Earnest Sweat 00:00
Welcome to swimming with allocators,

Alexa Binns 00:04
the VC podcast from the LP perspective,

Earnest Sweat 00:07
with your hosts, Alexa bins and earnest. Are you ready?

Alexa Binns 00:11
Let’s dive in. All

Earnest Sweat 00:15
right. This week on swimming with allocators, you’re honored and blessed to have your two co hosts here, Alexa bands and earnest sweat in the final episode of the year, final episode of the season two for your favorite, fan favorite, DDQ episode. So this is DDQ number five. Somehow we’ve gotten to 50 episodes. It’s crazy. Alexa, how do you feel? Man,

Alexa Binns 00:45
I feel super grateful to those first LPS who came on the very early episodes, and any of you who have been listening to multiple episodes, thank you too. Now it’s actually really been normalized that allocators are open to speak to us and speak to other podcasts too about what they’re looking for in venture. And that’s a huge win for everybody in the ecosystem. I think

Earnest Sweat 01:09
it is. Although I don’t care about the other podcasts, they should all just not be real until you come on here. We’ll get into that later. But yeah, it’s starting from just a dream, and the forcing function, I have to thank you, Alexa, I’m really big on names. I’m really big on concepts and ideas. And when there’s a little idea that’s just like, burrowed in my head, I feel like I have to get it out. And when you came up with the name, I was like, we have to do it. So thank you. Yeah,

Alexa Binns 01:40
if anybody wants to be repping swimming with allocators, we can get you march. It’s on our website.

Earnest Sweat 01:45
Yes, please go get it. We can have a little thing below. If

Alexa Binns 01:50
you love the name, swimming with alligators as much as earnest. Do you need some beer?

Earnest Sweat 01:57
So a reminder on DDQ, this is an episode where Alexa and I will discuss a few topics that are going on within our industry of venture capital, and things that we’ve learned from our numerous conversations on the record and off the record with the allocators. We also debate a few things, and then we’ll answer a few questions that come from our community, and this is going to be a special one given at the end of the year, so you can expect a lot of reflections And so we’ll jump first into our first D, which is discussion. And Alexa, I’ll let you start us off.

Alexa Binns 04:15
Sure, one of the things we’ve been hearing from a lot of LPs lately is how the nature of their job is changing because of RIA roll ups. And I can get a little personal context. I think if you were raising capital for a venture as recently as five, four or five years ago, Ria has felt like a real blue ocean opportunity. You know, you’d, you’d sit down with these guys and they’d say, you know, we really haven’t done much in alternative assets. We recognize it’s something we should be offering our clients. Goldman’s doing it, etc, but we haven’t quite figured it out. So I think everybody was kind of humming and. Drawing on what the right strategy was to bring things like venture deals to their clients. And you fast forward the past few years, all the RIAs have been getting rolled up, and so they’re collecting the PE guys and collecting the assets under management fees. And the latest thing they’ve added to the strategy is the OCIO so first they collected all the clients, all the high net worths and their wealth managers as sales people. And 2024 has been the year of PE buying up the ocios. So I’ll rattle up just a few of them. Marin Wealth Advisors announced plans to require CO and Fourth Street performance partners. Saturday partners have joined with agility. So that’s now surety partners. OCIO Wow. Path stone, a favorite family office advisor that we know well is acquiring Hall capital and and then Sarah Samuels, who I just mentioned she’s been advising pensions and endowments at any PC, and they’ve just been acquired by Hightower. So the the strategy if you are approaching these RIAs now is actually going to be very similar to what you experience with the individual endowments or some of the smaller foundations where they’re they’re also now going through the consultants all these Oh say, oh CIOs are now the the front door to these high net worths who are working with RIAs. So it doesn’t actually, I think it’s still a positive sign that there’s all this private wealth, this like democratization, where individuals can now get access to, like best in class research being offered by folks like any PC. But the strategy to meet these decision makers is gonna feel maybe a little more tiresome, and it could really be one of these consultants who, like, makes or breaks your chance to break through and and become a, you know, historical name brand fund.

Earnest Sweat 07:32
I will say, I will say that some things that you know, after hearing these Converse conversations about the roll up opportunities with PE taking out over outsource CIOs, I think one issue that’s going to happen is, are you even going to be eligible for what they’re looking for now, with so much capital and AUM under management now, does it make sense if you were looking for this foundation or this organization to provide you with a 5 million, 10 million, even $20 million check? Does that make sense for how big their team is, how much capital they have under management now? Because a lot of times in these roll ups, they’re seeing that, you know, like you said, Alexa venture was, was something very new, so it wasn’t much exposure. So how do they get right sized in the right amount of allocation at the right amount of time, is that going to be a bigger opportunity for your kind of well established, bigger players who continue to raise billions of funds? So I’m really thinking about, you know, who does it impact within our kind of emerging, established and mega fund kind of categories, and who’s going to benefit from

Earnest Sweat 11:59
I think to this kind of goes with the consolidation and the impacts of consolidation within just the industry overall, and pretty much every industry today, you’re starting to see a similarity, or I’ve been able to pick up A similarity between allocators, especially mid career at allocators, being involved in kind of roll ups and consolidation, feeling the same pain points as those individuals who are at firms as GPS, young GPs, at firms that are starting to get bigger and bigger and bigger and so I think there’s less similarities, A lot of frustrations of like, what can I actually focus on? Is it about preserving capital more than actually finding alpha? And so I think the result of that is going to be more changes and more of a merry go round for allocators, because it’s really getting that point and inflection point in the industry, an inflection point in a lot of people’s careers, of like, Hey, I have a balance of youth and wisdom. Of like, experience. What should I do? Like a lot of the GPs are doing and spinning out or taking up opportunities at younger firms, and so I think we’re going to start to see a lot more of that. And so there’s a lot of talent out there. No,

Alexa Binns 13:34
That’s super. I think that’s a super helpful point of empathy that you as a VC pitching an allocator may not have had in the past, which is just like you, you know, you get crazy conviction on a deal. You’re trying to convince your team to do it. Maybe they’re not into it. The allocator is often in the exact same seat, and so you very well may be their thing that they say, Oh, you don’t quite fit into all of the categories. You don’t quite check all the boxes that we’re looking for right now, but they’re still obsessed with you, and they are handcuffed a bit, yeah, despite having real conviction,

Earnest Sweat 14:13
yeah. And so it’s why you need to have real touch points and develop really real relationships, no real relationship in any aspect of life, is just me pitching and always telling you where things are going without there being something that reciprocal, right? So as GPS, as aspiring GPS, please ask questions. Understand what is actually going on with your allocators or potential allocators. What drives them, what you know, is there an alignment on, you know, what you’re offering, and if it’s kind of what they’re looking to get and what they need to do to succeed in their role? Yeah.

Alexa Binns 14:59
I. Absolutely. Another thing that every LP seems to mention these days is CO investments. Yeah, co investments, co investments, co investments, what are you hearing from them

Earnest Sweat 15:11
on CO investment? Yeah, co investments have been something that has over the last five years, so about half of my venture career has been creeping up more and more in an interest of, you know, not only family offices, but we’re as we get more and more institutional, up the LP stack, and I was having conversation with some junior team members of a pretty large endowment in the SEC and they were speaking on just like their process of when it comes to their Venture Program, investing in pre seed and seed funds, and over time, Getting really aggressive on CO investments. And first, you know, kind of dabbling their toe by doing SPD is like most kinds of CO investments, but now looking to, you know, be more of a player by investing, just off, you know, as their investment company. So, you know, being able to establish those relationships on their own, and so for me, is what’s really has me thinking is, you know, I understand the interest, but the question that keeps coming to my head is, are allocators the best suited to do this CO investing, and because they have also full time jobs that are quite difficult, especially when you look at venture capital, where, unlike some other asset classes, venture is really determined on you picking the right manager. And some of that is a little bit of luck. A lot of this primarily looks but you need to have like criteria and a way to even just have access to those right managers. And so given that, to do that, given that a lot of times they’re also looking at other asset classes too, there are kind of two strategies in which you can do right. One, you can be passive and like as deals come up, you can do that if you trust those managers, they’re already in your portfolio. Two, you can, you can have a team dedicated to it, or just put people dedicated to it, where they split time. And still, the question comes up, you know, will you have the dedication to have that access? And then thinking about the portfolio company, is like, you know, what is it? What are you? What are you offering? What’s the value add? The same questions you ask as fund managers. So it seems like it’s an opportunity now, because a lot of people want to do it. How, what, where I come and the question I ask you is like, how can you know your GPS service? Is it better to build that muscle?

Alexa Binns 18:19
Yeah, it’s a really good question. I think partially you have to, it’s, it’s to your benefit to recognize that the CO investment is really what they’re talking to you for, like, maybe you are a truffle pig hunting on behalf for that, like they’re going to end up putting the same size check into your fund, as potentially many of your portfolio companies. And that’s sort of a painful thing to swallow, but recognizing what your job they’re hiring you to do, and and you know, they’re willing to pay the 2% management fee for the access. But then, like you, the expectation is you’re also going to deliver some of these other great opportunities. Yeah, particularly, I think, for like the family offices, I got to look at the Global Partnership family offices. Good has a report they put out recently where CO investment was a big piece of what their report was looking at. It’s the family office private markets Benchmark Report 2024 and it broke it down for me by like, why? How do people even define co-investment? Why are they doing it as well? As you know, what fees are people willing to accept? And I think one of the things that really jumped out was that the special expertise of the investor was one of the key benefits that they were looking for as well. As sharing the due diligence resources. So it really is your opinion as a GP on why this deal is really special, and it also potentially, you know, sets you up as a true specialist. Maybe the only thing you’re a specialist on is, like this particular founder dynamic, or how this team, why this team is so exceptional, and what the rest of the market doesn’t know about them. But more likely, it’s going to be a thematic like that. You are a deep expert on whether it’s, you know, hard tech, Frontier, tech, climate, tech, etc. So I think that helps on your pitch, as you’re presenting the opportunity to family offices, for sure,

Earnest Sweat 20:44
yeah. And I mean, I personally, if anybody has any ideas and wants to reach out to me or have conversations as an allocator, who’s, you know what best practices they’ve done to develop the muscle, or are actively trying to do that, whether you’re an endowment or anything in between, I would love to have conversation, because I actually think there’s an opportunity as well for, you know, recent spin outs or people that are looking to warehouse deals for a partnership between those individuals with the experience to also be able to show, you know, actively in real time deals and getting some type of like, with starting a relationship and compensation on the on in that manner, right? Because, I think it’s not only finding deals, but if you’re able to also show value and be a point person, I think it does a lot of things. It helps that allocator understand how to, you know, do deals, diligence deals, turning inside and out, but then also how to really add value in an intentional manner. And so it is not a pledge fund. It’s not a SPV, per se, but it’s more of a finder’s fund or something like that. So somebody wants to talk about this kind of concept of idea, an idea, yeah, I would love to Yeah.

Alexa Binns 22:08
And, and, I think to address your question of like, is this the job that allocators have the time to do, let alone the skill set to do? I think they are pretty self aware, and fall into a couple camps. There’s there’s groups that are just going to index and they’re going to do most of the CO investment deals that they’re brought because the hard work that they did was in selecting the managers, yeah, and therefore they believe you and they trust you, and they’re going to do what you share with them, versus those that are maybe with Deep on an industry, a family that’s coming from textiles, etc, who are going to go deeper on some of the industries that they have personal experience with and are not. They’re not playing a statistical game. They are themselves, the industry expert.

Alexa Binns 24:14
Now it’s time for us to debate, lovely discussion on what we’ve been hearing from LPs. I would love to ask you earnestly, yeah, about coming Mark downs?

24:40
So

Alexa Binns 24:43
VCs are in an interesting position, where we are beholden to the founders who make it rain on behalf of each fund, but we are also beholden to the LPs, who are the customers over the. Long term, yeah,

Earnest Sweat 25:01
so they also, they also make it rain, but yes,

Alexa Binns 25:06
So I think it’s, you know, we, everybody gets to decide for themselves, how they are, what processes they want to put in place. In order to mark their bucks, you have to have a strategy written and written down, but you can write that strategy however you like. So obviously, the LPS would have been asking for transparency. They’ve been asking for no surprises. They also have data on the same portfolio company across three or four different funds. And so it’s not like your marks are the only marks they’re seeing. Do you believe the optimists, the ralliers, the hype men, are ultimately the ones who are going to end up doing better across the board, or the you know, more pragmatic style GPS, who have potentially already marked some of these companies down, are leading with some of the not great news, or sharing some of the you know concerns they have about some of their big winners in the portfolio.

Earnest Sweat 26:23
I think I wouldn’t even call them pessimists, but I think the realists, yeah, are the ones Who are going to win, in my opinion, because more than ever, you need to have strong relationships with your sources of capital with so much uncertainty. And what I’m anticipating is going to be some pretty volatile markets. And you know, be good as well, and I think in the beginning of 2025, but who’s to say it won’t be volatile after that on the other side? And so I think being able to have a level head of where you think those marks should be, and reminding your capital sources, allocators that we have a good eye on what we think will provide, DPI, and we because of these opportunities in the market, possibly doubling, tripling down on those certain companies and having a criteria for it, I think that’ll go a long way for you. And those VCs that were honest about where things were, where they made mistakes, what they learned. We heard this, you know, throughout this year, what you know, if you share what they learned and how they’re going to approach things differently.

Alexa Binns 29:38
I mean, or to play devil’s advocate, you’re trying to raise your next fund right now. So why are you going to make your Oh, like, okay, there’s a lot of good arguments to say. We still don’t know. The founder is holding this company at the last price. Ice. I’m not the one who’s gonna go, you know, rock the boat. I got to keep these guys working hard. I want them to continue to be motivated. I’ve been telling them they’re one of the strongest companies left in the portfolio. Everybody else has it

30:16
worse. Yeah,

Alexa Binns 30:20
and potentially they need to follow capital at some point. You know, it is not to your advantage to necessarily share all of the concerns that you have about your biggest, you know, your theoretical biggest winners. So I don’t know, you keep it at the last price or even half instead of cutting it a second time, and you’re able to go out and raise your next fund. Because, you know, everybody agrees, like it’s too early to tell we don’t actually know what AI is going to end up doing to this industry. Or, you know, for now, like they’ve got a lot of cash in the bank. There’s a lot of ways you can, sort of,

Earnest Sweat 31:08
yeah, but you want to keep the line above board. And I’m not saying, hey, Vc is about vibes, if it’s about if people don’t, if there’s one thing people take from this entire conversation, it is about vibes. But you can’t be too delusional, just like founder with founders. And so I think it’s one piece on sharing kind of like, Hey, we’ve been conservative and marked or kept it at the same price, given what we see in the public markets, but also where for my situation to be, like, I’m still an early stage investor, so I’m not thinking about, you know, what’s going on in the next year, is about like, where things will be in the next seven to 10 years. And so you’re still going to give those vibes of positivity and and because you believe it and have conviction, but if you’ve made glaring mistakes and got involved in, you know, hype loops, you’d have to address that. Yeah,

Alexa Binns 32:13
yeah. I think there’s, there’s often also you describing, you know, being a super early stage investor, you have very little information, in some cases, on some of the companies that are the big markups of your portfolio, and so it isn’t you know your best guess on if there hasn’t been a repricing.
Earnest Sweat 33:06
absolutely something to think about. You know, there’s an old adage that you are what you eat. My question is free for you. And debate is what, let’s say you’re a GP, who should you be targeting as your customer? LP, right? Should it be the SMBs? So that would be like family offices should be mid market, kind of like your smaller fund of funds, multi family offices, or should you go after the large institutional players? Totally,

Alexa Binns 34:30
I think partially, it’s like you want to sell to whoever you know is buying, right? Yeah, and so there is a, I think it’s a really healthy exercise to outline. Who do we think in 2025 is actually going to be enthusiastic about venture and why? And be making some and actively taking some positions, the endowments they’re in. Income, and the big institutions are highly concentrated in alts already, and they’re kind of cooked like there’s not going to be a ton of opportunity to swap in and swap out somebody new. Yeah, the sovereign wealth funds still feel like they are expanding, sort of like, what percentage of the pie is going from traditional to alts? You’ve got maybe pension funds and stuff moving from like 2% to 4% and then we’ve talked about the RIAs, the RIAs are now often going to approach things similarly to the small like the other nonprofit endowments, etc. So there’s going to be, actually, a lot of groups deploying there, but they’re going to have some maybe more old school opinions on what a good manager looks like. Yeah, they’re gonna be looking for third or fourth, funds, etc. So I think it’s, I think it’s sort of like narrow, your narrow, your focus on people are actually buying when you’re out sellingwhether you’re a founder or GP, and the equivalent being, we had the rise of all these family offices, especially during kind of like 2020 2021 2022 jumping in. And then we also had some people who, like, missed it. Last you know, some pretty notable pension funds that missed the last mark, markup, or rise up of the venture market that being equivalent to on the founder side, plg right product led growth, going after small customers and then moving your way up the customer stack, with the world of more consolidation and Automation. I think those are two crazy concepts coming at the same time. Yeah, and a administration that is, who the fuck knows. And so I think where I’ve been going and talking to a lot of you know, whether founders or GPS is, I think, if you don’t know how to sell to enterprise, at least for the next 10 years, like, like, you know what is not going to be sustainable. Like you’re not going to feel. And I’m not saying it’s easy. It’s not easy, but people who are able to sell to the biggest players of whatever markets they go after, they will take advantage and get a huge lead. So learn how to develop those long sales cycles and relationships and do them in kind of a critical mass. Find all the different touch points that you can find if you’re a GP, if you know that, you know, keep in contact at an RIA now. How can you start to make that an advantage of having multiple people who know your story in our are developing some conviction in you, or you’ve been able to help them find some co investments, whatever it is like, but learn how to sell to the enterprise. Yeah,

39:06
yes,

so we’re just going to rat off some a few predictions, and I’ll let Alexa go first.

47:35
I I

Alexa Binns 47:37
predict that. Crypto is going to give people a lot of free capital, just that people are going to start feeling wealthy thanks to crypto. And so I’m going to predict that, speaking of high net worth, I would go pitch your crypto whale friends. I think those will be the easiest gulps to land in 2025

Earnest Sweat 50:58
I think that we’re going to start to see some pull back in the infrastructure plays when it comes to AI, and I think we’re going to start to see more activity in the middleware and application activity. So I think, you know, a lot of money has gone into whoever’s going to attempt to win, and kind of llms and small language models. And so I think more of the focus is going to go to those that are the application and middleware layers. And I think San Francisco is going to rock again. So

Alexa Binns 51:58
interesting. Yeah, San Francisco is back earnest, called it, and he has a pretty good eye for where there’s a good time.

Earnest Sweat 52:05
Yeah, I do.

Alexa Binns 49:26
Okay. I think another prediction of 2025 is, I think dei is going to remain out of favor.

Earnest Sweat 49:44
Is that a prediction, or are you just saying that the sky is blue? Because I think a couple of weeks ago kind of told us that.

Alexa Binns 49:55
I wonder what it actually means. This is like, as

50:02
I like, the theory of invest

Alexa Binns 50:05
where others are not necessarily investing. If you’re investing where everybody else is investing, you’re too late. So I think it’s actually a really smart time to be looking at the kinds of categories and the kind of people who are not necessarily trendy. So I would say you’re going to see more wins coming from some of the places that you kind of least expect them

I predict that season three of swimming with allocators will be the biggest and baddest season that we’ve ever had, and we will have some of the best guests ever that no one expected us to ever have. So

Alexa Binns 52:33
That is awesome. That tee is up. Very much a question from the community. We’re going to answer a few questions here that you all have asked us via social or in IRL. One was, who’s a guest you’d love to have on the show?

Earnest Sweat 52:51
So if you look at just like who we’ve had and we’ve had amazing guests, and we’ll have a lot of those people back on in season four, I think that’s when we start repeats, probably, but there’s been some obvious kind of like areas within the LP stack that we have not had, and so endowments. So I would love to have friends from Yale, especially after learning from their prospect fellowship program and that process MIT van D Stanford,
Alexa Binns 54:19
Appreciate interest. Yeah. I appreciate the interest.

Earnest Sweat 54:21
Good. Anybody? Anybody what you want? Alexa,

Alexa Binns 54:27
I would love to have a couple people on the show who are just not doing any venture at all, to be able to give us that, that counterbalance and so that each I think at this point, if you’re pitching a fund, you really need to be able to pitch like, why your strategy is one that is the biggest opportunity yet, why you’re the right person to do it, and why this is better than any other asset class that they could also be considering. And so I think that would give some good perspective. If somebody’s saying that I’m not, I’m not doing any more ventures right now.

Another question that we’ve received is, what’s LPS return expectancy for venture today?

Alexa Binns 55:27
Yeah, totally fair. I mean, I think historically, it’s like, it’s a huge range, like 3% to over 10% more, IRR expected, as the paid, you know, to lock up that capital. And you’ve seen a bunch of endowments, for instance, underperform because the markets have been rallying. The public markets have been rallying. And so having 30% in alternatives means you are performing below the market
hopefully we’ll have some IPOs that then the market will open. Is anyone’s best guess on how they’ll do six months after but that will provide some liquidity to the market, hopefully,

Alexa Binns 58:07
Okay, maybe the final question from the community is, what should we read this holiday season? Earnest. You often are the one mentioning different books.

Earnest Sweat 58:19
Yeah. So I my favorite books this year have been wide range of topics, I would say, to make men free, which is the history of the Republican Party, is fascinating, and it also kind of shows, you know why America is kind of just an interesting place when the two most important documents, Constitution and Declaration of Independence, you know, if you take those two ideals all the way to the top, they’ll conflict with each other. So that was good. Anti fragile. Really just messed up my mind when it came to humans, like desire for stability and their desire to predict things when that’s so silly . Just because you have a lot of data doesn’t mean it’s not just data filled with noise. And he really challenged me. And this idea of like, how do you respond well, to random, randomness, because randomness is going to happen. And I think power law is one that was really good, just on the history of venture and if it was inspiring, and hearing that every generation of the next generation, generational firms had to create their own path. What would you suggest? Alexa,

Alexa Binns 59:51
oh, man, this is a really random one, but we sort of get bogged down sometimes in our day to day lives and our. Are like jobs and our to do lists. The in between is about the perspective of a woman who is a hospice nurse, and maybe December is a really good time of year to kind of take a step back and think about, like, Oh, what are the things that you’re going to care about in the end? And I found the in between was just sort of weird, a feel good way to get out of sort of like just thinking about work stuff and day to day life stuff.

Earnest Sweat 1:00:38
I love it. what I love about this experiment called swim with allocators, and what I’ve learned. I love that we just kind of had an idea and then we just started to watch it grow by, you know, convincing. Thank God for our sponsors over the two seasons, over the whole year that, have you known, believed in you and I, and thanks so much to all the allocators who didn’t know what we were. Thought it was a funny pun, and we just really liked life giving conversations. I got to speak for you. But as somebody who’s about to turn 40, not only feels this year of being able to look back and forward of this past year, but it’s like looking back and forward to like, you’re really mid and the middle, mid lives, like midlife, yeah, just mid life that’s that’s just heavy, but it’s also inspiring. It just shows off, like, all the things that we’ve been able to accomplish. And so what stuck with me is like different quotes from different allocators, like venture is a is a is a heartbreak gay, I think Chris told us that, yeah, about Yeah, Sarah, who talks about, just like, seeing another woman who was commanding and then that gave her hope, or the whole like, I think this was off. This one didn’t make that episode. But this idea of, there’s a special type of bark that trees you know have going through stressors that helps them grow. And if you don’t have that, trees will just grow but then fall over. And just that metaphor with like, how to build your own resilience, and what you’re looking for in founders, and so it’s each little conversation that has stayed with me, and what I look forward to in this next year and next 40 years is being able to utilize that information. Define and shape the world that I want to see. And so I want to see more emerging managers. I want to see more spin outs, or I want to see large firms getting smaller and acquiring people and giving them the keys of their firm, because the time is now and we can’t wait

Alexa Binns 1:05:20
See you later, Allocator.

Earnest Sweat 1:05:23
after portfolio, tile, investing with a smile.