test, and sometimes we try to make that because we’re humans, and we like to have frameworks that help us deal with the abstract nature of the world, especially our kind of random industry. But this is more of an essay, and so think of it as like, all right, I have kind of what they’re looking for, but I’m going to write it in. All right. Here are my strengths. Here’s what I’m good at, acknowledging what you’re working on to mitigate your weaknesses, but really honing in to like what you’re strong at, and leveraging that. And I think when people try to talk about, you know, as allocators, you know, we’re looking for differentiation. That’s what they’re looking for, is someone who’s been extremely thoughtful, and hey, I understand, and I’m learning more of how you think as an LP, but I’m not trying to just give you answers I think you want. I’m trying to craft the best essay that will appeal to you. I

27:25
I love that. I love that point.

Alexa Binns 29:29
On this episode of swimming with alligators, I want to play a game: start, bench, cut, and the topic I want to dig into is this retaliation, or democratization of access to Vc. But what does that look like when it’s actually a friend asking you what they should do with their money? So start, they have an option. This is a good friend. Maybe it’s a high schooler. They are an accredited investor because of their own. In tears, like, this is a gunner. This person’s been working hard, and they run in great sort of network crowds, but not VC specifically. So we’re not talking about Podunk, you know. But this will be their first VC investment. Okay? So one option starts, they have heard of a mutual friend who is spinning out of a major firm, and they could put 100k in. There’s, like , a big minimum to get in. This is like a no brainer. Everybody’s trying to get into this round, and they’re coming to you saying, hey, sorry, not this round, this fund. They’re asking you, would you do this? I only have 100k to put into the venture. Should I give it to Rachel whatever? Yeah. Option two For start, bench cut is a new product that hasn’t existed before. Hamilton Lane OG alternative investments now, as of two weeks ago, has made a product that any accredited investor can get access to their portfolio of managers, specifically VC. And this hasn’t existed before, and you now are getting all the benefit of all of their research. You know, they’re sort of indexing this for you, and it’s liquid, you can get in and out a lot less drama, okay? Or option C, if you’re only putting in 100k what’s the point? And you suggest that they pass that, there’s plenty they can do with that one on 100k that is going to be a better fit for them.

Earnest Sweat 31:47
And do they, like, know, other assets like they have, like, oh, I can be in, put more in, like, Publix or something like that, right? Exactly.

Alexa Binns 31:54
Yep, they’ve been managing their own capital. They’ve been doing well, this is one of your smarter friends, and they’re saying, if I’m gonna participate in VC, how should I do it?

Earnest Sweat 32:03
Wow, that’s a great question. Those are all great options, to be quite honest. I think because they’re first starting out, and if they have an interest in doing this more often, I would say, wait one last time, I can’t split the money.

Alexa Binns 32:22
I think, let’s say there’s

Earnest Sweat 32:24
minimums. Okay, cool. I was, I would start the Hamilton lane, given their experience, and it would give you some exposure. And hopefully they, you know, they would have some like materials that you could receive as well. So you can understand, okay, these are the firms that they’re investing in. These are the performances. And it’s kind of an I think we should have a return of like, Great fund to funds, given what we spoke about in the previous segment. And there’s so much capital being concentrated in very, very big firms. And you know, by definition, those are turning a lot of deals into consensus faster. And so you’re not going to have the rate of return, the outlier returns that you probably want. And so, you know, one of the big reasons why, you know, emerging manager programs are having troubles. Because, like, you know, if I’m raising a $300 million fund, some big pension fund can’t put just 20 million. They need to put like 50, 75 million into a fund. And so I say that to say, like, I think there should be more capital put into funds of funds, especially experienced ones, or ones that are taking an approach of, hey, we’re gonna we’re really experienced in a certain asset class, and we’re gonna provide you Alpha. Second I would do, I mean, I’m, I guess this would be the bench I would do. I would do the spin out fun, because I host a venture Podcast. I’m not going to tell you to go do private credit or Publix. And so I make that bench instead of starting because this friend is new, like, unless I have some real information and I know that, let’s say these three people or four people who came together are some real, real gunners and have a unique approach that makes them founder magnets. It’s going to be about more than anything else, not that they came from tier one firms. I could care less about that, but it’s really about the specific individuals, because we’re at a moment, at a time where we will have new. Finding exceptional firms, but they’re going to look different and have a different approach. That’s the only way this thing works. And I am just going to be fighting for consensus. They’re going to be trying to define what consensus will be over the next 10 years. So that one, I would tell them, you know, be careful with unless I have some real insider knowledge of people that I think are just exceptional. Yeah, and then, you know, cut Publix and private credit and search funds and everything else

Alexa Binns 35:35
I was pretty shocked recently when I saw that there was a Vanguard interview I listened to where they were recommending 20% of your equities you consider putting into private equity, including venture, and that was much higher than I would have been expecting from a Vanguard representative. So it does feel like more and more we’re going to be getting these questions from from our friends who have been taking more conservative paths on what is the right way to participate in venture capital, specifically, and and like, you are not going to get things like, you know, vintage diversification, etc, if you’re making one bet out the gate. But I think maybe it’s to your point on, what are your expected outcomes, where, if this is one bet you can make that’s going to zero or gonna 10x cool, if you’re happy with that, or, you know, are you looking for something that feels more like consistent deliverable returns, more like a public ETF or something?

Earnest Sweat 36:50
Yeah, I think it should. You should be making decisions. Friends should be making decisions based on what their risk profile is, how they’re diversifying with respect to the asset class. I’m actually not that surprised by the 20% because within private equity, private equity is like so much stuff, right? Totally private credit that I make fun of all the time. You know private equity, there’s more permanent capital for all these like services and family businesses that are happening, and that’s probably going to be a majority of it, and venture would be, I’m sure, not more than 5% totally, of your of your portfolio. But yes, I think we’re moving to this again, because companies are staying private longer. Okay?

And then the last question that I’ve just been kind of thinking about is, you know, everyone’s talking about, we’re clearly in a technological shift. We’re in a geopolitical shift too, economic shift, but staying on the technological shift with AI, I’ve been thinking about in a world where we have these larger venture players that kind of can determine what is consensus, fast of like deals, and again, we my view of venture is like, you want to find no consensus today, there’s consensus tomorrow. Is that going to change the archetype of everything going on with AI? Is that going to change the archetype of the outlier founder?

Alexa Binns 47:00
Oh, for sure, absolutely. I think maybe before you wanted something interesting. I think my favorite sort of archetype is the like, exceptionally non harried, straightforward, thoughtful, the guy who’s like, actually seems like he’s got a lot of free time. Founder, I would, I would say zooms. Founder, I’d liken my buddy Demetri of modern treasury to this. It’s like nothing flaps them. I think we’re, I don’t want, I don’t want any more of these, like energetic party planner founders in an AI in an AI era. I’m looking for people who are way more methodical. Because I think, yeah, yeah, I think. I think it’s and it’s an era that’s going to be all about process

Earnest Sweat 48:11
That makes me think of an AGM, a digital AGM I attended, of a friend’s promise, of her firm growth warrior, and she was speaking that on just this with how fast computers are going, the concept of ICP ideal customer profile is not a static term anymore. It’s one that you’re going to consistently have to move to garner that respect and garner the interest from your customer base and keep that market share. And so I think what for me, what I interpret from that, and kind of the thing I believe about an archetype, the archetypes of these new outlier founders will be who can do the hard stuff that AI still can’t do really well, what’s hard stuff like, who can quickly find analogies From other domains and apply it to theirs, who can bridge worlds right, like, if you’re on the coast in San Francisco and you’re selling into Midwest companies, who can do that well and connect, who can hire great talent that can be creative and thrive. I know we think that they’re gonna have these worlds of companies that are really big, efficient and only have three people working at them. I don’t think so. And so you’re going to need I think we’re in a vacuum currently of leadership, and that’s across the board. And. Everything. And so I think these new archetypes of founders are going to be amazing, amazing leaders of women and men. So that’s what I’m kind of looking for. Yes, they’re going to be technical, but they’re going to have to understand the human experience really well, because that’s what you want when you have, like, a shift in technology and you upgrade. So

Alexa Binns 50:27
I think that’s a great point that these people are going to have high, high EQ, because that’s going to be a distinct factor. He agrees. He agrees.

Alexa Binns 37:36
And I have one more thing for us to debate, do you rock your OG swimming with an alligator hat? More of the new latest, swimming

Earnest Sweat 37:49
with an alligator hat. Wait, which one is this?

Alexa Binns 37:53
You’re wearing? The new one? Oh, okay, well, that’s the one nowhere. What’s the font? Wait, what’s the font? You’re small. Oh, yeah, that’s a new one.

Earnest Sweat 38:03
Well, that’s the one. So everybody should go get it.

Alexa Binns 38:08
Totally it’s not swimming with allocators.com. You can go get a hat that says that you are an alligator, or swimming with us,

Earnest Sweat 38:17
swim with allocators. That was quoted on Bloomberg. So,

Earnest Sweat 39:07
Now moving to our last section of the queue, which is questions from our audience, or just questions we have for each other. So the first question we have is, would you join a new climate focused fund today?

Would I join a new climate fund? I can’t say I would recommend that. I think it would be worth joining old climate funds, like anything that has history and some lessons learned of investing in spaces that have come in and out of

Earnest Sweat 41:47
favor. That’s how someone feels. He’s like, not a fan. Um, yeah. Quick follow to that. Start, bench cut, Climate Fund, crypto fund, uh, direct to consumer fund. Oh,

42:07
rough

Alexa Binns 42:12
run climate. I mean, we haven’t solved it yet, like crypto. I’m freaking . I’m still waiting for it to solve something. And besides just being a multi level marketing scheme.
Alexa Binns 43:24
Question from the audience, where’s your next event, and how do I get invited?

Earnest Sweat 43:30
So our next event? We’re working on that, but we got a couple of things likely happening in July, August and maybe September. And the cities we’re looking at will likely be San Francisco and New York, but if you and how you get invited is we primarily invite LPS that are located in that city we’re doing a live podcast recording that I’ll be in Chicago for their Chicago tech week. And so that’s on all my socials. And the next question is just from me. Alexa, you had a baby?

Alexa Binns 45:02
Yeah, I had a baby. That’s one reason why Ernest has been doing a bunch of awesome interviews solo. Thank you, Ernest, for keeping us swimming.

Earnest Sweat 45:13
That’s the next t-shirt, keeping us swimming.

Alexa Binns 45:18
This is like a story for me. I failed my lifeguard exam, the written portion, and I passed the swimming part. And so I like, fully, legally blinded my way to being a lifeguard. I massaged the quiz to make sure that I still got a passing grade.

Earnest Sweat 45:43
We should just have one one DDQ, where we just tell stories that that are venture related, some that aren’t just, like,

Alexa Binns 45:53
if you’re drowning, I can pull you out of the pool, but like, have someone else do the CPR is the lesson learned,

Earnest Sweat 46:00
okay, especially if they ask is, like, Have you passed the written portion? That’s funny.
Earnest Sweat 50:39
Cool. Well, we’re ending DDQ and but like most ddqs, even after those 100 questions, you’re like, I think I have some additional information. It might not be in the DDQ, but it’s definitely something I can’t stop thinking about so there’s a scene in American Psycho, yes, I’m referencing American Psycho, where Patrick Bateman is in a cab with his girlfriend yelling, I just want to fit in. That line hits harder in venture than most people want to admit, because right now, everyone’s acting like they just want to fit in. Founders pitch me like they read the same memo. GPS builds decks that feel like chat. GPT wrote them, even LPs, they’re rotating between the same eight funds like it’s a Coachella headliner. And look, I get it, things are chaotic right now. I’m 47 my senior year. AGMs feel like Met Gala. Plus due diligence firms are turning into RIAs. AI is flattening knowledge access, retail money is leaking into alternatives, and first time fund managers, they’ve only raised a billion this year, and not looking like they’re going to get back to where they were last year was 6 billion. So yeah, I understand the instinct to not rock the boat. But here’s the thing, this market doesn’t reward safety. It never has venture capital. Is supposed to be the industry that bets on non consensus truths. So why is everyone acting like they’re trying to get promoted at McKinsey? Differentiation can’t be just branding. It has to be earned, lived, brick by brick. The best GPS right now are asking themselves, where’s the world actually going? What do I believe that the market doesn’t yet, and what am I willing to risk to prove it? You know what I’m thinking about, where business culture and demographics are colliding, where generational shifts will require a new style of leadership, where the best founders may no longer be the smartest in the room, but the most tuned into signals that others ignore differentiation today means saying something bold, not safe, building firms that look more like movements than models, and maybe not fitting in at all, because if we all just keep trying to fit in, the future is going To look a whole lot like the past, and I don’t know about you, but I’m not in this game to replay history. I’m here to write the next playbook, and that’s our DDQ, thanks everybody for listening. Thanks for your support.