Alexa Binns 00:12
Today’s guest is Jordan Nel on the Nomads Fund of Funds team at Hummingbird Ventures. We get into how to identify outlier venture funds, the age old debate on picking versus winning, and the opportunities and pitfalls investing in deep tech. Today we are speaking with Jordan and now of Hummingbird ventures in Cape Town, South Africa. Jordan invests in both founders and GPs as part of the Hummingbird Nomads team, specifically emerging managers with funds below 150 million. Prior to joining nomads, Jordan founded a long short public markets firm and worked as a strategy consultant. Jordan has recently been publishing an LPS guide to venture funds. It’s so good I’m looking forward to your next guide and particularly in what you have to share today. Thank you Jordan. Can we hear the 411 on Hummingbird and nomad?

Jordan Nel 01:05
Yeah, yeah, for sure. For sure. So the background for Nomad. Firstly, thank you guys for having me on. It’s great to see both the background for Nomads and Hummingbird. Hummingbird was the mothership. Hummingbird is kind of the starting fund to precede global funds. Seed fund began about a decade ago, and the guys have had some incredible success. I actually think it’s probably one of the top performing venture funds over the last decade out there and the main thesis there is it’s more of a founder profile than kind of a market or sector thesis. It’s like the pitch is the opposite of a good founder is a great founder. A good founder is x stripe McKinsey Stanford MBA like references Well, super coachable, great founder is nonlinear, like a shepherd from Turkey, who teaches himself to code or was really hard to get along with or has father mother issues or something like this. And the model is really kind of concentrated into these few weird people, exceptional people. And then you kind of come in early, you price, you lead the rounds, and you double and triple down all the way through as much as you can. What if you kind of distill it into the abstract and then kind of spend a bit of time on Hummingbird just because it will inform how we think about nomads a bit, but the model is like, you’re global, and you’re looking for things that others think are noise, we’re trying to put out that UCS signal. And then it’s kind of more of a non consensus and right thing than an IT sector specialist. This over kind of successive vintages informed a lot of the starting DNA for nomads, nomads, which began about three years ago as a fund of funds. We look for GPS similar to Hummingbirds investing early stage under the radar funds with say, like 10x potential.

Earnest Sweat 02:58
Thanks for the kind of framework from Hummingbird. Now, with nomads, you talked about these exceptional people? How do you identify these outlier venture funds outside of just the exceptional people? Because you know, talking to a lot of different allocators? Through this research project, they have a lot of definitions on our criteria that they’re looking for. So how do nomads really develop their criteria? What is their criteria?

Jordan Nel 03:30
It’s a good question. And I think it’s one that’s a little bit tricky to answer because you, like we were, I was just explaining to you guys earlier before, like, you don’t want to preclude anything. And that’s, that’s by design. Like, there’s this cool teal quote about rule number one adventures that everything is power law. And like, there’s really very few companies that end up mattering. So you have to find these and get as much into them as early as possible and get as much as possible in. And then Rule number two is that because the power is so restrictive, you don’t want to have other rules. That’s a little bit what we think about it is like, it’s hard to put a Checklist Manifesto together with what you’re actually looking for, because you end up being more restrictive than you are bottoms up. The fund math is quite simple for our performance. It’s like it’s easy and ownership and then over fund size. So to a degree, you can look for things with a smaller denominator like the This can make it easier to get to. But generally what you’re doing is you’re looking for numerator data points like things in the investment behavior in the past that suggests that someone can have high ownership into companies that are big. This is kind of a bottoms up, you’re looking for bottoms up asymmetry, things that are going to be unusual in the venture fund, but that they have done in ways that it’s kind of hard to do. So this is quite different. But there’s one or two things that In most cases, sometimes it’s that they’ve been in the room before and can pattern match to a particular founder profile. Other times, it’s like they are particularly good at pre-empting inflection points across emerging tech. And so they ‘re looking for data points that can validate that what they did in the past, or the thesis that they have about being able to do is going to work out now in the present in totally different circumstances. Most of the time, this kind of comes down to the GP has superior judgment, I think it’s, it’s more around picking differently than it is like, sourcing or winning differently. And there’s various GP trades about this, like a signal to noise ratio, they speak with things that matter. They can zoom in and out of their PCs with quite a bit of granularity. And they’ve earned lessons along the way, like they’ve burnt their fingers. But these are not hard and fast traits. I think one of the mistakes we made in the beginning was to make these things hard and

Alexa Binns 06:03
Foster, it’s a little more flexible now. And I’ve seen you write about winning versus picking. Can you chat a little bit about why you’re now focused on picking?

Jordan Nel 06:16
I think this is somewhat of a factor of just capital scarcity, like, it matters more to be able to pick Well, When access is not as much of a problem, because there’s less money in the market. So less deals get done. So it’s less competitive. But I also think in the beginning, like what we originally thought of when we came as nomads, we took a lot of the direct team. And we would index on like nonlinear GPs, things that like speeded decision making for this type of pretty exceptional background person. And this is not exactly a one for one translation to what makes a good GPA. It probably correlates but I don’t think it’s exact. And I think this was a lot of what I started thinking through the unbundling article. Now I think you have more of a case where there’s less competition. And the thing that matters is a GP has an edge in how they see the world. You avoid concentration, you avoid crowded trades, you go to places that are a little bit less consensus, you kind of think in terms of alpha beta. And you as the GP, your capital is then the bottleneck, not a dearth and founder profile or something like that with earthen sorry, founder talent or market depth or anything else, it’s kind of what you do is you’re giving the founder the money that if they didn’t have that money, they would not be successful. This is not always the case, when it’s kind of flush with money. And it’s been more competitive. We’re gonna get

Earnest Sweat 07:55
into how the industry and asset classes change. But before that, because we’re on this kind of thread of how you determine talent. How is diligence changed? Or how do you think diligence needs to change for allocators who invest in venture capital, given all the trend changes all the different funds,

Jordan Nel 08:18
The way we think about it is like there’s maybe 5000 GPUs out there. And to go from 5000 to 1000. For us, it’s mostly like hygiene stuff. It’s database, and screening, and it’s the things that every fan does, for top of funnel, you can generally screen out on check size, and font size and velocity and the things these imply for selectivity, or the hurdle rate that it takes to 10x. To go from 1000 to 200. We then track these 200 closely. It’s mostly outbound for us. We do a lot of kinds of arcades and sectors. And in these places, we’re looking for areas where folks can get a relative edge. This is a little bit of a bottleneck that I alluded to earlier in terms of capital depth, but this process changes depending on what the LP thinks makes a good fund. For us. Like I mentioned, picking is a good fund. And so what we’re looking for generally is like we’re looking for a signal on the track record that they are in great companies. I think the best managers don’t come out of the jungle, it’s that they’re connected with good companies. And so in many ways, our job is kind of similar to a direct current actually, where you’re looking at companies you’re trying to underwrite the portfolio, you’re thinking through, how does this gap where they hang out that others don’t? And what type of people do they surround themselves with? And can I get some kind of data points on one or two of their companies in the portfolio that I can kind of understand their thesis around this company and I can understand why it was particularly non obvious. And so for most cases, diligence is just trying to Spend time finding those one or two data points that matter.

Alexa Binns 10:04
Are there any people or experiences from your life before being a nomad? Maybe that has informed how you go about doing your job today? I’m curious if there’s any stories you can share.

Jordan Nel 10:17
I mean, my past was more like long short equity. And that’s, that’s a lot of market thinking. But it’s only you can carry over a bit of thoughts around, you know, where do you play? How do you find alpha? I don’t think this really carries too much. I think what the people in the examples that have pushed the patent thinking in ventures it’s like, it’s more particular from within nomads. We’ve changed the thesis quite a bit over the last couple years. I think in the beginning, it’s kind of like I said, we index a lot on what the direct fund did. And that’s been pushed by meeting funds that have been incredibly successful, who look absolutely nothing like a Hummingbird. One example is Mike Dempsey, I think very highly of them. And what they do is, it’s kind of the opposite of what we did like, so we were concentrated founder centric, kind of, there’s no crystal ball, market agnostic, and don’t really try to predict any kind of market evolution, compounds completely different. So compound is like research based, thesis driven, quite diversified. And in abstract, like I mentioned, that inflection point timing, this is what they do. They were in leading companies in crypto AI, robotics tech bio, it’s really a little bit more of a, I grew up into my ivory tower, and I read shedloads white papers. And then I come out with a little bit of a thesis. It’s more bottoms up, and I’m making it sound. But that’s basically their approach. This was a nice recent case, actually, like the other day of something where we had to challenge a little bit of the thinking around heuristics on portfolio construction. And then also just like, what does it mean to have a founder centric view? For us, it’s really explicit for them, it was like, we dug into it, and it’s definitely there. But it wasn’t something that they would vocalize. And so this changed a bit of the way that we think about what it means to ask GPS about founders.

Earnest Sweat 12:16
So you’ve written a lot about this next topic. So I know you have a strong perspective. How and why is the adventure landscape changing right now? Originally,

Jordan Nel 12:26
I was quite keen on this idea. That venture was unbundling this like access to knowledge, better tooling, individual brands, supported by, you know, Twitter and stuff. And there’s a broader shift from public markets, the private markets, I thought that this would mean more capital. And then, you know, people index on speed and decision making and the value here accrues to the long tail of emerging GPS. I’m less convinced now. Sam Dyson put up a good thing on the shutdown of the VC factory lineup. I think this is quite aligned with how we’ve been thinking over the last year or so. And so I’d point people there. InVenture it’s kind of a two and 20 structure and pricing. So let me just zoom out for a second. Like, the way that market efficiency seems to work in venture is like you have this capital that is the price equilibrium level and not pricing. And so because everybody charges two and 20, it’s like capital that arbitrage has a market amount of investors their likelihood of offering, this means this influences quite a bit of our thought, like, you can’t now index so much on unbundling ventures. Going back to that scarcity of capital that we mentioned. And you have to be playing this game, like you have to be thinking in terms of okay, where’s my capital most useful? How do I avoid crowded trades? How do I think in terms of capital efficiency for my companies? How do I avoid competition? This, this thinking means that the arbitrage that leaves specific like specialists specifically fund goes away quite quickly, your fund thesis is arbitrage super rapidly. And I’d say this is true for networks. It’s true for ideas, whatever it is, to try to find folks who know how to navigate that, like rising competition. It is super like that’s, that’s what we do. It’s looking for people who are not Sequoia and who are going to try and purposefully not try and do what Sequoia that’s one of our GPS said at Cooley, he was like if you’re trying to think like Sequoia, then you’re either overpaying or under thinking whichever was quite a quite a good word.

Alexa Binns 14:39
Can you share more on what that competitive edge is?

Jordan Nel 14:46
I want to separate the competitive edge for GP out from the competitive edge for a company and I draw that distinction because I think, like when we think in terms of modes for companies, it’s one thing but like, modes for GPUs is very different. If you like you can build moats around the deployment side of the venture. This is like scales, network effects, this brand of flywheels, depth of talent that, you know, it’s like, this is a business way of thinking about modes. But I think venture is a lot about taste. And it’s more of a craft than it is building a business. And I think that was something that I misunderstood. When I first started writing about unbundling, I thought that you motor hard to think about with a test, you actually want someone who’s just got really good taste and people that they hang out with. And I think there’s a degree that I still believe in that unbundling article, but I think increasingly, like, it’s more around how you think through the people that you are around, and the people that you invest in, and also how you think through the edge that you have in investing. So to the degree that you have some kind of non obvious insight into a company like that age. And the degree that you can validate the founders hypothesis around why they should build the business that they do, or like to the degree that you can run their IDMs with them. This is ah, and I think that most GPS, underweight edge in favor of process, and overweight, or singing, winning slash process in favor of they think that that’s how you get good deals. And that’s, I think, actually how you get consensus deals. But that’s, yeah, that’s a little bit of thinking.

Earnest Sweet 16:29
That’s really interesting, because, you know, in a number of our conversations, LPs have also spoken about how looking at fund managers emerging or established fund managers, how good are you at actually building this? You are building a company, and somebody I want to be in relationship with as an allocator? For decades on? So how do you both like, you know, take on, you know, look for these outlier individuals who have great tastes around people they’re around, but they’re able to actually institutionalize that codify that to actually have a franchise that’ll be successful for long term? Or do you not look for that you’re looking for, hey, something that’ll be around for like, two funds, three funds, and then move on?

Jordan Nel 17:21
Yeah, I think this is a structure difference between LPs and GPS. Obviously, there’s a good LP, I want GPS to take my money. So I want to say that I’ll be with them for multiple funds. I think the like to be super Frank, actually, I think that’s the problem that LPs have is you just you go into this relationship and it becomes a rehab situation, and then you get lazy and then you don’t recognize the changing circumstances around the fact that previously outperformed and like the things that led to their performance and maybe not in place anymore. So when you rehab it’s not kind of what you’re actually what you originally invested in. I think this what both should agree to is a commitment to like mutual excellence and an LP says I’ll give you money as long as you keep you know doing super well and I think that the GP for that means what that means the GP is they need to then be committed to like being a little bit paranoid that the edges arbitraged. Then you will be committed to building something like continuing some kind of flywheel. Your question is around how GPs should entrench themselves? This is a really good question. And I don’t have a good answer. I think we’ve seen sometimes what it is like it’s a fun that moves into a new space capitalizes on what is initially some picking arbitrage, things like rivet and fintech or paradigm and crypto or like mushy and Kazakh from Latin like there’s an edge there because there’s no capital going into thematic trend and LubeZone. Once the big fish is in a small pond, they eat this edge. And then what they do in that process is they build brand recognition flywheels around them by being affiliated with the great companies in that space. And those brand flywheels, then carry them on to entrench them like this is the standard model, but you move from it picking it towards a flywheel driven top of funnel, winning sourcing edge. And that process doing that you scale em quite a bit. I would be very surprised if these funds continue to return multiple funds like 10x or 10x. I think Founders Fund is one of the few that has done this with billion dollars, maybe USB, but I think it’s hard. And I think most of the time, you have to kind of stay below a certain threshold. As a GP, you have to basically commit to like, Okay, I’m going to constantly reinvent myself. I’m going to stay below a certain threshold of AUM and I’m going to stay generalist. Maybe I have sector specialists that come in for a vintage or I train them up for a vintage and I have a very long term like automatic conviction that there’s going to be alpha in this trend. But this is, this is a very hard thing for a GP to do. Because either you get rich and then lazy, or like, there’s just not that many exceptional investors. So to build a firm around this type of thinking is tough.

Earnest Sweat 20:23
Now we’re gonna take a quick break to speak with our sponsor, from the co-founder and CEO of Passthrough we have Tim Flannery. Passthrough makes fun closing simple for funds, administrators, lawyers and investors. Is there a sub sect of LPs, maybe three that you guys have through data on the types that are being boarded more than in the past? And when did you guys start?

Tim Flannery 20:51
Well, it’s tough to tell when you take a look at dollars are heavily concentrated towards institutional capital and very, very, very large, non traditional single family offices. Yeah. But when you start to take a look at count, that’s absolutely not the case. And so I don’t have the stats off the top of my head, but the majority of dollars committed to pasture absolutely through institutional. But by far, the majority of investors are non institutional, there’s just a known universe of institutional LPs. Meanwhile, there’s about 30 million accredited investors in the United States. And so that number, just absolute towards it. And I think that’s actually one of the challenges that is particularly known for funds in the space that we’re in, which is, I go out, and I raise 90% of my capital from 20%, of my LPs, but that 10% of capital, if it’s my employees, if my if it’s my family and friends fund, if it’s the founders of my network fund, that is going to cost me more money and take me more time. And then all the rest of my fund was put together. So I’ve got a choice of do I forgo this or do I not. And what we’ve seen is that people are choosing to do it, because they see the strategic benefits of doing this, they see this as a way to line up people’s networks, they also see it as a way to reward their employees and other people that they’ve invested with in the past like this is a benefit to them, that they can participate in these kinds of vehicles.

Earnest Sweat 22:07
What have you seen as kind of brightspot And I guess, themes from standout managers, and what kind of they’re they’re doing from a tech and service stack to raise in this market?

Tim Flannery 22:21
A few things. One is that they’re, they’re not losing sight of, even though I have an investment thesis, how I communicate, this investment thesis is likely as important as the investment thesis itself. And so firms that have taken time to think about what is my brand? And what is my communication strategy? Not only do they have the ability to take their thesis and put it to work, they have the ability to communicate in their thesis. And that is a really big differentiator. And so spending time thinking about who are all the different groups that I’m speaking to? What are the messages that are appropriate for them? And how can I get that message in front of them, that’s a really good place to start. So once you can actually communicate what you’re doing, and you can run an effective process to go find LPs, convince LPs to come into your fund, the managers that we’re seeing be successful are also those that are thoughtful about how they’re constructing the rest of their stack. So figuring out how I can communicate what I’m doing? How can I make sure that the way that people experience my Fund is a way that’s consistent with what they expect, allows you to actually have the message of the reason why you should invest in me is x, because that’s the thing that they’re focused on, instead of being distracted by the nuances.

Earnest Sweat 23:31
What would be the response to maybe pushback of someone who started a fund one, or maybe it’s even fund raising out fun, too. And still in that period of life, trying to manage expenses, right? Because a lot of times some of those things, you mentioned more on the service provider side and kind of the tech stack?

Tim Flannery 23:49
Well, your LPs are going to be paying for it either way as a part of fund expenses. And so would you rather have your LPs pay a little bit less for mediocre experience, and then they’re gonna have to go spend their time figuring out, okay, data request, I need to go fill or Okay, I need to make sure that when I put a question out to this team, that I get a response in time. Would you rather have them spend their time and energy on that? Or would you rather actually have it just passed along and fund expenses, and they can get an experience that helps them move forward with their investment instead of just continually being stuck? When, depending on who the different groups of LPs that you’re speaking to are, when they’re thinking about you? They’re thinking about how I can invest in this fund, and the next one, the next fund? And so yes, they should be thoughtful about managing their expenses. But you can’t do it at the expense of how do I build a durable firm. And if you think that this, this provider that you’re doing is saving you dollars, there’s some places where it makes sense to save dollars, but there’s other places that are actually good, long term investments into your fund that allow you and everybody else to just focus on building the generational firm, instead of showing you that I know how to go save a couple of dollars. People aren’t looking for bargains, people are looking for investment returns.

Earnest Sweat 24:57
Thanks to Tim and the past 13 To find out how to give your LPS a better onboarding experience with Pastor go to pass through.com backslash swimming. And now back to our LP interview, your

Alexa Binns 25:11
your focus on these 100 50 million funds, obviously LPS other others we had on the show you then our far in the other direction? How do you all work together? I think you’ve actually been friendly with some of our other guests. So what’s that relationship? Like LP to LP?

Jordan Nel 25:29
Yeah. Look, I think it’s quite similar to venture. I mean, it’s formula driven. You share deals, you ping people on WhatsApp, hey, what do you think like about this GPU? Or, like, you know, I’m doing this fun, do anything weird? It’s not. I think to the same degree that I would say venture funds that index heavily on collaboration with other venture funds, generally get consensus results. I think the same for LPS. It’s really good for the top of the funnel, it makes sure that you see everything, but that’s more of a hygiene factor than I think it should be like a decision making consideration.

Alexa Binns 26:06
I can really Yeah.

Earnest Sweat 26:10
We’ve heard that most funds aren’t worth the fees. Could you just like, you know, share with the audience that argument and where you see the value really is?

Jordan Nel 26:21
Yeah, no, I think I’m in trouble for this one. I think this isn’t an indexing thing? Well, I think there’s kind of two approaches to this. I, what I’m addressing with when I say the Feast, like either it’s a global fund of funds, that really comes to venture with quite a top down mentality, like I’ll have x percent allocation to us X percent to Europe, and I’ll be mildly overweight or underweight in a certain trend. Or you’re like a local fund of funds, which is like, oh, cool, you want Japanese exposure, or I’ve got a portfolio of the top 15 Japanese funds for you. I think, with the former, it’s kind of like looking in the rearview mirror, it’s like you, we spoke a little bit on fund arbitrage and all of this and I think what you’re doing is you’re betting on what has worked, rather than trying to gauge what will. And that goes back a little bit to the rehabs thing that I was talking about, I think a lot of LPs get quite lazy. They don’t think about the fact that markets have changed, teams have changed. Generally, if a fund does really well in a fund like, say 1234, then they’ve really scaled by fund five. And just the fact that they’ve scaled the loan means you have to underwrite a very different value prop. I don’t think most funds are worth re underwriting points and news like that. Maybe as an LP, you’ve also scaled like this is the incentive structure. I think, if you scale AUM, and you say to your LPS in fourth vintage one, a cool Alpha vention, then you’re doing a nice IRR. By the time you’re scaled off, you become like, Oh, cool. I’m just doing market data. But I’m, I’ve got really good access. That’s a very different value prop. And I think that most of the time, that’s not worth the same fee premium. But this is not the end of the second case with the Japanese folk. I think unless that ecosystem is super deep and inaccessible doesn’t really make much sense. Because definitionally like a local fund, the fund is going to have one or two, maybe at best global maximum funds, the rest is just going to be local median, I think. So I think you dilute returns quite quickly with that.

Alexa Binns 28:30
And in terms of where there are opportunities. You seem to think there’s some opportunities in deep tech. What are you, how are you sort of thinking about that in terms of manager selection and just in general?

Jordan Nel 28:46
Yep. That’s super cool. I wrote an article a while back. I think there’s like two vectors of being convinced of deep tech. There’s like deep tech directionally and as deep tech magnitude really. I think we’re more magnitude really convinced as well, like, this is a fairly big thing that I think is not going away soon. That said, I think it’s not like we’re deterministically trend level convinced. It’s more about trying to understand the trend, and then find specific managers who can have alpha within deep tech. It’s not like general just indexing deep tech. I think there’s a ton of money going into deep tech now. And it’s not exactly non consensus, but there’s a really big barrier for smart delegation. And because of that barrier, especially with things like life science, the whole model is different. The whole venture funding model super different things like advanced manufacturing is really a super orthogonal network to what most kinds of venture careers gain. With all of these difficulties. You also have a lot of thematic tailwinds. There’s more funding that the For hardware, software primitives, talent is being trained. There’s a lot of demographic, geopolitical necessity. These don’t necessarily mean that like every deep tech company is going to do super well, wherever deep tech funds are going to do super well. There’s this interesting dynamic in deep Tech where there’s like not that much talent, really, in terms of exceptional founders. And so because of these lack of exceptional founders or lack of really well suited to venture funding markets, you have a case where there are particular companies that do super well. And the minute that they get market leadership, like investors absolutely coalesce around these things. And this is quite unique in deep tech, and maybe you find a little bit in some emerging markets, too. But I think that there’s not that many funds that can navigate this dynamic super well. So a lot of like, what we said in the beginning about it being yes, good thematic conviction bullish on deep tech, it’s also going to be very hard. And that’s why we generally go with GPS who are pretty familiar with the ecosystem rather than ones who are tourists.

Earnest Sweat 31:12
To end our conversation. We always like to ask, is there anything else you’d like to share with our audience? Maybe advice for fellow LPS or advice for fund managers?

Jordan Nel 31:26
I don’t have I don’t have any smart advice. But Teddy Roosevelt, what’s up, man in the arena species like ringing in my ear, but critical accounts, I don’t want to be like, so I don’t know anything smart to say other than anybody who wants to reach Jordan, that Hummingbird that VC.

Earnest Sweat 31:43
Well, thanks, Jordan for you know, sharing your wisdom. Getting into a little bit of trouble with some of your answers, and we learned to tie so thanks for joining us. Cool.

Jordan Nel 31:56
Thanks so much. Appreciate the time and lovely to see you but

Alexa Binns 32:01
See you later, Allocator.

Earnest Sweat 32:02
After portfolio tile, investing with a smile.