Eric Sippel the Emerging Manager Mentor: Guidance from the Family Office Investor on Twelve LPACs

With Eric Sippel ,
Philanthropist and Investor, Sippel Farb Family Office
This week on Swimming with Allocators, Earnest and Alexa welcome Eric Sippel, Philanthropist and Investor at Sippel Farb Family Office. During the episode, Eric shares his journey from being a private equity and hedge fund lawyer to operating a multi-billion-dollar hedge fund firm and eventually running his family office. He discusses his focus on backing emerging managers and acting as a mentor in the venture capital space. He also provides insights into his investment strategies, including the significance of consistent investing through cycles and seeking mismatches between capital and opportunity. Additionally, don’t miss our insider segment from Hugh Barran of Armstrong International as he discusses how to break into venture.

Highlights from this week’s conversation include:

  • Eric’s background in venture and investing (0:02)
  • Lessons from a Bottom Decile Experience (2:20)
  • Motivation to Enter the Venture Capital Space (3:45)
  • Challenges for New LP Allocators (6:08)
  • Supporting Emerging Managers (7:35)
  • Specialists vs. Generalists (10:53)
  • Judging New Fund Managers (16:24)
  • Attributes for Winning in Fund Management (18:57)
  • Insider Segment: Building Teams in Venture Capital (21:00)
  • Starting in Venture Capital (27:02)
  • Future of Venture Capital (28:14)
  • Finding Family Offices (31:16)
  • Investing through fund of funds (34:32)
  • Engagement with LPAC (38:02)
  • Follow-on strategy and tiered investment (40:24)
  • Challenges and advice for emerging managers (45:03)

 

Eric Sippel is an esteemed philanthropist and investor. He currently runs his family office and is an active investor and adviser to real estate, venture capital, and hedge funds. Previously, he was the COO of Eastbourne Capital Management, a multi-billion dollar hedge fund firm, and a Partner at Shartsis, Friese & Ginsburg, where he was a nationally recognized hedge fund and venture capital lawyer.  Eric graduated from Stanford Law with Distinction and Wesleyan University with Honors in General Scholarship. Eric has served on many nonprofit boards, including his current role as Chair of Goodwill of San Francisco, San Mateo, and Marin Counties.

Armstrong International is a specialist financial services executive search firm with 30 years’​ experience across Public and Private Markets. Our consultants possess deep subject matter expertise within; Fixed Income, Equities, Private Equity, Private Debt, Digital (Data Science & Technology), Private Wealth, Corporate Finance, Real Estate, Infrastructure, Emerging Markets, Credit, FX, Emerging Markets & Commodities We are trusted by some of the world’s leading financial institutions, who use us for 3 primary reasons: industry expertise, speed of hire, and ease of doing business. We like to innovate and have been at the forefront of some of the most profitable and exciting changes in the industry, including the technology revolution and the ever-expanding world of Private Markets.

Swimming with Allocators is a podcast that dives into the intriguing world of Venture Capital from an LP (Limited Partner) perspective. Hosts Alexa Binns and Earnest Sweat are seasoned professionals who have donned various hats in the VC ecosystem. Each episode, we explore where the future opportunities lie in the VC landscape with insights from top LPs on their investment strategies and industry experts shedding light on emerging trends and technologies. Follow along and subscribe at swimmingwithallocators.com.

The information provided on this podcast does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this podcast are for general informational purposes only.

Transcript

Earnest Sweat 00:02
Welcome to swimming with alligators. I’m Earnest Sweat and each episode of Alexa Binns and I give you a VC podcast from the LP perspective. You ready? Let’s dive in. Today on Swimming with Allocators, we have the pleasure of speaking with Eric siple, a philanthropist and investor with his family office called Sippel far family office. Eric started his career as a private equity and hedge fund lawyer before moving into the investment side. He’s personally backed over 50 emerging managers and serves as an informal adviser to the venture private equity and real estate funds in which he invests. Eric is a pleasure to have you on swimming with alligators.

Eric Sippel 00:45
Thank you very much. It’s a pleasure to be here.

Earnest Sweat 00:47
So I want to first start off with the full ratchet podcast, which I am a fan of and love. You told Nick, the first thing a VC should do when given a chance to speak with an LP is to ask them questions. So we’re going to actually take that to heart. So tell us about who you are. And what GPO GP should know about you.

Eric Sippel 01:14
So I’m the luckiest man in the world. If you thought about the probability, if you look at me growing up, that I would end up here. It’s infinitesimal. So I live every day like it’s a gift. And I’m just really happy to be here. As you said, I started my career as a private equity and hedge fund lawyer, moved over and became the chief operating officer of what became a multibillion dollar hedge fund firm. Or I was co leading our venture practice at that firm, and he was probably bottom decile. So I have lots of lessons that I’ve learned along the way, thankfully, we invested a tiny, tiny portion of our partners capital into the venture space. And so we didn’t actually lose them very much money but still, when I left, we shut down our firm. And now I’m running my family office, and I focus on emerging managers. And I focus on acting as a coach or sounding board or a mentor to those managers.

Alexa Binns 02:19
I’m curious if there are probably plenty of lessons learned. But are there any stories you can share from that bottom decile, like what, what’s the we don’t have many examples of people who are willing to come on and share what wasn’t working.

Eric Sippel 02:36
So I think the reason why we’re bottom decile is that we didn’t, we invested very opportunistically when a deal came across our way that we thought, Oh, that’s pretty interesting. That’ll marry with some of the things that we’re seeing out there in the public sphere. The question we never asked is, why is this steel coming to us? Why is this still not coming to experienced venture capitalists. And so and when we look back at, or when I look back at all of the different investors we made, we probably made four or five, they each share the characteristic of something that now I know, oh, a, an experienced venture capitalist wouldn’t have done that. But of course, at the time, we weren’t experienced venture capitalists. And so we made all those mistakes ourselves.

Earnest Sweat 03:30
I want to take a step back, Eric, what made and a lawyer want to dig into this asset class. And then after some bumps, and bruises still continue to like learn about it, I got

Eric Sippel 03:46
to the place where I was so burnt out from practicing law, that I wanted to really destress my life, get rid of my stress, and reduce the hours. And that all happened. But along the way, what drove me is sort of what I would say is intellectual curiosity. And so the other part about the practice of law, and particularly in retrospect, is it’s pretty much the same thing all the time. And it’s the you know, the clients are slightly different, the solutions are slightly different. But it’s all pretty similar. Whereas investing is just, you know, the vast differences across businesses and asset classes, there’s always something new to learn. And so that’s really what’s driven me, it’s that intellectual curiosity is what’s new to learn.

Earnest Sweat 07:07
all of that sounds like a very daunting task, when you mentioned the dispersion and comparison to even private equity, real estate, other assets, even other private asset classes. How the hell is someone who’s new to be an allocator? Within this space? Where do they even start?

Eric Sippel 07:28
I think it’s really hard to be new as an LP allocator into the space. And so I hate to be defeatist about it. So I’ll come up with an answer that I think, you know, how do you start because I think people can start. And so maybe I take back my defeatist comment, I think people leave me to lean into their previous experience and skill set. And so for me, I have been working with alternatives in the alternative asset class my entire 38 year career. I started investing in venture funds, just in my clients when I was practicing law 25 years ago. So, I’ve seen a REIT. So I’ve seen a lot. But when I started my family office about 14 years ago, I looked inside myself, and I said, What am I really good at? And what I’m good at is helping other managers like I’ve been doing that my entire career. And so that was where I started, because that was work. For me, it was like, what could I bring to the table to help other GPS that they didn’t otherwise have? If you’re an LP, and you want to get involved in the venture space, and you’re willing to spend some time, I recognize most people aren’t gonna spend 90% of their time. But if you’re willing to spend some time, I just say, look inside me, it’s like, Alright, why? Why am I here? What can I bring to the table? How can I help? And then, and what do I know and lean into those strengths? And then over time, the longer you’re inside of an ecosystem, the more you learn from it, but you have to sort of earn your way into the ecosystem. You know, for example, a manager came to me and said, You know, I was put together with this other GP, but it’s not working. How do we deal with that? And sort of help him through the divorce proceedings, or another manager. You know, I will help them and say, you’re not leaning into your superpowers. What are your superpowers? What makes you really good? And when you go out and communicate your message to the world, you need to communicate how your fund fits, who you are and your superpowers. And so that’s another example. I will often make introductions to other potential LP Is other GPS to portfolio companies where they may invest. So you know, sort of using my network. Those are some of the many examples. Another example is a GP where I feel like their follow on strategy isn’t really optimal. And we’ll have a conversation around what the follow on strategy looks like, or their portfolio construction. Just like anything you can think of, do not invest in this company. But rather, the rest of running a venture capital firm. Those are the things I get involved with,

Earnest Sweat 10:38
when I kind of want to switch gears to how managers develop a relationship with you and your rubric for selection. But first, since you’ve seen so many fundraising decks, what is differentiation? Today,

Eric Sippel 10:55
I’m gonna go back to something I just said. And I wouldn’t know if I would call it differentiation, or just critical and explain the story, which I think then gets differentiated because every GP is unique, they bring their own unique set of experiences to the table. And the great thing about this asset class, and also the very hard thing about this asset class is that they’re most of the GPS, if not all of them are very talented. So what brings differentiation is understanding what your superpowers are to design a fund around your superpowers, so your superpower may be that you have spent 25 years in the supply chain, and logistics, and so and you have a very deep industry network into those industries. So that’s a superpower. And so your Fund is designed around it, you might focus just on the supply chain. But then sort of what your experiences are within the industry and have that really, whether it’s not just your network, but your sort of insights in the like, and designing your firm and your fund around that experience. And then communicating that experience, because this is the mistake that most emerging managers make is they’re not very good at understanding but understanding the superpower of designing around but then communicating that they often design around it, but communicating that to their prospective and current investors. And so that’s what I think creates differentiation is understanding a superpower designing around it and communicating it.

Earnest Sweat 12:39
Where does that leave new generalists? The assumption there is that like people, the example you gave, which sounded like a lot of, I think, our mutual friend Santosh and his group at dynamo, but there’s definitely been an emergence of verticalized firms, yet, we still see a place for generalists. Where did that leave generals?

Eric Sippel 13:07
So I’m gonna answer the question two ways. One is what I look for. And the other is to answer your question. I prefer specialists over generals. So where that leaves me is it’s very hard to get in my portfolio of channels. I have some generalists in my portfolio. But it’s hard. And by the way, when I say specialist, I don’t just mean industry or sector specialists, it could be, you could be focused on helping immigrant founders, you could be a deep tech specialist, you could be a specialist in investing in Nigeria. So they are regional specialists. So there are specialists that I think are more than just industry. But there is room. There are a lot of very strong generalists, emerging managers, established managers. And they will and many of them will continue to succeed. So where’s it left? They still have superpowers. They may not be industry specific superpowers. So a superpower could be that they’re particularly good at rolling up their sleeves and getting a company from zero to 1 million revenue. And they are particularly good at helping a founder craft their marketing story. That’s an example. They may be particularly good at strategy. They come from a consulting background, way back when they could just be particularly good at empathy. They were founders themselves, and know the journey that founders go on and Just they’re the first call. They’re the ones that are there. You know, they, you know, they could be, there’s just so many different examples of generalists and how they can really, they really can have superpowers, they could be particularly insightful on. Knowing when a company is about to break out. You know, there’s one generalist that I’m an investor with, Zach Coleus, who’s amazing. And he is particularly good at knowing when those companies are going to break out and when they found product market fit, and that’s a superpower. And that’s what he invests in. And his results are truly outstanding. And he was a founder for many, many years, and has been an investor for many years. And he’s got one. Yeah, there’s a lot there. But there’s true superpowers, even though he’s a generalist,

Earnest Sweet 16:00
your viewpoint on kind of high conviction, high concentration of a portfolio and large ownership that could have been lost in his last, I think we’re calling it ZIRP moment, right? The zero interest rate period, how do you judge fund new fund or fund managers that you’re just meeting or you’re developing a relationship with that, you know, came up in that moment? So

Eric Sippel 16:24
I allocated to a lot of managers I knew during that ZIRP moment, and a combination of being lucky. And looking at the things I’m about to describe, I’d say that virtually all of the managers I allocated to during that moment. And the ones before and since all sort of share the following characteristics. Number one, I am looking for managers that are relatively sober. I, one of the aspects of my rubric is a GP who has had at least five years of operating experience, and at least a GP can be the same person, at least five years of investing other people’s money in the same kind of way. They’re investing my money, whether that’s working at another venture firm, syndicates, things corporate VC various different ways. And what that has led to is GPS. And this is and so this is how I would I judge GPS now, both the ones they invested in new ones, GPS that did not write a lot of checks, when everyone else was writing a lot of checks, they speak so they kept their pacing steady, along the way, that more than not less than just sort of steady, sometimes less if evaluations are too crazy in their space. That’s number one, number two, GPS that really tried to persuade their portfolio companies not to take these crazy inflated valuation rounds with massive amounts of capital. And if they were to do that, to really encourage those founders to not spend capital quickly. So to have, so if they were going to take large amounts of money, just extend the runway as opposed to be capital inefficient. That was something I was looking at then and I’m looking at now, the thing, the question I asked, that is the first one of the first questions I asked and that immediately helps me distinguish whether I’m interested or not, is the question how long between typically between the time you meet a founder until the time that you write a first check? That is my go to question. When people and and it’s in it’s asked in a very neutral way. And by the way, it’s horrible that I’m outing myself here on this podcast, because now other GPS listeners are going to not answer it the same way that they might have otherwise answered it. So but that’s okay. When they you know, during that cert moment, most GPS would answer, I can move really fast when I need to. I need a founder. And that’s the first words out of their mouth, and that’s immediately it doesn’t matter what really fast is after that. I’m done. I’m not interested. So really fast, I could do it in a day. Really, really not interested. I could do it in two weeks. I’m still not interested if what they’re focused on is speed. I’m not interested. If what they’re focused on is finding the right found Your GP fit, because it’s a long marriage that you’re working really closely with, and you can’t fire the GP. And you basically can’t fire the founder. And so making sure there’s a real good fit now, sector specialists or specialists generally can move quicker. So because they are a prepared mind, and so they can move in three, four weeks. But the answer out of their mouth is not. I can move really quickly, I can do it in three weeks. The answer is, I bring a prepared mind. Three weeks, if I really come in knowing that this is a this is a problem that I’ve spent many months working on the problem

Earnest Sweat 20:49
That made me think of the first criteria, that portion you’re speaking to a lot of people went to speed, because you know, it’s one thing finding sourcing, the other part is about being a fund manager is winning. And so they’re only, they’re only approach to winning is to actually, you know, speed. If you are not a fan of that, when it comes to the winning bucket, what attributes are you looking for?

Eric Sippel 21:20
So part of my rubric is three S’s sourcing, selection and stewardship. Most people, triple click most LPs, triple click on sourcing, what does the network look like, and the like, for me when I am choosing, and by the way, I’m not saying that that’s not really important. It’s vitally important. But me sitting in the seat that I’m sitting in, I think that’s very difficult to distinguish among GPs who has the strongest network, because not only is it whose LinkedIn to hoe, but it’s also if I were to ping you, I might not be the first person, you may not respond to me within 15 minutes. On the other hand, if I were to ping somebody else, let’s say we ping Santosh, as an example, you mentioned him, he will respond to me within 15 minutes, because we have a really strong relationship. And so it’s not just the breadth of the relationship, it’s the depth of the relationship. And you can’t measure that sitting in my seat. It’s vitally important, but you can’t measure it. What you can measure is stewardship, how much value to GPS add to their founders, you can see what they’re doing, you can ask them to describe situations you could dig underneath that you can talk to founders and find out if that was real, you can ask those founders, that other GPS on their cap table and how they’ve helped them to really calibrate, you could talk to other GPS about it. So you can really investigate stewardship. And by the way, stewardship, I think, more is what predicts depth of network, not breadth of network but depth of network, it predicts how likely it is that a founder is going to take your capital, because if you’ve been extremely helpful if you introduced 80% of the revenue for the first year and a half to accompany. Guess what that founder is going to do in the world for you. And in particular if you’ve done that, for every 1000, you’ve made massive introductions for every founder. And so guess what, when a potential company comes to a GP and says, Hey, what should I know about you, they immediately send them over those founders, those founders absolutely rave, and they win the deal. And those GPs have, you are able to talk with the founder and say, hey, look, you don’t want to wait an extra three or four weeks to see if this is going to work to find the right GP, founder fit, the money is going to be there. And so yes, winning is really important. But I think you win from stewardship in venture, there is never a bad time to invest. You should invest through cycles evenly. Because we’re talking about the future. And we’re not just talking about particularly if you’re talking early stage seed a because those businesses take for seven to 12 years to exit. And so much has to happen in terms of follow-on rounds of financing and where the world is going. That there’s no one right time or good time or bad time to invest in a venture. Now after the fact of course, you can look at vintages and say oh, that was a bad vintage so that’s a good thing. But yeah, And that’s after the fact that doesn’t count. That’s the result. So part of my rubric is I’m looking for areas where there is a mismatch between capital and opportunity. And so, you know, as an example, I have been excited for the last seven years. In HortScience, non digital non software science coming out, it’s being spun out of universities, where the federal government has basically, you know, paid for technology development for 10 years. And now it’s ready for commercialization. That’s an area and as a firm Rhapsody ventures, where I’m on there LPAC that AI is one of my favorite funds. Investing Exactly, exactly that. More generally, I am always excited about deep Tech. I feel like investing in areas where you don’t have a technology advantage is where you’re really focused on execution is much, much harder, then where you have a real technology advantage. So I’m really interested in that. I continue to believe that immigrants are not receiving the level of capital that they should be receiving. So as an example of funds Unshackled Ventures. Another example is Foothill Ventures, which invests in primarily immigrant PhDs in the deep tech space. So those are some of the areas that I find particularly exciting. You’re

Earnest Sweat 26:43
the second guests. LP guests mentioned the university’s spinouts, says Chris from a Ahoy Capitol.

Eric Sippel 26:52
Oh, yeah. So Chris, is it Chris? Is it fellow Rhapsody LPAC. Member? Yeah.

Earnest Sweat 26:55
Now we’re gonna take a quick break to speak with our sponsor.

Alexa Binns 27:00
On the show today, we have industry expert and sponsor, Hugh Baron, who runs the venture capital practice at global executive search firm, Armstrong International. Thank you Hugh for partnering on the show.

Alexa Binns 31:23
Any advice for folks looking to work in venture? Yeah,

Hugh Barran 31:27
sure. So I would, you know, from, from, from the people I speak to, you know, and what I would, you know, I think if you are currently in banking, currently at a startup, whatever, whatever it might be, I think at the end of the day, you know, venture firms invest in technology. You know, most of that technology is software based. So if you can find it, it’s about being authentic. And I think that’s, that’s when I speak to VCs and hiring for VCs on the investment side is, you know, authenticating curiosity, you know, so what have you, what do you do outside of your day to day that shows that you’re passionate about X, Y, and Zed because that’s venture at the end of the day. It’s it’s 24/7 all consuming industry. And if you don’t love it, there are easier ways to make money. That’s why That’s why I say to everybody, so you know, if you’re if you’re two years into Goldman, you’re three years in consulting or your your, your whatever startup just I would say pick two areas, it can be food, technically, crypto, it can be AI can be deep tech, whatever, find what you’re passionate about, and I think go super deep in those areas. And the first thing I’d say is, it will probably, you know, don’t expect it to happen in six months, it might take two years. You just got to prove that and do enjoy it at the end of the day because it’s access to harder job is to consuming for you not to be not to you know, absolutely love it and want to do it you know, outside of outside of your day to day works, I think. And you know, if you can authenticate, find what you’re interested in, authenticate that curiosity, write a blog, post, whatever, start a podcast, go on to meet founders in your spare time, find what companies are interested in. If you’ve got the money trying to Angel invest in stuff that you find interesting. I think that’s just you got to show that you’re, you know, you’re kind of in it for the long haul, I think and that will really impress most venture firms.

Alexa Binns 33:15
I will say the best advice I got when breaking into a venture with Rebecca Kaden said, you can start doing the job, when you don’t work for a specific fund. Learn how to filter and you can start sending great deals to the people who have been kind enough to take a coffee chat with you. And you can prove you know how to do the job before you’re in it. So I love that advice that maybe the job comes two years later, but you can actually start doing venture, you can start sourcing and filtering for 20 companies at once. 20 funds at once because they haven’t got dibs on you yet. Yeah, exactly.

Hugh Barran 33:54
And, you know, I do also like the Paul Graham quote, which is like if you have people go to and say I want to go into VC go to a startup first because in startups because that’s what you might never have to work again. And you have invaluable experience to help a founder. So I would also echo that echo that as well.

Alexa Binns 34:09
From your perspective, what does venture look like going forward?

Hugh Barran 34:14
Look, I think we’re in an interesting, I think we’re in a, you know, an interesting spot where I think we’re in a recalibration and restructuring of how venture has been for the last 20 years, which was, you know, bluntly investing in FinTech you know, consumer tech, and enterprise and b2b SaaS companies. I was coming at 90% of where venture dollars when I, you know, I do think, you know, with the use of AI a lot building those companies, you know, making engineers more efficient is going to come dramatically down and I really hope you know, venture goes back to solving the really, really hard stuff, you know, and nothing against 15 minute delivery, but if there’s more there’s more venture dollars that goes into whether it’s hardware and climate tech, you know, AI and robotics, you know, some of the areas of defense tech and aerospace, which I think is super, super important. Globally, if we can see more venture dollars just, you know, risk capital going into solving real problems. I think that’s, that’s where the west where Will, that’s where I hope the next 20 years, that’s where I think this there’s gonna be some really interesting returns, I think, software and SAS is is had a great 20 years, but it’s coming to an end. And then the next 20 years is focused on solving real real problems of real capital. And so, and I spoke to one fund the other day that said, you know, we’d want 80%. Today, 2% of our portfolio is software. 20% is hard tech and b2c, and we’d want that to be 5050 over the next five to 10 years. So I definitely think we’re seeing a recalibration, I think we’re seeing a restructuring. And I hope we can kind of go back to solving real problems, but also that 500 million 600 million 700 million exit is a good exit, and that there’s a view that liquidity is so important for this industry. And if we don’t get liquidity, it’s, you know, everything dies, m&a needs to reopen for companies and if that can get off the ground, that can be a kind of recalibration. That’s not all about just building, you know, an unprofitable unicorn. I think that could be, you know, really exciting. And make you know, the next one is super interesting for venture. Yeah,

Alexa Binns 36:32
I can see, solving big major problems is also probably quite helpful for recruiting the best talent to this industry. That you are real. You have a real mission in the work that you’re doing. You’re such a good partner to have in a venture. Thank you. For folks who are interested in working with you. And Armstrong International, feel free to email Hueh at Armstrong i n t.com. And now back to our LP interview.

Earnest Sweat 36:59
One thing we hear a lot of and even our experience, within the kind of booking this show, is it’s really hard to find family offices. What advice do you give to emerging managers of even getting into this world and finding family offices,

Eric Sippel 37:15
The advice I give is, try to get an introduction. Try to get a warm intro. And so if you think that I’m somebody you want to be introduced to as an example, you look in your LinkedIn and you see who you and I have in common. Santosh is an example. And so you asked Santosh, can you make it? Can you make an intro to Eric? That’s sort of the best way to learn who they are. Talk to other GPS, who are your friends and say, Who are some of your helpful LPs? Who are some of your LPs? You know, you don’t have to ask them for the intro. You could be they could you could depend on your relationship with that GP, but try to learn who those who those are. A conference that I think is hands down the best emerging manager VC conference out there called RAISE. I’m on their selection committee. But that’s great . We had 100 GPS this year, and it’s a selection. So out of like 650 applicants, but 100, GPS and 200 LPS in the room. And so going to a conference like that, or other conferences are great ways to do it. But then lastly, I would ask your LPS for introductions, say all right, who do you know, can you introduce me to a couple of people in your network that you think might be interested in? In me? It’s hard to ask somebody who hasn’t invested. So people i People ask me all the time, well, can you make an introduction for me to either your friends or to this particular person? And if I haven’t invested capital, I’m generally the very rare exception, but generally the answer is I just can’t do that. My best intros come from other LPs but where they’ve invested but particularly fund to funds, and university endowments. And so I have really good relationships with a number of funds of funds and university endowments. We trade ideas all the time. We compare diligence notes all the time. I really respect. It’s not that I don’t respect family offices and their diligence process. But if they’re going to spend 10 or 15% of their time, and it’s just a person in a space, whereas a fund of funds has a full staff of people, 100% of their time is spent in the space and they see everything out there. They’re going to be a more reliable intro for me, then, you know, some family office that I trade notes with from time to time. So

Earnest Sweat 40:08
Is this, this just makes me think of it? So is the answer for family offices that haven’t really institutionalized is to rely on consulting firms?

Eric Sippel 40:19
So, I mean, you asked the question a while back about, you know, if you’re an allocator, what can you do? So, investing in an outstanding fund to funds, like Cendana, or Industry Ventures or someone like that, they are really good at introducing their LPs to their GPS. And so that’s a great way to start to really get immersed in the ecosystem to sort of avoid a lot of mistakes, because there are 1000s of emerging VC managers. And so, how are you going to get introduced to them? And how are you going to evaluate them? That’s just hard. So I’d say that’s a, that’s, that’s a great way to do it. If you could otherwise, find somebody who’s immersed in the ecosystem, who will make introductions for you. That’s great. But that’s hard to find. So as consultants fund to funds, those are, those are, I think, ways to sort of get in and try to figure it out. And once you’re there, you go into an AGM, and you meet people like you meet me, and you know, you strike up a friendship? Well, sure, you can then get introduced that way, or you meet other LPs at RAISE and you can meet people that way. And so there are ways to get there without having to pay the fees. But you can shortcut a lot and get really high quality by getting us and Cendana and Industry Ventures or Stepstone. Portfolio. Was

Earnest Sweat 41:50
there ever an introduction and to a fund manager where you weren’t so sure about the strategy, but over time, you got to cultivate a relationship? And then you finally pull, you know, pull the trigger and invest it?

Eric Sippel 42:06
Oh, yeah. All the time. So as an example,

Earnest Sweat 42:10
yeah. So I’ll give you an example.

Eric Sippel 42:15
Joule Ventures, AI focuses on pre seed and seed Israeli deep tech. And I was introduced to the GP from spice, Amir Kashi, who’s a friend. And I had a meeting with Daniel, one of the GPS, and I said, Alright, I like what you’re doing, I seem like a nice guy, but I’m not investing. And here are the reasons why. And, but I’m happy to continue to help you. And I do this, not just not infrequently, so of the 45 or 50, GP venture GPS, I’m currently invested with probably a quarter of them have followed this story. Where I say I want to help. I like what you’re doing. And then over six months, a year, sometimes I pass on that fund, and it’s back to the next fund. So I pass on funds to invest in fund three, I pass on fund one investment fund two. Anyway, back to Daniel. So I kept working with Daniel. And every time I made a suggestion, he listened, he either pushed back and said, This is why it doesn’t make sense. And I was persuaded by him. Or he said, that this really does make sense. And he did it. And through the course of that I got to work through all of the things that I wasn’t sure about. Because those who because I presented as in, well, I think the LP world will care about this. And this is a problem. And lo and behold, they’re, you know, I came out and like I should do this. This is crazy. Why am I not doing this? And so I did. And it’s been a fantastic investment on their LPAC as well, I’m on 12 LPACS. And so it varies. Wow. In terms of what else LPACs do but the best LPACs are composed primarily of the LPS that they really want to retain for the future. And they then have a cadence every twice a year, three times a year, maybe it’s only once a year, but it’s in person at the AGM. They have a cadence where they bring the LPAC in. And they ask, and they provide information at a level that they can’t really provide to other LPs. It’s not that if other LPs why the information, they wouldn’t provide it, of course, they would, they’d be transparent. But they make a point of talking to their LPAC about the companies that have challenges, the companies that are likely to break out about what they’re seeing in terms of valuations and deal flow about expanding the team. And it’s a real conversation where they’re listening to their LPAC. And they’re providing transparency to their LPAC. When that happens, L PACs are LPAC members and are much more likely to understand when things aren’t, aren’t going right. And I will guarantee you 100% of the time in the asset management business in every asset class, there are periods of underperformance for every single asset manager always. And what you want and what you don’t want is in the venture space for that to coincide with the time in which you’re going to market. And if you’re and because what you really want is you don’t want to turn in your LPs, your easiest LPs to get are the ones that you currently have. And so you have to do everything you can. And by the way, your LPAC members are the ones who carry the most influence over other LPs. And they’re and they’re returning. And so you want to make sure they come back and you and they’re more likely to come back if they feel like they’re part of the team if they’re hardly decision making, if they understand where we how we got to where we got one that sort of comes up more more frequently these days is how is your follow on strategy? Where are you going to allocate your follow on dollars. And I have a very strong opinion as to where to allocate it. And we talked about the syrup period. And I think that the dessert period creates a massive opportunity for seed stage funds, who have reserved a reasonable amount of capital. And so I’m going to divide the world into four tiers of companies. Here one companies, and there were fewer of those because of the because of the desert world. But tier one companies are growing like gangbusters with great metrics, there are fewer of those because customers are not buying as quickly. But what you’re really trying for is, is true product market fit there is really, that’s a need to not want to in terms of the product. Hey, there’s tier one. There’s tier two, which is they’re still growing nicely. There’s that’s a need to for most customers, but they’re not growing. They’re not just sort of flying off the page. But they’re growing nicely, let’s say 50% per annum reasonable customer metrics, some things have to be fixed, still, they still really need capital. Here three companies, there’s something kind of wrong, you haven’t really found Product Market Fit yet. They’re just not growing as quickly this churn, the expenses are higher, CAC is higher, whatever it is. And there’s tier four companies, they just, they suck. They’re just not that good. They’re they’re living get here for companies never got funded in any environment as following. They got funded initially, of course, here three companies in desert world, they all got funded, and really nice valuations. And some of those will end up succeeding because again, this is all about probability. This is not a it’s a 0% probability that tier three is going to succeed. And 100% probability a tier one is going to succeed. It’s just when you are an investor, you have to think about what is the probability that my capital is going to return is going to return the fund? Because without a return the funder is it worth putting your capital in? And I’d say probably not now, follow-on capital is a little bit different, but is it going to really drive the drive so that the aggregate of the investment in that company will return the fund? So what I have that is great for seed stage managers now is tier two companies have been on sale for the last year, year and a half, that these are companies that would have done their a and instead you could do a seed extension at a flat to slightly uptrend. And you could allow those companies and then the reason is because those companies need to stay alive till 25. But they really need to stay alive until capital really starts flowing better. So they need that capital, they are still doing really well, they are capital efficient. But they don’t want to do a large dilution of round number one or number two, they can’t, because of the graduation rate from C to A and then of course from A to B, this rose dramatically into ZURB and has now come back to normal. What people don’t understand is we’re now back at normal, we’re not below significantly below normal. We’re at normal in terms of graduation rates anyway. So tier two companies are unsealed. That’s the best place to put your capital. Here are three companies. Well, if all you’ve got is tier three companies, well, that’s not so good for you. But you should follow out into your tier three companies, because you don’t have any tier two companies but that you asked about the LPAC. And what we’re talking about are some interesting conversations and lpac. So the interesting conversation is, okay, GPS, tell me which of your companies are tier two, which are tier three? And why are these the tier two? And why are these the tier three? And how are you both in terms of your time and your capital, because time is also a critical resource, how you allocate time and capital to lean into those realities.

Earnest Sweat 51:53
There’s been a tough time or just unprecedented times over the last couple of years, Eric, any kind of parting words to our emerging managers, it’s a really long

Eric Sippel 52:06
business. It takes forever for a fun one to get into the carry before you get into fun two, and fun three and the like. And so it takes real persistence and grit. And that only comes from having passion. If you are not passionate about what you’re doing, it’s too easy to get off of the train. And so what I would say to those who are not passionate is that maybe it’s not the right fit. And to those who buckle up, because it’s going to continue to be a winding and difficult road. They’re just going to be new challenges coming forward. Coming out of the last set of challenges will make you stronger for the next set.

Earnest Sweat 53:10
Thanks Eric.

Alexa Binns 53:12
See you later, Allocator!

Proudly sponsored by

Subscribe for updates on events and resources for LPs and VCs.

The Hosts

Earnest Sweat

Earnest Sweat is the Founding Partner of Public School Ventures, a dynamic syndicate of over 600 technical operators, go-to-market specialists, and LPs. Previously, Earnest built new venture capital practices at Prologis and GreatPoint Ventures. His focus is on investing in value chaintech, specifically vertical SaaS, applied AI, middleware, and B2B marketplaces, which are poised to revolutionize foundational industries like real estate, insurance and supply chain. Earnest has sourced and led investments in companies such as Flexport, Flexe, KlearNow, and Lula Insurance.

Alexa Binns

Alexa Binns is an angel investor and LP. An experienced investor and operator, she has climbed the ranks from associate to partner at Maven, Halogen, and Spacecadet Ventures and built digital and physical products for Kaiser, Disney, and Target. Alexa has worn every hat in venture from fundraising to sitting on boards. She invests in companies with mass consumer appeal, focusing on the future of shopping, health/wellness, and media/entertainment. Key angel investments include The Flex Co, Sana Health, and Chipper Cash.

Copyright © 2024. Swimming with Allocators. All rights reserved.