How 2023 Has Reshaped the Landscape for VC Firms

With Winter Mead,
Founder & CEO, Coolwater Capital
This week on Swimming with Allocators, Earnest and Alexa welcome Winter Mead, Founder of Coolwater Capital. During this conversation, Winter shares his journey from working in tech startups to becoming a venture capitalist. He discusses the challenges faced by emerging managers and the importance of training for aspiring fund managers, the changing landscape of venture capital investments, and the difficulties faced by limited partners (LPs) in assessing talent. Winter also emphasizes the importance of transparency, accountability, and accurate pricing in building a successful venture capital firm, the need for better management and increased specialization, and more.

Highlights from this week’s conversation include:

  • The journey in institutional investments (2:04)
  • Perspectives on Venture Captial (3:50)
  • Becoming a coach for emerging managers (5:50)
  • The Manager Accelerator Program (9:18)
  • Functions of a VC Firm (12:42)
  • Insider Insight: Tim Flannery on the need for Electronic Subscription Documents (13:27)
  • Finding investors (16:45)
  • The Evolution of Venture Capital (19:37)
  • Supporting Emerging Managers (22:24)
  • The rise of fund formation (24:38)
  • Shift in market dynamics (26:36)
  • The selection process for managers (33:00)
  • Trends and shifts in the industry (35:19)
  • The mismanagement of portfolio construction and reserves (40:43)
  • The need for increased specialization in fund formation (41:35)
  • The potential rise of specialized venture funds (42:36)
  • Final thoughts and takeaways (45:45)

Coolwater Capital focuses on emerging managers and technology investments. The firm has worked with over 240 emerging managers in the last four years by focusing on a model to build, launch and scale emerging fund managers.

Passthrough turns investor onboarding into a solved problem – it seamlessly manages subscription document distribution, execution, and compliance in minutes. As a leader in fund workflow automation for investors, fund managers, and other fintechs, Passthrough provides an integrated platform solution that makes the subscription document process turnkey for investors with replicable and verifiable identity information built in for future use. In addition to subscription documents, Passthrough also offers a full service KYC/AML product that streamlines collecting information from investors and screening them against sanctions lists so fund managers can remain compliant.

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.

Transcript

Earnest Sweat 00:02
Welcome to Swimming with Allocators. I’m Earnest Sweat and each episode, Alexa Binns and I give you a VC podcast from the LP perspective. You ready? Let’s dive in. On today’s episode of Swimming with Allocators, we had the pleasure of speaking with Winter Mead, the Founder and CEO of Coolwater Capital.

Alexa Binns 00:19
Winter is a coach and advisor to emerging managers. And I really got the sense that I was talking to one of the more helpful people in the ecosystem, everything from what operationally you need to be prepared for as a new manager, as well as you know, who you’re up against. Winter told us he sees basically every emerging manager in the market. And so he’s got a real eye for who’s, who’s standout?

Earnest Sweat 00:48
Yeah, there were so many great nuggets from this episode, but to name a few just to get you enticed to jump in. One, why being a great fund manager is equally as important as being a great investor to the challenges LPs actually face and diligence seeing managers in this interesting market. And three, what he anticipates will happen to the emerging manager ecosystem. So with that, let’s dive right in with Swimming with Allocators. Today, we have the pleasure to speak with Winter Mead, the Founder and CEO of Coolwater Capital. Winter is an allocator turned advisor. His investment firm Coolwater Capital focuses on emerging managers, and Winter is a guiding voice for allocators and managers alike. He’s the co-founder of the LP transparency movement called OpenLP, author of the book How to raise venture capital funds and operator, as I mentioned, of Coolwater, an Academy for training emerging managers. We’re really excited today for this conversation, because we’re definitely gonna get some training today. So Winter, super happy to have you, man. Thanks for joining us.

Winter Mead 02:01
Thanks, Earnest. Thanks, Alexa.

Earnest Sweat 02:05
First question I just want to jump into is, could you just share your journey with us in this world of institutional investments? And how you came to like, What’s the origin story to Coolwater from all that experience?

Winter Mead 02:19
Yeah, so I won’t go all the way back. But I will go back to when I moved to San Francisco during the last great recession. And I started working for a few tech startups. And that was probably my initial introduction to the substance of venture capital. So how does it actually work? And at the time, it was the founder perspective and the VC perspective. And I was like, Who are these people giving capital to these other people? And this is like funding these, like, really cool projects, right? So you know, those people were venture capitalists or angels, right? And that, like, started, you know, pulling on that string. And so this opportunity came up with a friend, she was the wife of another friend I’d gone to school with. Again, this is the lucky part. Right? She reached out and said, Hey, we’re hiring for this private equity role. So I had a couple of interviews. And because I had done some finance and investing work beforehand, I was able to, you know, I guess, get the boxes checked, and get hired there. And so I built this perspective on venture capital more as competing with other asset classes. Right. But I really got excited by venture because looking across, you know, other asset classes, there was a true value creation opportunity, and venture, right, the what people will now kind of, you know, colloquially call the zero to one, right? Everything else is kind of like one and later, but you adventure, you can actually, like, see a problem, try to solve the problem, you’ve created the solution. And it didn’t feel like that was really going on in other asset classes. It was more financial engineering, which isn’t a bad thing, right. And you can be successful and clip yields, like with financial engineering, but it had a different feel, right, it was kind of like its venture was its own unique beast, right. So that was the perspective I gained, I got excited about venture over a couple of years there. And I kind of said like VC is like the thing that is really, really interesting. And so I put the feelers out and got introduced to SAP, which is now sapphire partners, and kind of got in early there, which is interesting for me, because it was like a build role as well as an investment role. So the first one, I didn’t really gain this perspective, because it’s like you get plugged in, and you’re investing, right? Like you’re an employee of the firm. You’re like you’re doing what has already been built. But in the second role at SAP, it was co building the funds strategy, and the actual portfolio and getting in on the ground floor of the portfolio construction. So it was an interesting curve, it’s a more active curve. And I think I see more entrepreneurial LPS seek this out where they’re like, oh, maybe I’ll go work at a family office that just was created in like the last year or two, or maybe I’ll go to this new LP, like, new strategy at an existing LP shop where I can like, grab the reins, and I can define kind of the strategy a bit more and put my mark on it. So that was interesting. And I built the perspective of, you know, building as well as investing. And I realized, like, how hard the build process actually was, and it was hard for us. And we had a massive budget, right? So what I started to see, I started iterating on this concept, you know, which is eventually Coolwater in 2016, or like, what would it mean to be the best coach? For emerging managers? Like, what would that mean, right? And again, like this came from people asking me, right, as an institutional LP, you get a lot of the same questions over and over again. So you’re writing these questions down in your little FAQ, like in your little leather binder notebook. And after a while, you’re like, wait a minute, I’ve written that question down, like 15 times, like 50 times 100 times, you’re like, wait a minute. So why am I answering this question? 100 times, right. That to me, like if you’re at least living, or if you abide by a growth mindset, right? Or just like a scalability mindset, you’re kind of saying like, maybe I shouldn’t answer the same question 100 times, maybe I should figure out a better way. Right. And the better way for me in 2018, was writing the book, How to Raise a Venture Capital Fund, it felt like there’s this gap of knowledge, right? The same reason why hashtag open LP was interesting to create, because like, there’s all these disparate sources of information out there. And like, how can you consolidate all that? So you get the information, you still have to implement the information, right? And then, you know, how can I spend time on implementation and CO building, rather than just spending time delivering information like this again, like the one on one versus a two, a one. And so the book kind of solved a lot of problems at the time, you know, what people were asking me, I could just say, like, hey, check out the book, I’ll even give it to you for free, like, give it for free, if you want. And so that kind of felt like it was solving a information disadvantage that emerging managers had, you know, and then I started thinking, okay, what are my gaps? Right? You write a book, you kind of have to know what you’re writing about, or hopefully know what you’re writing about. But it felt like the gaps were on like, the CFO side, the COO side, like, how does an affirm actually run, right? And there’s these different functions at a VC firm. It’s not only investing, right? And I started to gain that perspective a little bit when I was kind of helping build out the business processes and the investment processes and developing the templates that you use for, you know, investment, diligence, and operational due diligence. And so I was like, Okay, who does that add a bridging manager? And the answer is usually like, one person, right? It’s the person that founded the firm. And like, it’s just like, all of a sudden realizes that they’ve become this, like the CXO of like, 15 different things. Yeah. Right. And so that felt like a huge disadvantage, especially like on a mission driven level understanding, like, Where does innovation come from? Right. So I was like, well, who’s helping that company? When, like, they need the most amount of help? Right? So I was consulting, working with like, a couple of different funds. I consulted with a company. And I was kind of like, oh, well, funds, if they’re really good. They’re actually driving impact at like, 20 companies at a time. Right? And so, and I’m helping like two or three funds at a time, so helping 40 to 60 companies, what if I could help like 10 funds at a time or 20 funds at a time, right? And so that was the idea behind like, gilt like moving into the cohort model, which was like, Okay, I, you know, I have this perspective, as an institutional investor, I invested a bunch of other people’s money, you know, somewhat successfully into a lot of really interesting managers that were just like, incredible at the craft. And then eventually, that turned into, you know, what Quwwata is, was just like training emerging managers, but trying to do it in a curated way, with the best emerging managers of like the next generation of emerging managers, and do that, because it’s a more scalable way to put managers into business and again, drive greater impact at early stage, which is primarily when a lot of

Alexa Binns 09:18
that manager accelerator program look like so it’s

Winter Mead 09:21
grown a little bit. It’s multiple programs. There’s a core program. And the concept behind the core program is fun management. Right? So there’s a difference between being an investor and being a fund manager. I think that concept has been iterated on in the last few years and I think is generally accepted. And you can be a good investor and not necessarily want to be a fund manager. Right? So we won’t go into it. For time reasons on this call, but there is another program for investors that we run and The one thing I’ll say about that is the important thing for investors, if eventually you want to become a fund manager is building a track record, right? Yeah. All LPs, whether they tell you or not, want to look at your track record and how relevant it is to the strategy of your fund, right? You were doing supply chain investments, you’re doing supply chain angel investments, you want to raise a consumer marketplaces fun, maybe, you know, you want to raise a, you know, crypto fund, well show me where crypto was relevant in the supply chain background, you know, you want to raise the supply chain fund. Oh, that’s interesting. Right. Okay. Now, now I can start to dig in and say, Okay, what is your thesis around supply chain? And why does this fun need to exist? And why are you the person who kind of likes being at the helm of that fund? So there is like a, like a good investor perspective of like, hey, build a track record that’s relevant to the fund, you’ll eventually launch. If you want to do that, again, it’s a much less opinionated program. The fund manager program is opinionated. And it says, Hey, you want to be a fund manager, you care about fiduciary responsibility, you care about governance, you care about building the right business processes, if that resonates with you, if you want to build an institutional firm, right, you’re not building an institutional firm to, you know, Jack, the amount of bureaucracy that’s there, right, like at your company, right? And just create, like, the most amount of business processes where you’re just like, drowned in filing paper all day, right? Like, that’s not the goal of institutional, the goal of institutional is like, alignment of interests, it’s actually the business processes becoming more efficient, right? So that you can scale, right, it’s like putting the pieces in place so that you can scale, right, it’s the same thing you probably think about when you’re investing in a company and whether the company can scale it’s like, Can this company scale? Great, you’ve got a couple of customers? What if this goes to 1000? Customers overnight? Is it gonna break? Right? So if you’re an Emerging Manager Fund, Hey, you’re 5 million in AUM, what if I gave you a $100 million check tomorrow? Are you going to break? Like HUD? Like, are you set up for success? Like, are you thinking about setting yourself up for success? And it’s a different calculation than just an investor, right? That’s kind of like, Hey, I just need to find great opportunities. It’s more of a sourcing game and a network game upfront. And there’s things that like, again, like the institutional journey will care about more so than the investor journey, obviously, at the heart of it, what I’m not saying is like, You’re not an investor, if you’re a fund manager, what I’m saying is like there’s a different behavior for fund managers. And so yeah, this core core thing really focuses on fund managers that want to understand, like the different functions of a VC firm, or an investment firm, which are operations, which are fundraising, which are investing, which are potentially value add strategies, right? There’s potentially more but like, there’s these functions that all of a sudden were alluding to earlier, they have to jump in to and kind of understand really well, and you have to run and set up the right foundation, so that you can eventually scale and like the intention is to scale, right, you don’t have to go, this doesn’t mean like you have to become a multibillion dollar firm. But it does mean that you’re looking to build a real business that you could potentially walk away from, like at some point, and that business can still run, right? It’s the legacy option of the business, right, which you don’t always need to do, again, to be a great investor. But I think for this program, that’s where the training is focused on is like these people that want to elect into being a fund manager and fund management and like being the CEO of their firms.

Earnest Sweat 13:27
Now, we’re gonna take a quick break to speak with our sponsor. Now, there’s so much for today’s, you know, GP or managing director of a firm no matter the size, the business has just become more and more complex. And, you know, it’s my belief that it’s going to become more and more complex, as we see this decade. With that, and with the advantages of the electric electronic subscription document core product and KYC, AML. There’s so many different portions of the or I should say, there’s so many target customers that you could go after within the ecosystem. Who do you think this is for? Or is it do you think is for every type of GP just Just curious on that

Tim Flannery 14:20
Passthrough is for anybody who’s got more than 20 investors, and that’s about it. We work with $300 billion fund managers, we work with $10 million proof of concept funds and everybody in between. But the moment that you need to move on from something that’s a fund in a box kind of strategy, where you have discerning LPS where you want to be able to go use fund formation counsel, then you need to have something in place to actually go and do this. Because otherwise you’re going to get trapped in higher and higher billable hours. You’re going to put forward a you’re going to put forward an experience for your investors that isn’t going to be the level at which you would expect them to get it and so you need to have a professional, a professional way for them to to interact with you. And so this has been true of everybody, if you’re in venture, if you’re in real estate, if you’re in private equity, if you’re multi strategy, it doesn’t matter, we’re moving to a world where everything’s electronic subscription documents, one of the benefits of faster is I don’t actually care who your fund administrator is, or who your lawyer is, or whatever technology providers you’re doing, by being the one platform focused exclusively on investor onboarding, means I can go plug in to everything else that you are already working with, to make it seamless for how you’re going to go out and raise. And so this is true, if you’re going out and putting together a fund with your typical VC tech stack and service provider stack. And just as true if you’re gonna go out and work with the large banks and trust administrators and custodians, and everybody else has the most complex requirements, you know,

Earnest Sweat 15:50
In doing research, and Passthrough, I found some really interesting data that you guys can pile on the state of fundraising, which is, you know, everybody’s at the top of everybody’s mind right now. You surveyed about 100 US funds, I was curious if you could just share kind of the highlights of insights that you guys found, that will be relevant for, you know, our audience,

Tim Flannery 16:14
Well, about 80% of fund managers think that it’s really difficult to raise right now. But 80% of fund managers also think they’re going to meet or exceed their targets. And so that either means they are incredibly good, or maybe there’s an element of hubris. And so both are possible. I think that that expectation does reflect some new strategies that they’re using, but also expectations for the future macro environment. About seven out of 10 fund managers think the macro environment is going to improve over the next 12 months. And so it’ll be a little bit of a tailwind behind them. But we’re also seeing fund managers that are pulling out new economic terms they are, they’re changing their fee structures, they are allowing co investment opportunities, they’re feeling pressure from LPs, for secondaries, and not just secondaries within their portfolios, the ability for LPS to actually be able to exit their LP positions, and the fund managers are often meeting it. And so it’s a very good time to be an LP right now. So when you consider that everybody is pulling out all the different stops, okay, then maybe that’s how they go do it. We’re seeing that about half of the fund managers that we speak to are saying, I’m gonna go rely on my existing investors more, they’re just not gonna go out to market. And then we’re seeing the other ones say, oh, okay, well, my existing investors are tapped out, I need to go find new investors. And that means I need to focus on new geographies, it might mean that I need to go focus on a placement agent, it might mean that I need to go focus on a new type of investor altogether. If I’m heavily institutional, I might finally launch my retail strategy. If I’ve been in retail and the family office. For the last few years, I’ve been building relationships with institutions and it’s time for me to take advantage of that. And so managers are doing everything that’s in their power right now to find investors that are interested and willing to come into their fund. And it’s really forcing them to think differently about what is my strategy, not just to talk about what it is that we do, but get that message to the appropriate groups, because the message that works for one group is different from the message that works for another group? Absolutely.

Earnest Sweat 18:09
If you know, that’s very consistent with the conversations I’m having both with LPs and, and fund managers. Thanks to Tim and Passthrough. To find out how to give your LPs a better onboarding experience with Passthrough, go to passthrough.com/swimming. And now back to our LP interview over this next kind of stage of venture. Do you think people are looking and I know you have more experience in emerging managers, so we can start there or just looking at the overall ecosystem? Do you think LPs are looking for better fund managers or better investors? Or all of the all of the above?

Winter Mead 18:52
It’s a really great question. Yeah, I think we could debate that for hours. I do think it has to be both right. I think the initial filter is looking at things like, what have you done as an investor? And I think there’s more leniency on, you’re not the perfect fund manager, and you could still invest in a great investor. But I think like I said, the intention has to be there. Right? Like you don’t have to necessarily pass the operational due diligence, the odd with flying colors, like a fun one. But the intention of building into that right, and managing the compliance and thinking about the alignment of interests, and kind of building in that direction. Like that is pretty important for most people, for most LPs, like if you want to scale. And so I think given changes in the market, you know, whether you’re saying these are new government regulations or state regulations, right, there is this move towards more transparency, more governance, right. And that I think, is truly represented in other parts of the alternatives market, and it’s starting to flow into venture. Right. And, you know, I’m not here to judge whether or not venture will get over its skis in 2020 and 2021. But when you start to see a cottage industry, which venture was 10 years ago, grow into a mainstream vertical where venture used to be tucked under private equity, right? Yeah. And people used to not even like to call venture out as its own asset class. Right, they used to not acknowledge that there were different return drivers in different investment dynamics for venture than private equity is just all all one of them because Oh, venture under private equity, but in the last, like, 510 years, like, people wouldn’t even make that an argument anymore, right? Like venture is totally its own thing. Right. And now it’s like, okay, it has its own nuances. So how do you govern those nuances? And I think that’s an interesting conversation that we’re having right now. And you’re starting to see some of the regulations, new regulations reflect that of what’s going on here. Right, especially if, you know, there is a lot of capital, hundreds of billions of dollars being allocated over each investment cycle, right, two or three years, if hundreds of billions of dollars is moving, just in the US alone, moving into venture capital, it’s a real thing, right. And so it starts to have to grow up a little bit. And again, that’s kind of Coolwater’s culture, which is like institutional doesn’t mean bureaucracy, it doesn’t mean like, you have to be like, you’re losing your, you know, essence, as an investor, it does mean like, Hey, you have to adjust to this new reality. And it makes sense to kind of understand what you need to manage. And let’s like, identify that set that up. So you’re not spending 80-90% of your time running ops and fundraising, right? Because then, you know, the big picture thing here is, what is alpha for VC, right? It’s being super connected an amazing network with excellent investment, judgment and discretion, and that picking assets and helping those assets like develop and scale, right, and if you’re not doing that, if you’re just running ops, because like, there’s all these new regulations, if you’re just fundraising, like that’s where I feel like emerging managers have a gap, and they aren’t properly supported, even still, right, like, Coolwater is scraping inclined to like, you know, try to help emerging managers, but we’re not doing enough, right. Like, I feel like we’ve been impactful so far. But I feel like we’re still tip of the Iceberg in terms of like, again, helping that innovation layer. The big assumption here is like, you have to care about human progress, you have to care about innovation, you have to care about technological progress. If you don’t care about those things, and your final status quo, then, like, what we’re talking about doesn’t doesn’t matter at all. But if you do care about those things, how do you actually help that foundational layer of innovation, like those emerging managers, right, that invest one to three rounds before the big boys like the big VCs, right, that are, you know, writing these like big checks and coming in to these companies that have already been in existence for a couple of years at the point of investing, and then they, they kind of get the brand association, because they have the brands, but there is like this huge, huge kind of like layer of emerging managers that are being really, really supportive to founders and companies before those bigger checks are coming in. And I think, if they can save time, like to go back to the original question, like if they can save time, and run their firms more efficiently. That helps, right? And like, every time a fire drill happens for an emerging manager, you’re like, ah, like, now I gotta spend 10 hours researching something, right? What if Quwwata researched it? Right? And crowd sourced it and solve the like, thing for you, right? And gave you something that you’re like, Okay, great. Now I need to spend an hour on it. Thank you. Now I can spend nine hours on sourcing, right, that creates, I think, real progress. And it’s not obvious, right? It’s not like there’s necessarily a true KPI behind that. But it does, in my view, like if you do enough cycles, you start to see the impact being created. And the cycle starting to change scale, given

Earnest Sweat 23:50
How dynamic the landscape is, and Victor in the venture ecosystem, what are the biggest challenges that LPS face today with assessing talent? There’s a lot of noise. And then just just from that front, I’m sure that helps shape what you even build within the curriculum for your managers.

Winter Mead 24:11
Yeah. So the question is, what are the greatest challenges that LPS face today? Yeah, I think it’s, I think it’s similar. There might be a few differences in 2023 versus a few years ago. But one of the premises of a program like Coolwater is, you know, the world has changed, right? And this is a big reason for kind of starting it this way. Like I felt the first year. I didn’t, I wasn’t able to see what I thought was every single fund launch in the ecosystem, I think it was 2016. I think I met with 504 funds. And, you know, we did our off site, and you know, folks are like well, that’s too many and I was like, well, you need to know everyone in the market in order to have an opinion on like, what the best is like, you know, If there’s 10 doors, and you only open two of them, and you know, there’s gold behind 10 of them, right, and there’s gold behind one of the two, you haven’t optimized, right, you’ve under optimized because you haven’t opened the other eight. And so yeah, I think the world started to change fund formation, like it started to increase. That’s an obvious statement. But it got to a point where it changed how LPS had to operate. Yeah. And most institutional LPS have not adjusted to this new world. Right? They like when I started investing, call it 2010 11. You could effectively count every single microphone on two hands, right? And if like, you did throw the dart at the wall, like you’re successful, right? It’s just like, that’s the supply demand dynamics, right. And the pricing dynamics at the time. You know, if you maybe call that somewhat of a heuristic, like I tried to work really hard, and like, see everyone in the market primarily in the US, it was like 500, for funds and 2016. It’s only gone up since then. And it will really peak 2019 2020 2021. There’s even a lot of fun forming in 2022. Right, and a lot of dollars being put into, into the venture ecosystem. It’s definitely come down now. Right? So, the problems may have shifted a little bit where the problems kind of over the last couple of five years generally, was a discovery problem. And underwriting problem, right, so you had discovery, which was like nine out of 1000s of managers, how do I benchmark against the managers like who’s the best one, and then a diligence problem, which is like, who, who’s really good, I haven’t invested in a single Emerging Manager Fund, I’m just at the start of my journey. But you know, someone said a venture was interesting at my firm, and I’ve got $20 million dollars to invest. I’m gonna put $2 million into 10 emerging manager firms. And I don’t know where to start on the diligence side, right, because I haven’t built a fund to funds before, I haven’t invested as an LP before, I haven’t, like, invested generally into ventures like the different dynamics across other asset classes. So I think those are like two big gaps, especially in 2020 and 2021. And, like, there was a level of FOMO in the market of and, like perceived scarcity, where folks were just saying, like, Oh, this looks awesome. You know, I’ve only seen three opportunities. I’ve only opened three doors, like I might as well just like make this bet, right. But it’s, again, like you’re under optimizing if you don’t kind of build a structure to see everything. And Coolwater has like this recruiting process, like we’re trying to meet with every single person, every single emerging manager in the world, right? It’s like, it looks very busy. There’s a lot of, you know, little mice kind of spinning wheels around, like at the firm, like every day, like, like, I’m the I’m the mouse, but like, you know, it’s like blue, like trying to like talk with everyone, because you want like that perspective, okay, I’m discovering stuff. But is this like an optimal? Or is it a sub optimal? Right? Now I need to do diligence, like, how do you do diligence, right? The best way to do diligence is like, work with someone. Right? It’s very easy, like, right? You’re like doing all these interviews, and like you’re doing all this posturing. Just like start working with someone, like see if it works. And if it doesn’t, like shake hands and say, Thank you like, if it does, let’s double down on each other. Right. So I think that was the big problem. Big problems from LPs and like, the last few years, but then like, yeah, it’s shifted, the market shifted. There’s now less fun formation, from what I can see from my data from Coolwater data. There’s, and I think that’s corroborated by other sources, right? Like, there’s that famous PitchBook chart now that kind of shows like, look at how small fundraising for all managers is in 2023. And that, I think, changes the equation for how LPS thinks about it. So whether or not this is a problem. But you know, there’s different things that LPS think about now. One is like, are your marks your actual marks? I think that’s the biggest one. Right? So is this a 2x fund? Because you’ve already readjusted your marks? Or is this actually like a 1.3x fund? And I think the perspective that seems to have been lost over the last like decade is you have you have funds where like before, you could raise your n plus one fund with like a 1.2x. And like LPs and ventures were like, Yup, it’s a long term. I’m gonna get 30% net IRR. If I just trust the process, but you’ve kind of moved into this world or it’s like, I raised the fund last year, I’m raising a fund this year. I’m raising a fund next year, right? And I like to look at I’m like a to x funds. And you’re like, well, the expectation and I do believe that the performance of some crypto funds change this as well, where like I heard LPS Tell me a couple years ago where they’re like 10x is the new 3x. And so we’re not even gonna look at equity funds anymore, right? Because like, we’re only looking at 10x funds, and those people are now looking at 3x funds again. Um, but like there was this kind of sentiment right at the peak where it was like, hey, like, we can’t even do equity funds anymore because like we’re making so much money over here. I think that has changed where it’s like, but there is that like thinking of, right, like you’re doing the diligence, you’re trying to understand the marks, but you’re, you know, there is a, I think, a more measured pace now from LPs, where it’s like, okay, we expect two to three year cycles, we expect the diligence process to be drawn out a little bit more, we expect to have more time to understand what’s in your portfolio, right? So again, like if you’re an emerging manager, how do you react to that little bit more patience, resetting of the expectations, a little bit more, greater transparency, more buttoned up operations. So you, again, like you can do reporting better, for example, by like, the emerging managers have to adjust to that as well, where it’s not just like, hey, I’m gonna do a zoom call, and we’re gonna get a million dollar check into my fond, it has to be like, doing a zoom call, the expectation is like, that person is gonna want to do another zoom call, and then they’re gonna want to meet in person, and maybe they’re gonna want to come to my office. And like, that takes time. It’s slightly more frustrating from the GPS perspective. But it potentially and hopefully, potentially, but hopefully leads to better outcomes. Because there’s, there’s, and this is probably happening at the company side as well. There’s a bit more diligence going on, and therefore hopefully, there’s a better marriage at the end of the day. So I’m hoping that’s hoping that’s kind of what, what, what plays out. Valuations are kind of a big topic of concern and, like, how LPs are thinking about ventures in the greater ecosystem, right? Where if interest rates are low, and you’re chasing yield, venture is very attractive, right. But if you’ve gotten over your skis, and you have adventures too successful, right, and all of a sudden interest rates rise in other parts of them, alternatives, markets, like you start to have choices. And, you know, the funny thing about ventures for institutions is if you’re too successful, then ventures are less interesting for you. Which is counterintuitive, right? If you look at the data, the top decile of endowments, right, has the greatest exposure to Vc. But if they’re too successful, then they’re like, Well, we have this portfolio management theory and portfolio allocation theory that we have to abide by. Right. So maybe this means like, we have to trim our portfolio before we add a new manager. So it’s funny, the success of the venture has been so successful. And again, this is like something I don’t think is talked about a lot. But venture has been so successful, that it is too successful, where like institutions have to slow their pace into venture. Right? So this concept of, you know, venture eating the world, right? It’s like it’s eaten endowment portfolios, we’re now like, they’re over allocated, which is counterintuitive. You’re like, Well, why don’t you just put more money into the venture? Right? If it seems to be like, well performing? I think it comes down to some other other considerations that maybe are out of scope, but you know, liquidity and other things. But no,

Alexa Binns 33:01
if, if, if everyone’s sort of marking their own books, there’s a lot of asterixis. How are you selecting the managers you want to work with? What’s your process for sorting and stack ranking? It sounds like you’d like to get involved in getting working with them before you really make a commitment. Yeah, so cool.

Winter Mead 33:25
Water has really been built for that. It’s trying to cobuild emerging managers, and I think you have to sign up for that experience. Right? Not everyone wants that. I do think there’s a level of accountability there. Where like, if you’re building in a more transparent way, not transparent in terms of like, posting something on x, but transparent in terms of like, hey, you know, I can open up to you in a safe space and tell you how I’m building this, you ask the question around, like the actual portfolio assets. That’s a little bit of a different perspective, I think you shouldn’t be marking your own books, know your company as well. Have the information rights, be talking to the founders, talking to other people at the company, be able to talk about your companies and talk about progress and understand kind of, right, like you’re trying to get to the next round, right? Like you’re trying to build a real business, a viable business, like the goal of venture isn’t to keep on spending venture capital dollars, right to grow, it’s to like, at some point achieve profitability and you know, sell sustainability. So if, if people agree to that assumption, then there is this element of like, Hey, can you talk about your business with respect to that outcome? Yeah, and if you can, that’s what LPS wants to hear. Right? This is venture you’re again like you’re doing that zero to one like you’re creating something creation takes a little bit more time than just like grabbing a profitable company and kind of, you know, you know, creating some synergies across the company and like demonstrating like, you know, higher margin and potentially, you know, higher EBIT da or something. It’s a different game. And so I think LPS recognizes that I think the tough part of this market is like, getting LPS inspired that emerging managers and VC in early stage VC is still really interesting. Right.

Earnest Sweat 35:19
So to close, Winter. One last question I had is just what are the trends and shifts that you anticipate in the industry in the coming years for the rest of this decade? And how do you think, you know, Coolwater is preparing for them?

Winter Mead 35:34
Yeah. So this is a really good question. It’s, let me just consult my crystal ball. Give me a second. Okay, great, got the answers. So everyone should place their bets on red. The, yeah, the future is kind of impossible to predict. What I’m seeing now is some consolidation. Right? I think the world of 2021 is different from the world of 2023. It’s only been two years, right. And that’s a very short time in the period of venture, but it changed fairly quickly. On the fund formation side, I’m seeing more operators, like more founders start, do fund formation start investment firms, then, I think in the past, there was more even distribution from like founders versus like spinouts, from traditional firms. So I think maybe those people who are spinning out now have more founder mentality, and they’re kind of starting something. But it takes like a, like a more focus, discipline, personality, I think, to spin out in today’s tough market. So again, fun formations down, which isn’t necessarily a bad thing. There is some consolidation going on. And people thinking about consolidation, with whatever the number is now 7500, plus, VC firms that are kind of in the ecosystem, you should expect that, especially if you have people that want to scale. And again, like you can have the, you can have the, you know, pivot north or Harrison metal version of a VC firm, you can have the benchmark for the version of a VC firm, you can have the Sequoia Andreessen version of a VC firm, right? Like there are different sizes, and they’re different strategies, like not everyone has to like to scale up to be the biggest firm ever. So you can’t have people that say, like, Hey, I don’t need to consolidate, I’m really good. I’m executing the strategy. It’s a niche. I’m doing it. Well, the portfolio construction is dialed in, my networks dialed in, my strategy is dialed and I’m just going to rinse and repeat. So you’re seeing some of those people. But there’s also people that are slightly more ambitious. That’s an unfair statement. Those people who are doing that are ambitious, they just have decided on that strategy. There are other people that are ambitious in terms of they want to scale to a bigger, Aum. And like they’re thinking of like, okay, I’m at 20, or 40. How do I get to 100? What’s the right team composition? Right? So again, I think that’s a good thing, you probably see more focus when the consolidation means like, putting together the right teams, right? I think that’s kind of the core concept here. It’s like, what’s the right organization I need to deliver to build a better firm and to deliver a better outcome for my LPs, right. And it becomes more challenging as your fund size increases. So like, the bar almost increases at the same time, as your AUM is increasing, right? Like you have to get better. And you have to think about outcomes in a different way. Right, where you can be a little bit more flexible with a smaller fund, like you can be less flexible with the bigger fund and that skill set has to change. And that team composition has to change, potentially, the strategy has to change. Right? So when consolidation is happening, I think you’ll see more of that, over the coming years. I think you’ll also see, right? Like, if, if something’s easy, right. And fun formation, like the barrier to entry, has been lower and lower over the last 10 to 15 years. It’s been very easy to start a fund, right? Like you don’t need any credentials. You don’t need to do anything, you don’t need to come through cold water, you just need to flip a switch. And all of a sudden, like you, you have a fund. So this is something I’ve been thinking about and kind of seeing this in terms of behavior right now. Which is something these funds don’t think about. And again, this isn’t necessarily a bad thing. Like I’m not judging here, like some of these funds don’t need to do an N plus one fund. And so they’re kind of like, this is a good fund. Right? And LPs, like the institutional LP perspective is like, I’m going to invest, and I’m going to do, I’m gonna back you up for three funds, right? So the expectation is if they invest, they want you to do at least three funds, right? And that is a 20 year commitment. If you do one fund, it’s like, three to five year investment period. Gotta manage it out. But I’m starting to like seeing the writing on the wall for that little bit where people are like, hey, when you know the running was good, jump in, right. But now that there’s some dynamics that are changing, and it’s harder to fundraise. is like the cost of service providers is going up, this is a big thing that we’re going to hear more and more about over the next like three to six to 12 months. And that’s going to become a thing in the market very soon, like the cost of service providers is going up. So all of a sudden, it’s not even, like, cheap, like the barriers to entry are a little bit higher again, right? It’s going down because like, it’s super easy, right? It’s like, Hey, I’ve got the freemium version. And now it’s all of a sudden, it’s like, the paid version has been turned on. Right? Like, I’m over my skis. And so there’s a level of like, if you don’t set that intention to build institutional firm, there was a level of like mismanagement that’s gone on, where I think you, you probably saw this with, like, the shutting down of a certain SP SPV service, right, like, where it’s like things when they’re more expensive. You know, if it’s too expensive, what happens, you run the cash, like the business kind of shuts down. So there probably will be some of that that plays out, which is it, which has an effect of, I think, not understanding what you need to manage, or properly managing portfolio construction and reserves, where some people like don’t have the ability to pay for their funds beyond like a certain number of years, like they’ve already overspent the fees. And now it’s like, who’s gonna be paying for that? Right? Shut it down, and you try to sell it, you pay for it, right? Like, you go back to your LPs and kind of say, like, hey, like, can we figure out a solution here, but I think there’s some mismanagement in the market that also has to flow through over the next couple of years. Again, which is why I think, you know, something like Coolwater should exist, which is to help people understand what those things are as quickly as possible. That’s just like my personality, which is like, go deep. Understand it, so you know what to manage. But I think in 2020 2001, you did have like, these, this fun formation, that’s such a prolific rate that you had people come in that are now kind of being like, oh, and now I need to understand management. Right? Yeah. And understand these like core concepts of what LPS have known for decades. Right. And this is how they kind of allocate capital into managers that are thinking about that stuff and are treating it professionally. So yeah, consolidation. I think there’s a move towards, like, better management. I think there’s, there’s probably a move towards increased specialization as well, where I mean, this has been happening for a while. But why doesn’t like LPs, keep asking, Why does a new fund have to exist? And so I do think there’s kind of this increased push towards, you know, markets are so relevant, certain markets are so big. It used to be, you know, the LP perspective was, if you’re a FinTech fund or healthcare fund, you can be specialized. But now, it’s like, you can be in other markets as well. Right? And how many of those markets are there? Right, there is this kind of move of, you know, you can be specialized, you may have to be specialized in order to compete, right? Like, if you’re writing a PhD, and like, you’re like, I’m going to do it on this big level topic. And the, you know, your advisors like, well, actually, that’s too broad. Well, how about this? And I’m like, that’s still too broad. Like, how about this, like, still too broad? Like, okay, well, I guess everyone has written on this topic like I was thinking I was going to write on. And so like, your dissertation is like, one like, very focused thing. And then you’re like, is anyone ever gonna care about this ever? And maybe you can raise a venture fund on top of that, but I think it’s kind of similar, where you’ve seen again, like the cottage industry to like this big industry happen. And like, people are like, okay, it’s so big now. And software’s touching so many pieces of the world, and all these corporations have to have a digital strategy, like what happens there, who’s kind of like, creating the innovation, creating the companies that are going to help that digital transformation? Like, it does seem like it’s going to be early stage venture funds. And so it feels like you’re probably going to see an increased focus on specialization and you’re starting to see some data. I don’t know if I like putting that out there. As you know, you could raise a fund on top of it, but some data where like specialized funds are outperforming we’ll see like if that continues to hold up, right, venture data is always a little wonky. But I think I think that’s going to be another trend over the next couple of years.

Earnest Sweat 44:05
Well, thanks again for joining us in, Winter. We really appreciate it.

Winter Mead 44:10
Thank you so much. It was fun to be here.

Alexa Binns 44:14
See you later, Allocator!

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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.

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