Earnest Sweat 00:00
Welcome to Swimming with Allocators, the VC podcast from the LP perspective, with your host, Alexa bins and earnest. Are you ready? Let’s dive in on today’s episode. We have Laura Thompson. She is a partner at Sapphire partners, investing in emerging and established VC funds. She’s a tremendous LP thought leader, well known for her insightful articles via open LP, today we’re going to chat about what guidance SAFIRE is sharing with their GPS in 2025 why venture reserves aren’t always a good thing, or maybe that changes we’ll see, and overall just the landscape of venture capital today from an established allocators perspective. So with that, we welcome LoRa Thompson, thank

Laura Thompson 00:56
you both for having me on here. It’s just thrilled to be invited and very excited to have the discussion today. So huge. Thank you. I feel honored to be part of it.

Earnest Sweat 01:05
Thank you. Glad to have you too. So we’ll start off with just how did you become an allocator? How did you get to this position? And what stops you from saying this is what you want to do.

Laura Thompson 01:20
Thank you so much for asking. I feel like it’s this hidden part of the ecosystem where it’s not hidden, because a lot of dollars come from it, but it’s just, you know, it’s not the number one career path for college graduates, because no one knows what it is. So I didn’t have a linear path, but I did start in finance. I did banking right in the middle of New York City. I decided that two years was plenty of time for some wonderful people. I did direct secondary investing, and also did some direct work for a family office. And it was at that point that I really thought about, like, what do I actually want to do? Because I should probably have a view on that. And during my time doing direct secondary investing, I invested across asset classes and also saw what made funds really successful, and also some funds that were less successful. It was really interesting to me. I also love people, so I wanted to make sure that what I did had a large people component. And I was really attracted to the venture. I just think you get to enable people who are changing the world, who hear, hey, that’s impossible. And they said, you know, they’re saying, No, it’s not, we’re going to do it. And for me, it’s just the most exciting part, you know, and I love, there’s lots of merits to buy out in some other parts, but this was the best. So I wanted to focus on early stage ventures, and then I wanted to do fund investing. So I went and joined Horsley bridge back in 2014 and had a wonderful experience there. They have a lot of really great people and best practices. It was a great spot for me to really focus on fund investing. And then I was able to come join Beazer and SAFIRE and help build our fund efforts here since 2018

Earnest Sweat 03:05
That’s awesome, and we’ve heard so many, whether it’s on the podcast or just general meeting other allocators. Horse Lee bridges is always like a common denominator of training ground for a lot of great folks that I like, thanks for sharing your just journey to Sapphire. Were there any anecdotes or specific experiences, whether they were at Horse Lee bridges or others, that kind of really shaped you, like, what was your view of early stage ventures? You mentioned that, like, you fell in love with it. But was there a certain experience or just trend that kind of led to that,

Laura Thompson 03:54
You know, when I joined horse Lee bridge, and then since that time, I just think that this is, this is the best job on the planet. You get to,sit with people and say, how do you see the world, you know, like, what’s happening, how are you approaching it? And get, you know, you can get views from people focused in different GEOS, different types of technology. And then, plus, it always changes. Which is both, you know, which is exciting. And then you get to meet the founders, and you’re like, I, as an LP, am supporting GPS, who are supporting people in these journeys. And at the end of the day, it’s the founders, right? The founders are the ones who change the universe and empower all of this. So when I get to hear stories of what people are building, and I like it at all stages, you know, like, clearly, there’s some folks who are about to IPO, who have really developed large scale companies. And I love hearing the stories of folks who have just started, who are building their teams, who are, you know, just in the beginning stages. So, like that has. Something that I loved the second I joined a horse on a bridge, and it’s still my favorite thing today. You know, it’s kind of like, why are we all doing this? It’s because of them. It’s because of the founders and how to support them and these journeys. So it’s just, it’s a magical part of the venture.

Alexa Binns 05:15
And what is your role today at Sapphire partners, I feel like you’re looking at both the emerging and the established managers.

Laura Thompson 05:22
It’s one of the reasons I joined. I joined Safar because of the people, and I also joined because of the mindset and the platform. So I love the early stages. We do early stage ventures. We do early stages in the US, Europe and Israel, and then we were able to partner with CalSTRS a couple, a couple years ago, and it’s just been, they’ve been amazing partners, and it’s allowed us to do even more in emerging managers. And we always have. It’s always been a key part of our program, but it’s just allowed us to expand that so both emerging and established in those geos and then all venture, which, as you look at allocators, it’s pretty unique to be focused on venture. And I just think, for me, it’s, again, the part I love. And it also allows you to do emerging managers, because if you’re two people, kind of working across every asset class, you do wonderful work, but you just don’t have enough bandwidth to meet with a lot of emerging managers. And I think to do it well, you have to get kind of be in the trenches and spend time with a lot of people

Earnest Sweat 06:30
your experience in asset class. And so many times, when we have people on, if you’re new to this industry or asset class, you might think that all allocators are kind of the same, right? But they’re not, and there’s definitely nuances that cause big differences in their approach or their philosophy of investing. What would you say that is for sapphire partners, like, what’s the differentiator? Yeah,

Laura Thompson 06:56
I love that question. So as I think about it, we’re really data driven, that’s something I appreciate. You also need time to do that, and then you also need the data set to do that. So, you know, but we really there’s a lot of questions that you can’t answer with data, and this is a people business, but then you can also use data to inform your questions and make discussions better. So that’s both specific to managers. And of course, the data set is going to be very different if it’s someone who’s raising fund one with an angel track record, versus someone who’s on fund seven and has kind of a large body of work. But using those data to say, like, Hey, I saw you move a little more into this geo. Tell me about it. Or valuations have done this. And here’s how we see you participating in the numbers. Tell us about this and what you’re going to do. So to do. So it’s everything from that to kind of to your question earlier about what has kind of informed my beliefs over time, about being an LP, I think you need to care about at the end of the day, you just have to be an amazing company. Sadly, there’s no shortcut to that. But,, like fund construction,, how are you thinking about it? every model is wrong, but do you have an idea of the outcomes needed and the ownership and how you like to participate in the market? does your strategy fit kind of, you know what you’re planning to do now and in the future? So the power of ownership, I was always a believer in the power of the early stage, because it’s freaking hard, right, like you’re looking at something, it’s like at the very early stages, a lot of things pivot. A lot of things are unclear. But if you get that right, and get in at early valuations, and are able to do that, the returns are really compelling. And you know, as we’ve looked about, some firms are really scaling in those fund sizes. And I think it’s in some ways harder to generate out sized returns with larger fund sizes in different parts of the market. And by the way, there’s alternatives, like, you can put all your money and buy out so, like, if you’re not going to generate, you know, high returns when the cycles are good, like, probably shouldn’t do venture so, like, all of those things have kind of informed my views. But at the end of the day, it’s about the people. And as an allocator, you’re literally giving a blind pool of capital. So it really is getting to know people over time and understanding their judgment and understanding how they make decisions and understanding what drives them. That’s one of the most interesting parts of the work for me,. what is inspiring someone’s journey, and all those pieces of the puzzle kind of lead to how we make investment decisions.

Earnest Sweat 09:41
So two responses to that. One, when you said all models are wrong, it just took me back towhen I was an equity research analyst, so I was just like, yeah, all these are wrong, but I have to have a point of view, right? And you have to, like, have a methodology, and people want to see that you’ve taken the time to build that out in a thoughtful way. The other thing was, you know, your data driven approach, you need time for that, and that gives you comfort to build out your investment philosophy to balance with, like the people, kind of like a squishy part of it for new allocators. We’ve seen so many changes over these last 10 years. how do they, how should they approach it? Yeah,

Laura Thompson 10:30
it’s a great question, and I feel a little bit as what is their program? Because some people make one new commitment every five years. They probably don’t need to worry about it that much, you know. And it is. It’s a really hard time to underwrite. I think in some senses this environment is easier for folks with long established track records, with funds, with dpi, or it’s almost easier for folks that are kind of brand new and doing something new, where there isn’t a lot of history. And I think it’s particularly hard for folks raising, I don’t know what call fund two or three, when the environment has really changed, and LPS do have finite time. So you know, when you’re thinking about the underlying companies for newer funds, they won’t know the companies. And clearly there have been fewer up rounds and valuations are, you know, something where they’re a data point, but it’s, it’s particularly hard right now. And so when I think about, when I think about new allocators, a lot is their program, what do they have in there? What are they trying to add? How can they focus? And then a lot of it always does come down to reference work. And so once they kind of narrow down what they’re trying to invest in, you know, and and have a pool of candidates, you have to spend time with everyone. Of course, pick the people that you feel most strongly about, and then spending time calling the founders, calling folks that follow on and doing that type of work, and it’s the underwriting is just hard right now.

Alexa Binns 12:06
Have you seen whether it’s based on the data, your own data, or just the environment, any shifts in what you’re focused on? Or how you think about manager selection? Yeah,

Laura Thompson 12:19
I think, like one of the things, I guess I’m highly biased, but one of the things I like about our platform is we just do early stage ventures so we don’t hop out or try and time the venture cycle, which is to your excellent question. Another piece of advice I’d give to folks is it’s just too hard to time. And probably when you get scared by the venture cycle and you step out, that’s probably the best time to make new investments. So wow, I keep deploying, and you do, you rely on GP, and the fund lies so long. They are not two years old. They’re a gazillion years, right? So like, you rely on GPUs to develop the companies and figure out the right time to exit. But yeah, I think it is. It’s tricky.

Alexa Binns 13:00
Is this strategy changing? Do you all see yourselves shifting based on either your data or so?

Laura Thompson 13:06
We’re not, we’re still early stage ventures. But I think, like, there’s clearly, as we were talking about, things evolve, and it’d be interesting to hear kind of what you’re seeing. But you know, Fintech is out of vogue right now. I still believe in FinTech. So like, we are still making commitments. I think some people are making fewer commitments. Crypto, clearly, we know is not always. It comes up and down. So like you see people trying to figure out how that fits in their strategy, and then this is probably on every other conversation you’ve had, but like AI, is so interesting because my personal view, which I don’t think is profound, is it’s truly going to creep into and be relevant for most industries. So then it’s for us, working with managers, figuring out how they’re thinking about adopting that technology into their companies, how they’re thinking about valuations, because they are not low and though they are, it is constantly changing., I do think for a lot of LPs, given the lack of liquidity, given the downturn, people are kind of like, back to basics. So like, people are trending saying, like, let me add, but let me add someone experienced with a track record, let me add, sometimes a little bit more safer bet just because of all this movement. So I do think it’s impacted how LPs are committing, and you can kind of see it in the numbers. You know, the dollars to emerging managers. I think there was a great pitch hook article in December, and if I’m remembering correctly, I think it was around 10% to emerging managers, something along those lines. So like it is, it’s hard to be an emerging manager, which is always true, but even more true right now.

Alexa Binns 14:46
And what’s giving you conviction on FinTech when others are running the other way,

Laura Thompson 14:51
It’s the same thing. I think when people think that it’s unattractive, that’s often the very best time to make you have to be aware of. There has to be a follow on capital. So you have to, you know, there has to be enough people to fund it. But, like, if you think about FinTech and how outdated, still, a lot of the technology is, and what a big part of the market is, it is a big effing part of the market. Like, I just think that there’s still, like, Will every company be successful? No, but I still think, like, Fintech is so broad, I think both, there’s really good returns to be had. And it does, I think, benefit from some specialized knowledge. And there’s some generals that are excellent at it, but I do think understanding how it works, given the regulatory component, is particularly helpful.

Alexa Binns 15:34
Do you have an opinion on generalists versus specialists?

Laura Thompson 15:37
You know, it’s so funny. It’s like, this is the magic part of the job is, every time you say something, there’s a million contradictions. And so it comes down, like our underwriting is everything from like, past returns to brand to fund construction to like, a million things. So there’s not one formula. But my view is it’s hard to be a new generalist. So if you’re an established generalist, either based on a personal brand or based on a firm brand, I still think you need a point of view. I just think in this market, you can’t do everything, so that’s either by firm or by partner or a thesis or, you know, whatever someone decides fits how they like to invest. Like you just need there’s still so much capital, and the competition is still so heavy, so high for many, many deals like, you need a reason to be on the cap table. And I think often you need to come with a prepared mind, and you need to have a view, and the founder needs to understand that, you know, what they’re trying to build, and can be supportive of it. And I just think doing everything is just hard to do. Things change too quickly to be able to do that. Well, you

Earnest Sweat 16:53
Now, a lot of LoRa, a lot of LPs have, especially fund of funds, have both programs for established managers and emerging managers. How does sapphire partners really balance that with because there could be various different criteria, and any kind of overweight shift could really mess up the portfolio construction for you all as well. So how do you guys think about that?

Laura Thompson 17:21
Yeah, I love that question. So the partnership we have with CalSTRS is specifically for emerging managers. So that partnership is well defined. And the way we generally think about it, it’s institutional funds, one, two and three. So for us, it’s pretty well defined, but I agree, in other programs, people have to really think about how they are because my view is, I think the very best returns can come from emerging managers, but there’s also mobile volatility in returns, and it’s unclear. So, like, you need a portfolio, you need a group. It’s hard to do. I’m going to do one emerging manager every 10 years. Like, it’s just that’s like a trickier thing to do, unless you pick someone who’s well established and spinning out. So people have to decide what works for their program. But I tend to tell people, if you’re going to do emerging managers, it’s nice. First of all, if you’re going to do the work to really get to know everyone, you don’t really want to do one new one every 10 years. So like, how do you think of a portfolio within your portfolio? What do you think of how you’re underwriting those returns compared to your established bucket? And it is really just a program. It depends on its program by program.

Earnest Sweat 18:34
That made me think of another question too. So even just looking when I’ve been in the industry since 2016 if you look at like 2016 to 2019 emerging managers looked like a certain type of way, and there was a different rise of, you know, operators turned investors, some spin outs, but mostly like operators turned Investors and people new to the space. Then from 2020 to 2022 there was a very distinct new crop of emerging managers. And so with a more challenging and then after, since we’ve had more challenging markets, what do you think the successful and that’s a loaded question, but what do you think the successful emerging managers raising fund one and fund two for this next period, for the rest of the decade will look like, and what do you think they need to pull from in those other periods, or maybe ignore, to be successful?

Laura Thompson 19:32
It’s such a good question, and I do. I think it’s too hard to say for the rest of the decade. I do think all those profiles can be successful. I do think we’re going to see a lot more spin outs right now than we have in the past. So some you know, and people, it’s candidly, just easier for LPS to back some of those, because either they know the people before, plus they’re they have comfort that they’re able to run an institutional fund, plus there’s more numbers. So I do think they’ll. More of those funds are raised, just given the characteristics, and then it is just by strategy, by strategy, because being an operator, that’s a fantastic skill set, you know, to be able to identify and share with founders. We partnered with a former operator last year with an angel track record. And, you know, so we’re open to all these different flavors, and she just has a very specific thing she’s worked for. She’s highly focused in a couple different areas. And her operating background, for example, matches that. And her pitch to the founders is kind of like, I can do XYZ. I’m never going to be XYZ, but I do these couple things, and when you reference her, they’re like, Yeah, this is kind of a no brainer for this, this part of the cap table. So I think it, you know, even though I agree there’s fewer, it’s not the flavor of the month, it’s, it’s a very, very compelling and, you know, in certain situations, and then with the spin outs, I think it’s a variety of things, right? Some people are leaving because they want a new chapter. Some people want autonomy over decision making. Some people have to leave. So, like, you’re just trying. I think each one of those stories is very different, and essentially, with LPs, you have to get to know them. Like, it’s very rare for people to fund you on the spot. It’s just because it’s a blind pool capital. Like, you want to get to know people over time, and that’s a challenge with emerging managers, because people are like, nice to meet you. We’re closing next month, and that is very hard for institutional fees. So like, who will be successful? Well, pick the right fund size. So, the fund size has to match how you like to work. So like, if you like to be a Series A investor, you need a bigger fund. You’re going to need some really big institutions probably to kind of anchor the fund. If you like ANGEL or, you know, kind of seed, pre seed, you know, style investing, in some ways, it’s many roads to Rome. You can do a smaller fund, maybe use family offices and individuals and get that up and running, then prove yourself, then decide to expand institutions that might be that could be very successful. So I do think the nice thing is, there’s more pathways. The hard thing is, the fundraising environment right now is very, very hard and and a lot of LPs are still waiting for liquidity to make, you know, substantial new not react, because we always plan for those but but commitments to new, new folks that they’re getting to

Earnest Sweat 22:26
know. Now we’re going to take a quick break to speak with our sponsor on today’s expert segment. We have our industry experts and sponsors. Shane Goudie, he’s a leader of Sid leads venture funds practice, and Matthew Ethan, partner at Sid Lee, focusing on investment funds and private equity. Thank you both for partnering on the show this year.

Shane Goudey 22:49
Thanks for having us. Gonna be a blast. Yeah, yeah. Super

Earnest Sweat 22:53
happy to have you all. I’ll first start with you. Shane, I know in our first meetings, I’ve always just gotten that energy and excitement. And so I want to just kind of know, how did you get into, being an attorney with that much excitement and liveliness, and then get into venture capital? Yeah,

Shane Goudey 23:15
It’s a very circuitous story. I’ll try to keep it as short as I can. Ernest, so taking you way, way back I so I graduated from University of Wyoming, played baseball there, actually became a somewhat decent minor league baseball player for several years, but figured out quickly that that was not what I wanted to or my trajectory was not going to be, you know, the next 10 years it would take me to make the big show. So I made the decision to kind of revert back to what I was doing in school, and that was political science. And I worked on the Hill for about three years for Senator Al Simpson from Wyoming. And so I got very interested in the political side, and that led me to law school. Law School led me through a very circuitous route to get a tax degree at LLM at NYU, and then I came out to the Bay Area doing a lot of high tech tax, international tax advice for a bunch of the tech companies out here, but also working with a lot of venture funds, doing a lot of international tax consulting. And then just wound up loving working with the venture funds a lot, and decided to really make the switch away from tax but focus fully on venture funds. And that was back in 1999 when we were in the Go Go es days of the valley, and everything was exploding around us in all the right ways. Three years later, they’d be exploding in all the wrong ways. But nonetheless, you know, that’s when I got the start. And we started working with venture funds doing their fund formation and operations. And did also work on a bunch of portfolio companies that did the VC financings. And so got that kind of full gamut of the fund. Information experience, but then started to focus mainly just doing the fund formation, kind of operations, administrations, you know, right around after the time the bubble burst, because it required a lot of firm operational kind of focus. And so that’s sort of how it all began. And 25 years later, here I am now, here at Sidley and the leader of the practice. And, you know, get to work with incredible people like Matt and a bunch of other folks so super excited about the world, and absolutely love what I do. This is the bee’s knees of any what any lawyer could possibly be doing. We’re working with VCs and tech companies and great people like Matt. It’s good stuff. And

Earnest Sweat 25:39
Matt, could you share how you got here?

Mathew Eapen 25:42
Yeah, sure. It’s sort of a very similar path to Shane, which is interesting, because now when I interview law students, they’re like, 23 and they’ve decided that they want to do venture fund formation. So I’ve always been, like, curious, like, how did you come to that conclusion? And so I studied public policy. I studied science in undergrad and public policy and bioethics, and then when I was graduating from grad school, I was sort of like, what do I do with this making I could go into academia, but that didn’t really fit what I was looking for. And so I got a fellowship with the government for three years doing science and tech policy, and I loved it, like the ability to work on, like, large scale issues that shape our society, that shape, like, the political landscape of the US was just like, really fascinating. And then it hit a point where all of the interesting stuff that I wanted to do disappeared and went to the lawyers, and then came back with a decision, and I had no say in it. And so my wife is a lawyer, and I started thinking like, okay, maybe this might be something I want to do. So now I went to law school at UVA, came back to a law firm, spent three years as a deal lawyer, doing venture work, and M and A, and then I thought like, Okay, well, what happens like, what happens when you have a realization, like, what happens when you have a liability at a portfolio company? And that’s how I got interested in fund formation. And I’ve really enjoyed it. Like, I love the relationship. I love counseling clients, especially for like, growth equity and venture fund clients, they just have a different world view, you know, like, it’s sort of like this investment thesis is like a much farther out time horizon. It’s just really interesting to sort of take a step back from the day to day and think like, what are the like investment topics that people are really interested in now, and how am I going to, like think about this over the next few years and really see this manifest its way in a way that like affects myself, my family and my friends, things like that.

Earnest Sweat 27:44
Yes, fascinating and both very interesting backgrounds. If I would have met lawyers like you guys, I might have, would have stayed. So you guys have seen a lot over the last Jay, you said 25 years, you’ve seen a number of cycles. What trends are shaping how venture funds are structured today?

Shane Goudey 28:16
Yeah, it’s coming at us from all angles. To be honest, a lot of it is, you know, some regulatory and tax pressure. It’ll be interesting to see how the new administration sort of affects all that. But I think it’s a movement towards increased access to the markets for a lot of different audiences and populists. I think, you know, there’s a lot of market factors coming out of some really difficult times, whether that be the credit crisis of oh eight, or bubble bursting in oh one, or the most recent sort of lip on the radar screen. And I think it’s just flexible planning. I think it’s flexible fund structures. And then it’s from my perspective, it’s just really the maturation of the relationship with LPs, with the GPS. And you know, if you asked me this question, 1015, years ago, it’s sort of all out warfare, and there, you know, huge long comment memos and a lot of very acrimonious logo negotiations. And I would say, I don’t know if we’re quite a detente, but I would say that it’s the realization this is a long term relationship that these partners have with each other. And I think the level of respect in the negotiations that goes on these days, and the appreciation for the partnership that’s trying to be created between GP and LP, I think that very much, even you know, outside of structuring and tax and all these regulatory issues, just in the trend line in terms of how these formation projects are going. You know, there’s a lot more open and honest dialog, and that’s okay, right? A bad answer doesn’t have to cripple anybody anymore. An honest answer is what really wins the day for a lot of allocators. And so I think from a GPS perspective, it makes a lot of sense, and those are a few observations for the buy side. How about you? Matt,

Mathew Eapen 30:07
yeah, what we’re seeing is a consolidation of relationships like previously you’d see like large pension plans and sovereign wealth funds sort of take a diversified approach to lots of different relationships. And I think what we’ve seen in a tougher fundraising market is people selecting a handful of relationships with GPS and really saying, like, Okay, I want exposure to like, seed stage deals. I want growth equity. I want your real estate and data infrastructure. I want all of these different relationships, and I want them to be bespoke. Like, if I’m giving you this large amount of money and you’re gonna be a steward of my capital, I want, like, reporting that works for me. I want excuse rights that work for me. And as Shane said, the really exciting part about being a lawyer working in this space is that it’s all about relationships. And I think where I’ve seen Mistakes happen is there’s like sometimes overlooking the importance of that relationship. This is not like one closing you’re done. This is like representing someone who wants a like, you know, years and generational relationship with a manager, and recognizing that you’re there to facilitate like this transaction, that the relationship continues on even after closing. I

Shane Goudey 31:22
I think that’s exactly right. And I, you know, the thing that I’ll just add on to, to what Matt said, is the tailored nature of the GPL, P relationship. Now this isn’t just investing in a blind pool vehicle. We’ll see at the annual meetings, and, you know, we’ll lather, rinse, repeat, three years and four years from now, this is very much customization of the gplp relationship, and in the way of CO investment has been a huge boon for that development, whether that’s SMAs single managed account relationships for in our larger funds, or even In the emerging manager sec, where you may have a true believer from an institutional investor who has put a good slug into the main fund, but then also wants direct access to portfolio companies and the amenability of having our underlying fund managers be prescient for that these days, I think it being open to, you know, these curated relationships. And, you know, I think the GPS is willing to do that, it’s a lot more work. But I think the juice becomes worth the squeeze, if you could really make high dollar institutions, you know, family offices, sovereign wealth, you name it. LPs feel as if not only are they doing the right thing by them, by investing in the relative sectors that you’re an expert in, but allowing them to sort of have direct access to that deal opportunity as well. And, you know, obviously this ferrets itself out. If it’s, you know, a bunch of side letter stuff on, you know, regulatory pieces or confidentiality, that’s sort of the garden variety stuff, but I think it’s just been this ability for GPs to really allow the menu of goodies that they offer to their underlying LPs to be much broader than or ever has been. And now back to

Alexa Binns 33:15
our LP interview. Your partnership with CalPERS, I think is one of these things that people, people sort of know there’s this new pool of capital they’ve re-upped for another, another fund with you all, which is great news. Are there other categories of LPs that you happen to know are interested in emerging managers that those listening should focus on,

Laura Thompson 33:42
yeah. And so, I mean, we feel, again, like having a specific mandate with, like, with CalSTRS does help us out with that. And then I think, you know, there’s a couple endowments that are pretty active in emerging managers. There’s some other fund of funds that are very active. The sober news is it’s pretty small for institutional investors, just because,the body of work is different, and you can’t cover it, or, my view is you can’t cover it with just a couple people. And then everyone hates this answer, but I’m like, go find the family offices. The issue is there’s no directory, right? Like you can. I mean, even with AI is search. It’s not good. Like, you can’t you can’t figure it out, and every family office has a different flavor. And just like you were saying, LPs aren’t the same, GPS aren’t the same, and family offices aren’t the same. So like, how do you navigate that? You know, I think there’s, like, great things. Like, there are some kind of events and some some some things that help you match kind of different investors, to to GPS raising, and then I think it is conversations and like, let’s say you are, you know, a well known fund has followed on, and you’re friends with them in a lot of your investments are in the same sector, and they’re over allocated. Did you might say, like, who are folks who want to get into your fund? You know that might have, that might be interested in mine? Sometimes GPS will make, and it’s make introductions. And the best introductions are kind of informed introductions. It’s like, Hi, I’m a GP that you already know, and I love this person’s work, or it’s very new, but I’m following what they’ve done. I look at it all right. I’ve sat on a board with them, and their help is really has been impactful. Or LP, intros do really help? You know, it’s like, I know you well, and I’m really looking at this fine. You should take a look. The cold intros are better than no intro, but they’re not that helpful. You know, I met this person once for 20 minutes. Do you want to meet? Like, like, better than a random email, but not particularly helpful, so trying to use your GP and LP friends to kind of navigate who’s actionable, and then having like, a two way discussion. Say, like, are you deploying this year? You know, in a nice, nice way, you know, how many new emerging managers do you plan to partner with next year? Because usually the relationships can be helpful over time, because it’s such a long term game. But if someone really doesn’t back emerging managers or isn’t looking to deploy, you probably want to think about how much time you’re spending with them, and then ask them how they want to stay in touch, so that you know you can use your time most thoughtfully. But I wish I had an easy, kind of Harry Potter magic solution for this, but there just isn’t.

Earnest Sweat 36:32
Not all the models are wrong. That’s the callback. And so LoRa, you actually got to be thinking when you were talking about your expectation for more spin outs, for the criteria, going back to the core investments, how that’s a tough thing to really think about on, like how to continue with an established firm that you’ve already probably had success with? Have you squeezed all the juice you can and then we have this trend of more and more people, whether they have to or they want a new chapter, are spinning out. Is there a way that you look at, like, establishing reading up with established funds and like, is there a criteria that’s like, under key manner at risk was like, next man risk just curious. Like, yeah,

Laura Thompson 37:20
yeah, it’s a great question. I mean, generally, when firms are performing, we do not think about changing. You know, it’s a long term partnership. So if there are major, major team changes, or there are kind of, we have concerns about performance, that type of thing, then we will think about turning or they change strategy, we will think about that and have discussions. The way we look at it is, and this is where some of the data can come in handy. I know some firms really don’t care about attribution, but we do try and understand kind of how members of a firm are operating. And you could have people who aid in sourcing, but aren’t senior enough to have the title of the boards. And we really try to parse the data to understand each person and their body of work at a firm. And then it’s, you know, folks are close to retirement, it’s, it’s, that’s one of the lovely things about a close partnership, is you can have transparent discussions and say, How are you thinking about this? How are you going to navigate these transitions? And sometimes people don’t know, and they’ll say it and say, like, I think it’ll be during the next two cycles, but we don’t know yet. But here’s what we’re planning to do. I think you need to be intentional, though, and you need to have a process. And the biggest thing is the rest of the firm needs to be comfortable with it. It is challenging if someone’s leaving and they’ve generated a lot of historic returns, right? And so that does happen, but with all of these, it’s kind of okay. Here’s the body of work, here’s who’s been driving returns, here’s who’s been like, looks like they’re really promising and aiding investment efforts, even at a junior level. And then how are people compensated? You know, maybe you do one on one and just say, like, how are you doing? Like, how are you thinking about this? And just understanding, kind of, yeah, who’s going to be at the firm and who’s going to be deploying capital for the next couple cycles. But essentially, we don’t turn folks unless, usually there’s a reason. That’s why the lovely part is long term partnerships, and then it is trying to understand whether we think the next couple cycles are still folks who are driving returns. And we also try to get to know people early, like we love to get to know more junior people, because, you know, they’re going to be senior people at some point, hopefully. And so we try and get to know people early so that we know who’s contributing to investment efforts around the table

Alexa Binns 39:44
and and for these people who are just spinning out or just getting started on their own fund, any guidance on portfolio construction, like you’ve written about why reserves aren’t always a good thing,

Laura Thompson 39:57
yeah, I think. And it does relate a little. Bit to what we talked earlier about, about every model is wrong, but you kind of want a model. And so I think, you know, if you’re spinning out, what are you doing? What’s the same as your password? Because you’re going to get that question from every LP, what’s different? Like, how do you like to invest? And it’s, you know, it’s hard when someone’s like, well, I’m going to raise a small fund, because that’s what I can raise, right? Like, that doesn’t feel that is very realistic, but does not feel super compelling. So like you’ve

Earnest Sweat 40:27
been doing, right? You’re

Alexa Binns 40:30
a very successful series B. Your tracker looks great. And because you’re raising 25 million, you will be investing in pre seed friends and family rounds exactly

Laura Thompson 40:39
and like, and there are shifts where someone’s like, Hey, I did this work, but really I was passionate about a stage early, and this is like, how I thought about it, and who I met. So there are, there are strategies that work that way. But I do think it’s like, like, what do you really want to do? What do you want to build okay? And then what are you doing right now? And is it a stepping stone to that, or is it what you’re going to be doing longer term, and then the model or wrong model? But like, Do you have a view about, and there’s, I think there’s a lot of models that can work and there’s some models that absolutely can’t work. So like, Do you have a logical view about? Like, I think it’s this many companies, and this is kind of the valuations, and here’s what I think of the ownership, and then just an awareness of, like, what outcomes it needs. We always do this. No, no, throw us to you like this, but baby math on like, here’s the ownership. Maybe it’s deluded to this. And then what do you need to return the fund? Because of our discussion earlier about what’s kind of formed, some of my views are that there are some outperforming funds that don’t have fund returners. There absolutely are, but there are more outperforming funds that have fund returners, or companies more frequently that return multiple times the fund and so baby math shows it needs x billion dollars. Like, are you striving for that? And do you have signs of partnering with some of the companies that can reach that scale, you know, or at least, have you seen it? So, you know, I do think the fund model is super important. And then I love fund management. You can tell my blogs, I do like, love writing about it, but, but the reality is, you can’t have a good fund based on fund management. So you know, you have to be in those outlier companies to drive your fund returns. And then fund management, I think, can make a good fund even better, or an okay fund, we know a little bit better, but we do like to have a view on that. And one of the reasons I wrote about reserves is I do feel like it’s like, oh, there’s, this is the industry norm, right? It’s like, 50% reserve. So well, maybe it doesn’t have to be, at least take the time to think about how you like to invest and then what the number should be. And it’s not an automatic thing, just because everyone else does it. And then, for example, in this environment, I think it’s something I’m thinking about updating kind of my work over the next year, the fundamentals are the same, like you have to invest in companies, and if you’re doing reserves, they have to be concentrated in the best companies, because otherwise you’re just going to bring down your multiple and that’s very sad. But I think what has changed is a couple years ago, there was rounds happening so quickly, people were wondering how to choose, because a lot of times companies hadn’t fundamentally like they hadn’t fundamentally changed, except for having more come, you know, more capital, and people were having to decide where to put those dollars. And now there’s fewer rounds. So I think, you know, from a GP perspective, maybe the pool of candidates is smaller, but there might still be, it might still be hard to concentrate that much capital in the rounds. It might still be hard to decide exactly who your out performer is going to be, even with a little more time. And then I think it’s challenging. Like, how do you pay to play? Like, how? Because, you know, for a GP, for many GPS, relationships with founders and their reputation in the market, right? That’s really important, and it is important. So like, how did you, how do you communicate to founders, how you’re going to, how you’re going to participate or not in those situations as a GP, and I think there are some companies that have pay to play or have who are not getting funded, especially given all the changes in the market, that will be really productive. But I don’t think it’s all of them or the majority. So you know, if you are faced with those situations, how do you decide how much capital to allocate to those rounds. And I think that’s just really hard.

Alexa Binns 44:44
Yeah, I encourage everybody to check out. LoRa is writing because she breaks down scenarios for you, and there’s some real numbers you can dig into. And it makes me also nervous on behalf of all the laps who come on here, who are really interested in CO investing for. Looking at the reserve strategy as sort of a bellwether of what you’re offering your LPS for directs or SPVs, etc, because it’s so easy to get it wrong.

Laura Thompson 45:15
And LPs are like, I want them. I want to invest. I want this to offer the fees like I want them. And then later they’re like, Wait, this didn’t work. Yeah,

Alexa Binns 45:23
Even if you aren’t thinking about your own fund construction, but you are committed to co-investing, I think it’s worth taking a look at. LoRa is data on this because, yeah, it’s, you know, you want those concentrated bets,

Laura Thompson 45:37
but, but then they have

Alexa Binns 45:40
Do you trust your pre seed investor to know what the right concentrated bets are? I

Laura Thompson 45:45
know, and I think co investments are particularly difficult for all the reasons you outline. And I just advise, you know, sometimes GPS to, like, ask LPs and be like, Are you doing your own work on you know, like, how are you? How is the process working? Because I feel like some LPS do their own analysis and come to their own view, and they want to see everything. And some, you know, some LPs are kind of, like, we’re not direct investors. We’re kind of going to do what you say. So like, we need your, you know, like we need a different level of recommendation. And so just working with LPs to understand kind of how they’re thinking about it, too. Yeah,

Alexa Binns 46:17
Open LP is, in general, an awesome resource. Do you mind describing for our audience, what sapphire has put together for us all? Thank

Laura Thompson 46:25
you for such a kind compliment. It’s something we’re really, really proud of. So the idea, the idea was, all of this stuff shouldn’t be a secret, you know, it’s it’s an unfair advantage, and everyone should have access to things like best practices, market insights, and so open LP really is a spot to aggregate different views on the market, on fund management, on a bunch of different topics, from LPs and GPS. And I don’t think we have as many founders, but we love when they look there as well. And we always like ideas for content. So if anyone listening has burning topics that they’d like us to explore, we’d love that. But the idea really is like, why do you need to go ask people about, you know, how to fundraise, or how to like, what, what, what this term is, or how to put together a data room, or like that should be available for everyone. And that’s, you know, we just think the venture ecosystem is stronger by diverse viewpoints and diversity in every sense of the word. And if we can help some folks with some of these questions, we love it, and it’s for some, you know, experienced managers as well. Some topics will be less relevant for them. But we always like putting things out there and trying to use as much data as we can to be helpful.

Earnest Sweat 47:41
That’s awesome. It’s an amazing resource. And every fund manager, emerging manager and LP, I should, I would think, should check it out. I wanted to kind of close with any parting thoughts you had to fund man or emerging managers, because you guys have this amazing stat where I believe about 60% of your emerging managers have gone through and reached some kind of fund to become established managers. Is there any kind of through line common thread that you’ve seen in those managers, that they’ve been able to do something that is extremely, extremely hard to do.

Laura Thompson 48:23
I love that. I think, like, some of the things that we see are incredible persistence, you know, and just a real commitment. It’s not someone I went to business school with. So I think, you know, someone who graduates from business school and like, venture looks fun, you know, like, looks interesting and lucrative, like, you know, like, it’s just this, like, incredible commitment to, like, I want to do this, and I’m going to build this, build this firm, so we see that across a lot of different folks and like, and then a little bit of creativity, like, Okay, I can’t raise it now. I’m going to do SPVs, or I’m going to be on Angel List and prove this out, or I’m going to raise this fund with individuals. And then this is how I’m going to do it longer term. So I think that’s something that really comes through. And then there is thoughtfulness around some kind of, you know, the strategy and all the things that we talked about, like the fun construction and this, and being, you know, open to feedback. And again, I always tell people, This is yours. Like you need to do. Like, if someone says, Oh, my minimum commitment is this, you should raise this. Only do if it’s right for you, you know, follow. But I do think we see people who are open to at least listening to different points of view and learning, because this is, you know, a very, very hard journey. But I’m optimistic. I think it’s a really good time to make new investments, and so I’m optimistic. And we just need liquidity to come back, because we need LPs to free up some capital to, you know, be able to fund more emerging managers, because a lot of people, I think, want to, but, you know, are waiting for some dollars to come. Back. So I

Earnest Sweat 50:01
I think this is from you. I knew this in theory, but it makes more sense. You said it a couple times, but like, the importance for DPI and liquidity is not only for those individuals, but it’s for, you know, investing in new managers too. So it is the industry giving back to or investing in itself again. So, yeah, let’s get some liquidity. Let’s

Laura Thompson 50:23
do it. Yeah, no. And, you know, it is hard, just different organizations, like, you know, venture marks were like this, and then they came down. And sometimes people have to rebalance our portfolio. So sometimes people have the intention or want to do more, but we need to, you know, be impacted by some of those factors. So, but, yeah, liquidity is one of the big ones. So, let’s make it happen.

Earnest Sweat 50:41
Let’s make it happen. Well, LoRa, thanks so much for being on the pod today, sharing all your insights. And there are many more questions we have for you, but we want to take all your time in this new year. So if you’re looking for LoRa, check out her blog. Check out open LP, and thanks again for being on swimming with allocators. Thank

Laura Thompson 51:02
you so much for the wonderful questions, and it was so great seeing you guys. And I look forward to more discussions, and you guys are so thoughtful. So when you want something on open LP, or there’s specific topics that are missing, just please send them my way.

Earnest Sweat 51:14
We’ll do Thank you. All right, take care.

Alexa Binns 51:17
See you later, Allocator.