Investment Strategies Through Cycles with Samir Kaji of Allocate

With Samir Kaji,
Co-Founder and CEO, Allocate
This week on Swimming with Allocators, Earnest and Alexa welcome Samir Kaji, Co-Founder and CEO of Allocate. Samir shares his venture banking background and insights on evolving investment strategies. He highlights the importance of realistic expectations, strategic portfolio construction, and the potential for strong returns in the current market climate. Also, don’t miss our insider segment as Nico Toro, head of Latin America at Silicon Valley Bank, explores the growth and nuances of Latin America's innovation ecosystems, emphasizing tailored investment strategies, the role of supportive regulations, and the importance of connecting Limited Partners with regional startups while addressing investment risks and market characteristics in Latin and South American countries.

Highlights from this week’s conversation include:

  • ​​Samir’s Background and Journey (0:31)
  • Founding Allocate (1:09)
  • Emerging Managers Focus (4:26)
  • Market Cycles and Investment Strategies (8:11)
  • Current Market Trends (12:22)
  • Illiquidity in Venture Capital (14:04)
  • Misconceptions About Venture Capital (16:05)
  • Direct Investments vs. Fund of Funds (19:51)
  • Operational Needs of Wealth Advisors (22:13)
  • Building Infrastructure for Investment (24:16)
  • Insider Segment: Nico Toro of Silicon Valley Bank (27:00)
  • Customization in Different Markets (28:55)
  • Understanding Local Ecosystems (30:07)
  • Opportunities in Fintech (32:26)
  • Consolidation in Private Equity (36:49)
  • Investment Strategies for Family Offices (40:43)
  • Responsible Participation in Venture Capital (44:50)
  • Ideal Investor Profile (47:05)
  • Market Growth and Challenges (50:04)
  • Current Investment Climate (52:00)
  • Connecting with Samir and Final Thoughts (53:12)

 

Allocate is a platform designed to modernize and democratize private market investing by providing accredited investors with curated access to top-tier private capital funds and direct investment opportunities. Allocate’s mission is to empower a broader audience of investors to participate in private markets while emphasizing transparency, efficiency, and inclusivity.

https://www.allocate.co

Silicon Valley Bank (SVB), a division of First Citizens Bank, is the bank of the world’s most innovative companies and investors. SVB provides commercial and private banking to individuals and companies in the technology, life science and healthcare, private equity, venture capital and premium wine industries. SVB operates in centers of innovation throughout the United States, serving the unique needs of its dynamic clients with deep sector expertise, insights and connections. SVB’s parent company, First Citizens BancShares, Inc. (NASDAQ: FCNCA), is a top 20 U.S. financial institution with more than $200 billion in assets. First Citizens Bank, Member FDIC. Learn more at svb.com.

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. 

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 00:13
Today we have the pleasure of speaking with Nico Toro. Nico is the head of Latin American Latin America at Silicon Valley Bank. He brings a wealth of experience in venture capital and the startup ecosystem across the Latin region. Nico, thanks for joining us today. It’s a pleasure to be here. So for our audience that may not be familiar with the kind of nuances of what’s going on in Latin innovation ecosystems. What’s been going on in the last five years is similar to what’s been going on in the US and Western Europe?

Nicolas Toro 00:51
Yeah, it’s mirrored a lot. So the Latin ecosystem has matured significantly by its growing regional entrepreneurship, that increases international investor in nature and it has a very supportive regulatory ecosystem, and also in terms of accelerators and organizations like SVB and others are supporting general systems. So yet it’s mirrored the dabs and downs of the US markets and bio has grown incredibly especially the past few years, and, yeah, with

Earnest Sweat 01:32
a global organization like SVB, you know, the thing that comes to my mind is you all provide customization to any market and any customer that you interact with. I would think that would be even more difficult in LATAM, where people, you know, the US perspective, is like, oh, okay, once size fits all the similar products for all. But I’ve had portfolio companies of the past try to, you know, build and expand within Latin and having that approach of one size fits all, fits all usually leaves them not gaining market share. So I’m curious about the different countries that you guys have a presence in, how are you able to understand the different nuances of every market? That’s a quick question. So

Nicolas Toro 02:23
I think that, to be honest, there’s several adopters. One that happens in Brazil, yeah, it’s the biggest part that it brings in the highest percentage of VP bonding carries the highest percentage of union courts that in itself, all markets. It’s all in the regulatory system and small and small resistance opportunities. Then there’s Mexico, and mainly I would bundle that with Colombia and Chile the other episodes that are really growing, maybe Argentina, which is starting to pick back up. And then the rest of Natan. We’re very active in Brazil, Colombia, Mexico and Chile, Argentina. And yes, we do see a lot of different nuances of the entrepreneurial ecosystem, the regulatory ecosystem. They’re not the right of investors in each of those markets. And the benefit that we bring is that SBV has been very active for 13 years there? Can we strength? We have very strong relationships with, you know, the legacy funds that we bank pretty much all the funds in, the big bucks in all those countries. So we have very strong relationships there. We have very strong relationships with organizations like endeavor, with other accelerators, 500 startups, et cetera. So we’ve been at my experience living there working in this ecosystem for the last 10 years. We understand with different needs that each of those ecosystems can, for instance, Brazil, very heavy in FinTech. How can we help the FinTech Mexico right now, very big in the terms of logistics and nurture. So how can we serve and support those startups that are business

Earnest Sweat 04:13
From your vantage point, what are you seeing the needs of whether it’s LPS looking to invest in those venture funds in those countries, for the actual kind of venture funds that are local in those countries, what are the needs that they need for this next decade?

04:30
So we bank a lot of so what we do in startup

Nicolas Toro 04:35
banking, and what I do is I bank the startup, yeah, the VCs and the LV Yeah, which is actually, you asked me, the secret sauce and the magic of SV is they’ll be back to hold the ecosystem, yes, which makes an ecosystem builder a connector. So what I do on a day to day basis, I connect LP to funds that might. Vendor pieces. And I connect to bugs with startups that kind of, you know, that have their vendor PC. So in terms of the LP that you’re asking, I see, I treat it by using, I’m starting to see more and more interest, or regaining interest, of LPs from across the world to go into Latin there was a scare. You know, last couple years, as you know, what happened to us, the thing happened in LA DAG. So people got a little scared. There were a lot of tourist investors. Yes, that went in with a passion, then left. Now we’re seeing, okay, there’s a man sure that persistent. They’ve learned that, you know, they’re very well respected and prove a track record of finance. The economies are growing. There are strong institutions in these economies that founders are incredible. Everyone thinks that, and the opportunities to create value. Again, we’re talking about fintech. So there’s a very young and tech savvy calculation across the region. There’s a lot of opportunities in disrupting legacy banks. And you know, so there’s these huge opportunities in FinTech. So you have examples like new banks, like Walla, and then there’s also new opportunities with New York here. So LPs are seeing those opportunities like we need to be part of this story. So what we do is we connect them to what are the right funds that are investing near shoring in Mexico, what are the rank funds that are investing in fin tech in developing countries like Chile with Bin quo lumpia with Bobby Rabbi Ben or Ruben in Brazil, you

Earnest Sweat 06:45
know, so for a US, or, you know, outside of Latin LP, if it’s their first time investing in that market and Latin market, I’m sure there’s a lot of different things to kind of like, you know, navigate your way through, what are some risks that you Yeah, what are some risks that you believe that they should consider when looking into this market and invest, or just things to consider. So

Nicolas Toro 07:13
I think the biggest risk of investing in LA Thanh is that the chill and their her religious day, just upgrading, big deal, making culture, yeah, so that M and a culture, is still very small, but it’s growing. I think that the second thing is that there’s still a small and very small secondary and growth capital market. So I can that delays, you know, so the cycles for VC it up have been proven to be a little bit longer. I think the other risk was parental fluctuations? Yes, and regulations, but I think those things considered the key opportunities I heard about. Yeah. So when assessing a fund, I would evaluate all instance

Earnest Sweat 08:16
you mentioned regulation, one question I had was, how do local financial regulations in Latin America? Latin American countries affect venture capital investments. So,

Nicolas Toro 08:30
Not surprisingly, the Latin governments are recognizing foreign incidents, promoting tech ecosystems, yes, because they solve a lot of issues, because they track a lot of capital. So overall, the regulations are very friends, very supportive. So you know, and they’re very mature. They have very mature markets, like Brazil, like New Mexico, like Shige, and a family office industry that’s been going on for all decades. You know, they are very, very mature about grading the right regulations to support them. So I think, in terms of those regulations, overall, it’s a very welcoming market, which is why we see and rethink Sequoia Tiger and many robots investing in those buckets, because on the other side, this is where, as you can taste, a huge robe. You know, we bank all these startups, we bank all these funds, and they’re all part of the, you know, they’re all, they all make a payment standard. So we think, you know, the delta c, so that’s where the funds that elk have, like the trust like a failure. There is an American thing supporting it: it’s been selling trust. It brings transparency absolutely.

Earnest Sweat 09:59
And comfort.

Alexa Binns 10:02
Welcome to Sameer. Kaji. If you follow the lpgp network at all, you have probably read or heard plenty from him, co-founder and CEO of allocate. We’re so thrilled to have you on the

Samir Kaji 10:14
show. Thank you. Thanks for having me.

Alexa Binns 10:18
Prior to founding, allocate. Sameer has 20 years of experience in venture banking, supporting over 700 different VC and PE firms. He’s at Kauffman fellow like my co host, and today, we’re going to talk about this ongoing exploration of wealth managers and rise into venture as an asset class, how they’re doing it and what’s been working for them thanks to allocate, you begin your career at Silicon Valley Bank and first republic bank. Were there lessons learned from those experiences that sort of started percolating the idea for allocation? Yeah, there’s

Samir Kaji 10:55
a lot of lessons, and I’ll give a little bit about my background, because it does speak to why I created allocate with my co-founder, Hannah, and then ultimately, what we’re looking to do in terms of bridging between the world of private funds and the world of private wealth. So my dad was actually a first generation immigrant, came over from India, ultimately got a degree from Old Dominion as a civil engineer, and then realized about four years later he wanted to do something that was more entrepreneurial in his mind, where he saw opportunity was commercial real estate. And this was the mid 70s, No one is really giving him an opportunity. And then finally, there was a guy named Jack Bailey that said, hey, you know, I like the way you think you’re a hustler, you’re obviously very persistent. Why don’t I give you the opportunity to join me and you? I’ll see what you do. And I really like that big I really like the story because it speaks to, you know, giving people opportunities that historically have never had opportunities to succeed in certain areas. And so my dad ultimately,started his own real estate business. And so I got this great fortune of working, you know, alongside my father as a teenager, just going on his trips. And he bought a lot of property in Dallas Fort Worth. And so we were commuting there, and I’d see the guy wake up at 7am go to sleep at 10, and the same level of energy at 10pm that he did at 7am and it really kind of stood out, like I want to either be an entrepreneur or work with entrepreneurs. And so when I graduated in the late 90s, I had the opportunity to join my dad’s business. But at the time, I really wanted to chart my own path, and had this opportunity pop up on my job board for Silicon Valley Bank. This is a 99 at that point. This was the height of the tech bubble. You know, companies were going public every seemed like 18 months after starting, and I said, you know, this is an opportunity for me to work with these really interesting companies that were kind of reshaping the world with technology. And the internet was the thing that was top of mind. So I joined SVB in September 99 not knowing that seven months later that the bubble would burst and we’d go into the.com bubble bursting completely in those two years of like, what did I get myself into? But during my time at SVB, I got to work with some great entrepreneurs. I worked with folks like Roku and LinkedIn when they first started. And one of the most fascinating things is when you get to work with people that start things, and you work with them at the early stages. And along the journey, you kind of see how they change. You see how they can impact so many different things. And I really enjoyed that up until, you know, 2008 when the next, you know, crises happened. It was a global financial crisis. And actually kind of made a career change within the organization. I moved to the private fund group, so that was doing the banking for the venture funds, the private equity funds, and also investing in the funds themselves. And at that time, you both know this really well, is that the technology industry had changed because of AWS. It made starting a company so much cheaper that created this Cambrian explosion of startups, which then made it possible for the institutionalization of the seed market back then we called super angels, and it was people like Mike Maples, and I didn’t send cuts and Jeff Clavier. And I remember, in 2010 I’m like, I think this is the future that venture capital is going to institutionalize. It’s going to fragment, it’s going to go the way of private equity, where we’re going to see different types of products. And I really liked working with the emerging managers, primarily because they felt like they were entrepreneurs that happened to write checks versus code. And so I made my way from there to the first republic of 2012 to really start a group focused on banking venture firms with the focus being emerging managers. Our first two clients actually were i. A firm called formation eight, which now is broken into a few pieces, eight, eight VC being the biggest. And then the second was the forerunner, which is a woman named Kirsten Green, who started the firm in 2012 and during that time, our focus was, how do we help these emerging managers get off the ground? And the area that we thought we could add the most value. And it wasn’t really banking. It was around this focus of capital formation. The people that are investing in these firms tend to be family offices, individuals. How do we get them in front of these people consistently and at the same time? Help? You know, some of the family offices we were working with access, you know, interesting opportunities within the, you know, emerging manager space. It was eight years there. We built a group of over 50 people and ended up working with about 700 different VC firms. And during that time, we saw our family obviously deploy about a billion dollars into these different venture firms. And so it became very clear that as the world continues to shift, investors are moving more of their capital away from what we call 6040 portfolios, meaning that 60% public equities, 40% fixed income bonds, to things like alternative assets. Venture being one of the alternative assets. So in the first republic, it was great because we had a private bank, we had a wealth management firm, and we had a commercial bank. Within the wealth management firm, we were one of the most active in bringing alternatives to our clients, so much so that over time, we realized we have to expand the aperture to include things like growth equity and venture capital, which we did in 2019 but the same thing came kept coming up, which is, for an individual investor to invest, you have to be able to not just put money in alternative assets, but build the right type of portfolio. So portfolio construction, you have to get into the right assets. The dispersion of return, as you know, adventure is Grand Canyon size. In fact, the top decile is about 30% higher in terms of net IR than the bottom decile. So you really have to be in the best so how do you remove these barriers for people to be able to not only invest in alternative assets, but to do it in a way that’s highly effective and highly efficient, and that was the idea behind let’s start a company that really builds an end to end sort of tool set for LPS being family offices, individuals and Wealth Advisors to be able to build the very best portfolios with the least amount of time. And that’s kind of what we’ve done, but a lot of it was shaped by the 25 year learnings at the two organizations I was with

Earnest Sweat 17:43
Samira, that’s really helpful, especially your perspective on seeing so many shifts in the market. So starting your career in 99 then OA till now, you know, as you’re developing this thesis for allocate, how are the experiences of the previous kind of downturns within tech influencing kind of your kind of theory of change when it comes to allocate being a real need in the market?

Samir Kaji 18:14
Yeah, and what we do is, ventures, one segment of what we do, we certainly do private equity and things like that. But let’s maybe venture into the asset category. First of all, number one, it’s changed. 25 years ago it was like you only needed to identify the top 10 to 15 venture firms and try to get in, and that was because everyone was effectively doing the same thing. Today, ventures are very different. An emerging manager cannot be compared to a large cap Multi Product platform, like you can pick your firm, sequoy Andres and Lightspeed, very different types of products. And so when we look at venture, we define venture very differently. It’s anything from pre see two people in a garage all the way to essentially pre IPO, and that’s kind of how people Buck adventure within that. There’s different classes which we can go into later. But one of the things that we fundamentally have looked at with venture in cycles is that venture is a cyclical business. There are going to be long periods of risk on, followed by sometimes very rapid periods of risk off. You saw that in the 90s, when the internet, if you look at the amount of capital that was raised by venture funds in 99 it was probably 10 times as much as you probably needed at that time, given where the infrastructure was. And then risk came off in 2000 2001 and then it slowly built up until 2008 when, you know, the market shifted in about two years and everyone took risk off, not because of tech or venture, but because of the broader economy. And then we went on this long risk period, from roughly 2011 maybe 2012 all the way to the end of 21 small blips. When it came to COVID, there was like three or four months where no one was doing, everyone, everything, and people thought the sky was falling, and then you had rates go down, and you had so much liquidity pumped into the system. So as an investor, we always say that you’re always going to deal with cycles. And from an investing standpoint, you have to invest through cycles because you don’t want to be at a point where you’re only going in when times are the hottest, when marks are the most expensive, and when you lose all sobriety, meaning that there’s a lot of things that get funded that shouldn’t. And so what happened post 2021 is very similar to what we saw in 2009 and 2010 people go risk off there. Maybe there’s a liquidity issue. There’s a ton of things that get people not to want to invest in long, long term liquid assets. The problem is, these periods have historically been better periods to invest, because you’re starting a new curve. And what we look for is two things, number one, as sobriety comes back in the market number one, which I think it has, generally speaking, there’s we, we can debate. There’s probably some pockets that don’t feel like there’s sobriety, especially with large llms and AI. But overall, it is much tougher to raise capital today for both funds and for companies. No doubt about it. The second thing we look at is, within venture is there a new technology paradigm starting? And we saw this, you know, the Internet was there. It was real. But the reason companies like web vans didn’t work. It was just too early. The infrastructure wasn’t there. The cost didn’t make sense right. Now, artificial intelligence is the next paradigm. Now, these paradigms tend to be overrated in the very short term. That’s why you have so much money and are underrated in the long term. And so if you are a long term investor in the asset class, these are the times you typically do live for, because you have this intersection of a new paradigm coupled with sobriety coming back to what I would consider 90% of the market. And so I look at this cycle, and, you know, things don’t always perfectly repeat it itself, but there’s enough rhyming characteristics where it’s not too far of a path to visualize that what we may see over the next 10 years is a similar type of output that we saw post 2008 and certainly post 2001 and two,

Alexa Binns 22:25
you all put out awesome market research. Is there anything else that you’re sort of seeing in your crystal ball for the next 2025, and even beyond?

Samir Kaji 22:36
Yeah, so within venture in particular. So one of the things that you know I mentioned earlier is like companies used to go public really quickly, right? So the time from, you know, starting to an exit used to be on average, four to five years. And people sometimes forget. Amazon was founded in 95 it went public in 97 with trailing 12 month revenues, less than $20 million a year. You would never see that type of company go public. In fact, the market cap of the company was sub 400 million. I think it was 385 million when it went public, open AI just raised at a $157 billion valuation in the private markets. The problem is, because there’s so much capital now in the private markets, these companies don’t have to seek an organic way to exit quickly, right? You don’t have to go to an IPO. And the bar for IPO is much higher than it ever was. And even the M and A market, probably to a certain degree, is going to be impacted by regulation and the fact that, if you have capital, a capital market that will continue to fund you, you don’t really need to sell. You can continue to build and build and build for individual investors, the characteristics actually impact them more than the big institutions. Big institutions you invest in venture number one because you do have access to great firms. You also have less of a liquidity need. It’s more venture provides you diversification across your assets, lowers your volatility. But as an individual, if now companies are staying private for 12 years, 1314, 15 years. Well, my liquidity, illiquidity premium has to go up. You know, I can’t take two and a half x if you’re going to take 15 years to get my money back. So one of the big trend lines we’re seeing is, and we saw this in private equity, is that venture investors are figuring out how to generate liquidity in non organic ways. Organic is like M and A and M and A or IPO. You know, we saw secondary tenders, you know, selling in a secondary I’d say that’s semi organic. But more recently, we’ve seen things like strip sales. We’ve seen even continuation funds by bigger firms to generate liquidity back to their LPs. And I think that’s something that needs to be solved. Illiquidity is generally, I think, a feature, but there’s limits to when it starts becoming a bug. And so I think over the next five years, 10 years, we’re going to see much more of a secondary opportunity for. Generating liquidity, I think they’re going to be more GP driven liquidity, not just LP, and those are things we’re following really closely right now.

Earnest Sweat 25:08
What do you think, as far as the movement of more individual investors looking to go into these private asset classes, in particular ventures where you said, like, who you pick as a manager is the most important decision. What are some misconceptions that could do with today’s market, or, like, even just long term? Yeah,

Samir Kaji 25:29
I think there’s a lot of misconceptions, unfortunately, and some of this is because venture in itself is a very idiosyncratic, weird asset class. It doesn’t behave like anything else. You have this thing called the power law, which few companies drive so much of the performance, and then beyond that venture, the way it operates in terms of within a portfolio, you may have two or three companies in portfolio that actually determine how successful a fund is going to be, and you don’t know until maybe five to six years later. So it’s even hard to make a decision based on track record, because if you’re looking at an emerging manager, there’s no track record, or there’s little established managers. The track record might be too old to matter, or it’s too new to matter, and the business model might have changed over time, where now they’re raising $3 billion funds, not $500 million funds. But I think some of the misconceptions are the following. So number one is, venture can be timed. It cannot be timed. I have no clue which vintage years are going to be the best. All I look at is characteristics and say, Do I believe that? You know, there’s a list of ingredients here that could help me be more successful in a given year. The second, I think, is, it’s a one size fits all investing, which is venture is definitely not a monolithic asset class. So if you look at the number of US venture investors, depending on how you count, it’s between three and 4000 so between three and 4000 the fat tail is what we’d consider micro VC, 750 million. That’s the vast majority, by number small, by AUM, within that there’s the highest degree of volatility in terms of returns. In fact, the standard deviation of returns we found to be 2.9x higher than the big funds. So again, that’s where you can shoot for alpha, but you have to get into the right one. So it’s not just because I’m a small fund, I’m going to succeed. That’s there’s a lot of survivorship bias, unfortunately, in the numbers sometimes, you know, people present. So again, it’s not one size fits all. You really have to determine, like, what your risk return appetite is. And then I think the other thing that often comes up is that, you know, looking at venture as an asset category that doesn’t require some level of diversification. I think you do really need diversification. Some people I’ve seen invest in like two VC funds a year. And candidly, I think that that is not a way to get enough coverage to be able to get those power law outliers. And for the vast majority of people, actually, they should probably look at a fund of funds, unless they can, you know, designate enough time to build the relationships, build the diligence capabilities, and then have a capital foundation to be able to invest in a lot of one off opportunities. So these things come up a lot. Liquidity comes up a lot. It’s like, well, it’s gonna be it’s gonna take me 10 years to get my money back. Not quite true, because the drawdown schedules are typically four to six years, and then distribution starts in year seven. But you know, this is an asset class that needs a lot more education to get right. Because at the end of the day, the reason we launched something called allocate Institute is because we saw so many people with misconceptions of big fun, bad, small fun, good, and it just became a little bit paint by numbers. And there’s so much nuance that goes into identifying, not only how you build a portfolio, but how you even pick a good fund manager when you’re meeting with all these people, and venture investors are very good at sales. They’re great at telling a good story. It feels great. But then, if you’ve been like myself and looked through maybe 3000 decks, everything starts to look the same after a while. And so what actually matters is, how do you think about a firm in terms of its ability to be advantaged on a go forward basis. And so these are all the little things that education really needs to be in place for for individuals to be successful in the asset category. Oh,

Earnest Sweat 29:33
Well, I had a follow up that I just want to ask you, Samir on that subject of not having diversification. I’ve also noticed a growth in just the desire to do more directly from experience and non experience allocators. What do you think that’s about and what do you advise people on? So

Samir Kaji 29:54
the reality for the vast majority of people, if you’re not doing this full time, it’s hard to make the case that you are going to outperform somebody that does do it full time that is actually of high quality, and so adverse selection is rampant. And don’t get it wrong, there’s some great family offices that are very, very good at, you know, doing direct. But I did see a lot of people learning and then doing the CO invest along with the firms they’ve invested with who you know, tend to have less adverse selection, because if I’m an LP, I can, you know, they probably want me as an LP going forward. And part of the reason was people wanted to save fees. And, you know, generally speaking, when people are successful in other parts of their world, their world, you know, lives, they feel like it can carry over to, you know, this industry, which you know, candidly, lot of things did work during the 2000 10s, because everything was up into the right and so you start to get this false level of confidence because your companies were marked up, and all of a sudden you feel like, I’m really good at this. And then 2022 and 23 come around, and everything goes, you know, hopefully not to zero, but in many cases, we went to zero, and then many of those families then come to the conclusion that venture is a bad asset category versus I probably prosecuted the strategy the opposite way. So I always think about crawling, walking and running. Crawl, walk run means if this is not what you do, and you haven’t built an entire team around it, usually start with something that would be a gateway, which would be like a fund of funds, and then you can start picking individual funds and do co investments. And then if you find you’re really good at that, and you really enjoy it and you can dedicate the time, then you can start sourcing your own direct investments. The people started, unfortunately, the other way around, and it hasn’t worked out for the vast majority of them. Curious,

Alexa Binns 32:19
to your hypothesis on what the high net worth family office RIA community would want to look at, or the way they’d like to approach venture as an asset class when you first got started with allocate versus what you’re sort of productizing for them today. What have you learned is actually much more, maybe it’s just from an op standpoint, what? What actually really works for them and their clients? Yeah,

Samir Kaji 32:51
there’s a couple things that usually come up. And this is maybe not just venture, but it’s all of private assets. The reason a lot of Wealth Advisors have gone down the path of adding alternatives is number one. It’s a highly competitive market. There’s about 18,000 wealth advisory firms in the US. We’re also going through the biggest generational wealth transfer of all time, where money is being inherited by the Gen X millennial from the baby boomers. This next generation definitely is inclining more toward alternative assets as part of the portfolio right now. It’s still a small amount, though. So if you look at all of the assets managed by wealth advice, independent Wealth Advisors, less than 10% and it’s generally less than 5% on alternative assets, less than 1% in venture and the reasons are hard to understand, hard to access. You know, it’s the illiquidity of all these things. So what we found for a lot of the Wealth Advisors, is if we are going to implement these types of strategies like venture, number one, you have to de risk it so that I can feel comfortable giving it to my clients. Number two, operationally, needs to be easy for my clients to be able to invest and track their investments. And, you know, for those that are listening, that have done a lot of individual private investments and funds, sometimes either log in 30 different portals to get your documents and then try to extract it. It’s, you know, people use the most successful software of all time, Excel to, you know, get all the information, it’s super manual. So what we kind of realize over time, it’s not just access to opportunities that are highly vetted, but it’s also, you know, creating the infrastructure that makes it easy for people to sign up, like digital sub, sub, Docs, KYC, AML, and then being able to track your entire portfolio in one place without the manual approach of having to log into a different portal. So what we found is it’s not just a point solution, but it has to be holistic in nature to enable Wealth Advisors or families to be able to provide these assets at scale. And so that’s a lot of what we focused on the last year and a half is just really building those software tools. Uh, that sits on top of our origins, which today are venture and private equity, in which we have a team that goes out and finds the managers, gets access, and then miniaturizes what people have to invest. So the average investment can be 100,000 going into funds that historically have had minimums 20 or 30 million. And even then, that’s not an immediate sort of pathway to get in, because you still have to convince these high quality GPS to take your money.

Alexa Binns 35:30
I’m curious if any of the GPs who gave you allocation in the past year or two, what your strategy is to continue to have space. I think

Samir Kaji 35:41
The reason is, number one, I think people realize a couple things are happening. So number one, there’s not a lot of new institutions forming every single day. How many new pensions, how many new foundations, how many new endowments can there be? And those groups historically have been very heavy in investing in privates. And so the price of admission for them, for you to get money from them, and for them to add a new name, is pretty high. And so as you think about diversifying your LP base, more and more people are figuring out that accessing the wealth channel, but doing it efficiently is really important. This is why Blackstone and Apollo and Carlisle have so many people dedicated to covering the wealth channel. If you’re a venture firm, you may have 321, IR people. How are you going to talk? Let’s say 150 250 500 RAS out there. There’s just not enough time in the day to be able to manage that, let alone administer all those small checks. However, if you can get, let’s say, large amounts of capital de risk yourself by not just having one type of LP in the long term, capital formation is going to be more efficient. It’s going to be more effective. And what we see in the next five to seven years is trillions of dollars are going to be invested from the well sector into privates. Today, private AUM is over 13 trillion, expected to grow to 25 trillion. Well, where is that growth going to come from? From the capital providers standpoint. Some will come from institutions that might be 70, 80% of the capital, but it’s not enough to sustain the growth of the market, and so that’s why we see these entry points for now more people wanting to access the wall sector, but they work with groups ourselves, because it acts as a single plug in for them.

Earnest Sweat 37:40
Samir, you know, you bring up an interesting point of the trend of, like, a lot of this the wealth transfer, people leaning towards alternatives. But another thing is going on as well. We’re starting to see private equity firms roll up, right? So my question is with that kind of consolidation. Who’s going, who’s the best position to win? Is it the larger funds, or can can, kind of, like right sized, early stage funds or micro funds get an opportunity to efficiently, kind of diversify their LP composition. So I think it’s

Samir Kaji 38:19
everybody that can diverse, diversify. In fact, the smaller funds tend to actually be more individual focused, especially if they didn’t roll out of another shop. So if someone leaves light speed, someone leaves Excel with a pretty good tracker, they’re going to raise from institutions. Mainly, there’s going to be a few non institutions in there that are high quality family offices. Going back to the earlier point, let’s just kind of look at venture as an ass category today and maybe provide some of the characteristics the way we’ve thought about it internally. There’s kind of like three main buckets. There’s small cap managers that tend to be, you know, two 50 million or less, and I wrote a post about this, but the adage of your fund size is your business model. So under that fund, unless you’re doing some growth strategy, typically the exposure that LPs are going to get our seed in series today. So that’s, generally speaking, we’re going to get higher alpha, because one company can return a multiple of the fund. The people that are winners are going to people that have true not differentiation, but true advantage differentiation. And, you know, there’s not gonna be 2700 winners. I mean, there’s gonna be a small group, and there’s, we’re gonna see a lot of these folks now raise a fund two or fund three or fund four. In fact, the stat is, you know, what percentage of people go from one fund one to fund for I forget the exact number, but it’s like 20% one in five. That’s not a lot, so some of that will just kind of go away, but the ones that do succeed are going to outperform every single year, no question about it, from a cash on cash standpoint, as you go up market and you go to mid cap. So there’s these mid cap managers that are not the big platforms. They don’t have multiple products now. Raising billion dollar funds. But they tend to raise very thematic or sector focused strategies. I mean, Forerunner is a great example. They were. They just announced their fund raise, which is 500 million kind of focused on the broad sort of category of Commerce and Consumer. There are going to be some real winners there. And the exposure you get is kind of C to Series B. Ish, really. Now your return profile slightly goes down because you do have some of the exposure in that B and C, but your volatility goes down too. And so when we underwrite, for example, a seed fund, we’re looking at, can we get at least a three and a half x net pretty consistently and small? That’s really hard to get. It’s not easy. Just because you’re small, the mid stage ones, you’re kind of getting a 3x and then when you go to large platforms, you know, there’s a lot of discourse on LinkedIn and Twitter about that. You know, these big funds are just asset gathers. They’re just playing a very different game. And if you think about private equity, there’s the cartels and the blackstones and the black rocks and folks like that. Well, the bigger firms are effectively covering everything now, from inception to IPO. And so when you typically invest with these larger firms, they have like the early stage fund, and they have the Growth Fund, and so you’re kind of getting a blend. And to me, that is what we would consider high quality venture beta, which means unlikely you’re going to get a three to 5x but it’s also equally unlikely you’re going to get less than maybe a one and a half to 2x and it’s fairly consistent time and time again. And so when you think about who’s buying these products, what’s the product market fit? So what we find is family offices typically gravitate toward the small and mid RAS typically will gravitate toward the larger and mid cap, because it’s safer and it, you know, the world of wealth advisory is generally the stay rich game. It does not take a bunch of risks. And if it doesn’t work, you know, like it’s okay. I mean, most people aren’t running their businesses like that. And so, as I think about it, if you’re a large firm, you know, tapping the wire houses, the private banks, the wealth advisory, if you can do it efficiently through groups like us, is a great way for smaller ones. It’s really kind of the family office network, which, you know, we see a lot of people wanting to build exposure, because they view venture as the area of their portfolio. That number one, they’re willing to take some risk if it comes with alpha and it comes with relationships. So that’s the other thing. It’s hard for somebody to put in a million bucks into brand name, you know, Firm B over here, and even get a call back, and it’s not going to get it doesn’t move the needle for a $2 billion fund, but you put a million into a $30 million emerging manager, you are going to get their time. And so a lot of families and individuals tend to gravitate toward that. So when we work directly with families and individuals, it’s more about tailoring their experience for those the MS and so the RAS, we find it’s more kind of the mid and large

Alexa Binns 42:59
cap no that that makes a lot of sense, that each of them has a different risk appetite. And I recall from my days of fundraising from RIAs, they all said, you know, oh well, we only look at the if we were to do it, we would only look at the top brand names. And thanks to you, they can.

Samir Kaji 43:18
I do think, though, in the future, people are going to start to realize that a small part of the portfolio should be, you know, some of these true alpha generators, but you have to get it right. And the problem, and this comes with the institutions too, is picking is really hard. It is really, really difficult to pick emerging managers, and it’s really difficult to discern who’s really advantage and why their advantage, and is it sourcing, winning, picking what you should be indexing on? And we have 1000s and 1000s and 1000s of them. Like, even picking 10 might require you to meet three to 400 managers, right? So it’s a time thing. That’s why I also tell people like, well, maybe what you should do is invest in, like, an Emerging Manager Fund of Funds, because it allows you to be able to get enough diversification, and it takes away sort of the time issue, because to invest successfully in private markets, you have to have access. And it’s not access in just the traditional sense of, can I get into certain funds? It’s access to time, access to knowledge, access to relationships. If you don’t have those things, you have to figure out how to hit the easy button, because investing shouldn’t come at the sacrifice of returns. And a lot of families, what we’ve seen historically is they’ll invest in people they met at the golf course or whatever, and they build a relationship, but unfortunately, it comes at the expense of returns, because it’s not a manager that has some kind of significant advantage. So it is something that we were big believers in, you know, having covered emerging managers for a long time, I continue to believe it’s one of the best places to invest if you get it right. But if you can’t get it right, it’s a horrible place from a risk, you know, return, sort of dynamic,

Alexa Binns 44:59
the numbers. You shared that you know what percentage of people’s private wealth is currently in private Do you have a sense of sort of net worth where you can actually participate in venture capital in a way that you would recommend? You know whether, whether that’s following some of the models that you’re building at allocator, the endowment model, it’s like, is this, can we truly democratize this, or is there really sort of a ceiling in which this becomes smart or idiotic?

Samir Kaji 45:35
It’s such a great question. And this may be a strange thing coming for me, given what we do. So the word democratization probably has been overused a little bit, and I think it’s more about responsible participation. And what I mean by that is somebody that has, for example, the ability to qualify as an accredited investor on the basis of income alone, right? Because you can do that. You can make $200,000 for the last couple years, and I think I’m going to make that this year. I can be an accredited investor, therefore, invest in a lot of the venture firms that are structured to allow accredited investors. The problem is, the liquidity premium for me should be pretty high, because if I don’t have a lot of capital, I might need to buy a house, or I have medical emergency, or in family, or whatever, venture is actually not the greatest place, because my money is going to be locked up for a while. Better to put it in things like private credit or even lower middle market private equity, to the extent that you can get access to it, because you have a shorter time and it’s going to risk adjusted, it might be a better fit for you and for most of these people, they should the public markets are a great place. Just put in an index. I think once you get to about five to 10 million investable assets, that’s when it becomes a real conversation of using venture as part of your portfolio in a structural way, which is, now I’m gonna put 10% of my portfolio into something like venture. And 10% is not a lot either, because if I have ten million it’s a million dollars to put into the asset category to which I’m not going to do it all in one year. I mean, usually you want to build that over three to four years. So that’s 250 a year. And so then how do you build a portfolio with 250 a year that’s going to be highly diversified into the right assets and so generally speaking, you know, people that are less than five, maybe you do one off here and there. I have no problem with you know, you put 20 here, 50 here. But when people go too far over their skis and venture it can be a highly risky proposition. So I generally would say five to 10 million plus is when it becomes like, hey, let’s really think about implementing venture structurally and is part of your portfolio construction.

Earnest Sweat 47:49
That’s really good advice, because I was, I was going to ask who’s the ideal type of family office to come to you? And it also made me think of talking to a good friend, am I? As from QED, he was saying, noticing that there is a trend, and especially in millennials, of financial nihilism, right? Like not being responsible because things are so democratized, and this is why we’ve seen the wave of crypto and all those things, and that being a trend you can actually invest in. I love the approach. You said, responsible. What else do you want the individual to kind of be thinking about and kind of be prepared before going to talk to elk?

Samir Kaji 48:37
So number one, there’s no one size fits all. Everyone’s different when it comes to the liquidity, liquidity requirements, the risk tolerance, the return expectations. I have some families that come to me and say, I’m only going to do venture if I get a five to 10x and I said, Well, I just don’t think that’s realistic. I mean, when you look at the top decile being just a little north of three. How do you expect to get a five to 10x that’s just not a reasonable sort of outcome. So I think number one, are they realistic in terms of what you can get on the asset class? Maybe you get surprised by the upside. But even for long periods of time, some of the best allocators are not getting five to 10x on their venture portfolio. Number two, why are you doing it like, why do you want to implement venture as part of your Is it a diversification thing? Is it because you believe in the technology revolution and what it can bring? And then thirdly, what are your opportunity costs? Like, what else could you invest in, and does it make sense to implement something like that? And then from there, you know, the team spends a lot of time just actually tailoring solutions for him, or like earnest, you know, for example, this is what you have in your portfolio right now. This is how you know you want it to look. Here’s how we would recommend you building it. Oftentimes, private investing has been done opportunistically. Which is, I find a deal here, I find a deal here, and then you look at a portfolio that doesn’t actually make sense, because you have one vintage, or you’ve invested, like 60% of your assets, and then you have a bunch of exposure and fin tech, or it really just doesn’t tie together. And so you know, being able to understand how somebody is, what are their long term goals? And sometimes their long term goals, believe it or not, are not just based on economic return. It’s like it’s learning, it’s impact. And so you have to take all those things of the why, and then be able to deliver someone advice that helps them build it in a way that’s going to meet all their economic and non economic, economic goals. So those are the questions we asked in the first conversation.

Alexa Binns 50:44
Are there any other things that you’d love to share with this audience, as long as we’ve got you?

Samir Kaji 50:49
Yeah, the only other thing that I would mention is, you know, we’ve been, you know, doing this for three years now. We’ve seen the growth of the market. The market has changed a lot. So when we started, it was almost the worst timing to create an organization focused on privates going into 2022 and 23 however, it is. It is very clear that you know, when you build a well diversified, balanced portfolio, without having any privates, it makes me really wonder, how are you going to actually capture Alpha? Because by the time these companies are going public, some of these companies are 5060, 100, 100 and 50 billion in market cap. And so when I think about public, public versus private, they’re both equities. At the end of the day, one is just non tradable, the other one is tradable. But oftentimes what you see in the venture market are companies that are being funded that 25 years ago would have been public companies. Those would have been IPOs. And so, you know, the big thing is to find whether it’s us, whether it’s somebody else that you want to use as your engine to build your private portfolios or manage your private portfolios. Make sure you do it in a way that really takes into account your own personal care, your characteristics, and then also make sure that it’s something you want to sign up for the long term, this is not a type of asset or set of assets that you come in and out of, and I see So many people underperform dramatically on their privates, because they they come in and out of the market. They usually come in, unfortunately, when the times are the hottest, and then they sell off, and they go through this trough of disillusionment after the bubble burst, and they miss out on the good years until things get hot again, then they go back in.

Alexa Binns 52:36
So would you say now is a good time to be investing in venture because valuations are down, but maybe in the series A and above,

Samir Kaji 52:44
I think that it’s the ingredients for it being good, a good vintage, you’re certainly there. There are going to be areas where I think people will lose money, and I don’t think are going to come out. And I think a lot of these large AI deals, you know, they’re great companies that are basically building the pipelines and the infrastructure, but from an investability standpoint, probably won’t ever, you know, make the type of returns, and that’s okay, like this is we’ve seen this before, but if you were to ask me right now, sobriety is back, people have to do more with less, and that’s always a good thing when you have capital constraints. So outside, put AI out for a second. If you’re a SaaS company or consumer company, the bar is really high to raise the series A and Series B. So companies are much further along. So it’s not just evaluations, but it’s more efficiency in the builds. It’s less competitors doing the exact same thing, because everyone was getting funded. So I do feel like the next few vintages at least have the opportunity to outperform, and maybe, if done right, will make up for maybe some of the poor performance of the fund. You know people that invested in heavily in 2020 and 21

Earnest Sweat 53:57
thanks. Amir, always good to talk to you and where do, where should people find you, if they’re, you know, family office or a GP, yeah,

Samir Kaji 54:07
so you can go to allocate.co that’s the website. We also, you know, as, as you know, I have a my own podcast where I talk about venture, which is venture unlocked, which is sub stack, iTunes and Spotify, and my LinkedIn, if anyone has any questions,

Earnest Sweat 54:23
awesome. Well, check out Samir there. Thanks so much beyond Thanks.

Samir Kaji 54:28
Thanks. Everybody.

Alexa Binns 54:31
See you later. Allocator.

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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

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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