Alexa Binns 00:13
Today, we are speaking with Nate Leung, partner at Sapphire Partners. Sapphire Partners is a limited partner with over 1 billion in investments in elite early stage venture capital funds across the US, Europe and Israel. Sapphire is also the engine driving hashtag open LP. Our guests, Nate, have been every seat creature in the venture food chain operating at Optimizely, investing at Bain Capital Ventures, and allocating at Industry Ventures. Nate, you’ve always been so generous with your guidance and introductions, it’s a real pleasure to be able to share this time with you. Thank you.

Nate Leung 01:24
Thank you for having me.

Earnest Sweat 03:15
Nate, from your experience, and you know, on the venture side, and kind of at Bain and then Industry and now Sapphire, what are some of the key learnings that you’ve received? Or, you know, like, favorite stories that have really shaped how you look at the asset class today? Because, you know, I’m not gonna say the number is probably the same amount of years I’ve been in industry or a little less, but it’s been a wild ride. So what have you taken away? And what keeps you sharp on the industry today?

Nate Leung 03:51
Yeah, I think it’s almost a, a core principle or like, just a, it’s a people business, it’s a relationship business. And this is a repeated game, so to speak. So it really matters how you treat people and, and how you develop relationships. I think and, and I think that’s been just a threat that’s, you know, gone from each, you know, each each step in, in, in my career, at least, and helping shape kind of where I think the opportunity set is going forward to and what I mean by that is, I think, you know, by by being a long term partner and, and going through sort of cycles and being able to be a sort of consistent investor through cycles, creates opportunity to kind of do more with, you know, with with the folks you’re partnering with, and I think that’s really exciting, especially like, going through, you know, macro challenges and things like that.

Earnest Sweat 04:59
Did you give us a story behind Sapphire Partners? I know you all like our what I think of LPs that are leading the charge and in thought leadership in trying to kind of raise the bar for the entire allocator stakeholder group, I think of you all, but could you tell the kind of the story and from when it started to what it does now? Yeah,

Nate Leung 05:28
Actually, I’ll start with today. And, and kind of jump backwards. Today, we’re an $11 billion venture capital asset manager, you know, investing in both funds in companies. And that is actually what we had been doing when we started about 12 years ago. Now. And even before that, the team that’s, you know, before my time here at Sapphire, but the team had spun out of SAP ventures, and became, you know, Independent, became sapphire ventures. And we launched both a direct investment strategy, as well as a fund investment capability. And from the beginning, on the fun side, we’ve been seeking exceptional venture fund managers, focused on the early stage, both established as well as emerging. And that’s sort of the thread of, for our investment strategy that’s been very consistent. We’ve consistently wanted to partner with the very best GPs. And that’s both, you know, new and established.

Alexa Binns 06:46
And you’ve recently announced, you’re launching a new emerging managers program with a big time solo LP CalSTERS. That’s

Nate Leung 06:55
the current Yeah, that’s the big change, actually, this year is, is that on our funds platform, we added we’d add a dedicated capital for emerging managers defined as funds one through three, which we had previously been, you know, active, fairly active in partnering with new and upcoming GPs, but it was always out of one pool of capital. And what, you know, what we did in partnership with CalSTERS, that we announced this fall, was to segment that out as a dedicated program, you know, entirely funded by CalSTERS. And, and I think that, you know, especially at this time, there’s a tremendous opportunity set that we’re excited about pursuing together. And maybe we’ll take a step back and talk a little bit about CalSTERS, and sort of the origin of this partnership CalSTERS had been investing in venture and backing emerging managers, you know, for over a decade now, too, they’ve been very active, great long term partners in the ecosystem. And, you know, that said, they’ve been kind of doing it, you know, broad based in private equity, in general. And as we, as we had conversations and developed the relationship, we shifted that program to really focus on venture. And that ended up being a really good fit for both what were what both groups were trying to accomplish, in terms of, of backing and finding and backing the next generation of great managers.

Alexa Binns 08:43
Is there anything else that’s helpful on this platform? We have a lot of emerging managers listening, that you’d love to clarify, or that they should know about this new program?

Nate Leung 08:56
Yeah, I think, Well, I think the most important thing, and the reason why we did it, is frankly, the mission of serving the teachers of California was really compelling for us, both, from what the mission stands for, as well as the institutional quality of CalSTRS, as a partner there is as institutional as it gets, right over 300 billion in assets, in investing in private equity for decades, partnered with some of the very best GPS, you know, since their very earliest days. And, and so we saw this partnership as a way to accelerate both of what we were doing, and, and the mission was really, really compelling for us to support and, you know, for the emerging managers out there, that is the mission that this capital supports, too. So,

Earnest Sweat 09:58
so one question I wanted to ask Because given that you guys have experience with emerging managers, as well as kind of establish fund managers, you know, how do you you know, the criteria for both? is, I would assume it’d be different, can you provide some kind of insight on kind of how you judge? Or, you know, how diligent you are, both? Whether they be new opportunities, or follow up?

Nate Leung 10:30
Absolutely a great question. And you’re right, that they’re different. But our process isn’t much different, if that makes sense. You know, what’s different is the track record, right, like the, you know, the amount of and maybe just the, typically, when we’ve been partnered with a group, there’s, you know, we’ve seen the consistency of a certain strategy play out and, you know, with a, with a new relationship and a new partnership, you just don’t have that sort of working relationship. So the, you know, the key difference, I would say, is probably around the kind of data that, you know, you can look at, and rely on, versus the more qualitative kind of analysis. And then, you know, a history of partnership like years or fund cycles of a partnership is a different consideration than sort of a brand new relationship. Right. And so, what I think is very helpful, and maybe this is sort of a pin in the advice for emerging managers is how to develop an authentic working relationship. You know, before you’re sort of officially partnered, you know, in a fund, like whether whether you’re raising your first fund or second fund and thinking about, you know, cultivating new relationships, a tool that I’ve found really helpful, and this kind of goes back to my Industry Ventures days, and frankly, my Bain Capital days were co investments were a great way to partner with, you know, with potential LPs or with these and, and also with existing LPs. You know, I remember one of the investments that one of the earliest investments I did at Bain Capital was a, it was an investment that we were leading, but it was a sizable check. And we brought in an LP to like, join for the diligence meetings. And that, you know, became that those a large part of Industry Ventures strategy as well, which is to do co investments in partnership with GPs, and, you know, now, particularly in this market, where capital is more scarce, and where opportunities and valuations feel more, either more logical or more stable, more market can be attractive, and a great way to get to know how to work with an LP and work alongside them. Have them see your diligence experience, your diligence, you know, firsthand, which I think is really exciting, and a great way to, to build a relationship.

Earnest Sweat 13:13
Yeah. And then for the established funds, you know, as my assumption, and what I’m hearing in the market is that, you know, we a lot of firms expanded scope significantly during this low interest rate environment. You know, we had very high prices and valuations and a lot of those companies think alike. The latest data says there’s about 100, and no, sorry, 1200 unicorns. And usually only about 20 tech companies go IPO every year, I mean, on average over the last 20 years. And so or maybe that’s the at most but whatever the fact is, like there’s a huge bottleneck, right? And so, when it comes to allocators in their, in them diligence, seeing their relationships with established firms. What are you even just like you can say, detailed high level thoughts? How do you, you know, take that into account? When people could be at a point of like having a lot of success and plateauing and not being relevant anymore?

Nate Leung 14:28
Very good question and sort of a lot to unpack. You know, I’ll start with the, I’ll start with at the sort of portfolio and company level, I think we try to get as much information as we can on actual company performance and really understand, you know, are like how, how real are the fundamentals around the value drivers, how real are those valuations and there are two I think there’s several layers to it, but the the ones that sort of stick out to me are you know, What are the things that are actually measurable, you know, around revenue, profit, you know, capital raise preference cap of capital structure and capital stack? And then how does the GP talk about them? Right? Or how is it presented? Right? Like, are things held at the last round valuations? Are they things, you know, sort of adjusted for might be appropriate today, and how do they discuss, you know, the, the, like, the sort of current state of the investment? And what’s that sort of, you know, level of communication and transparency, it’s like, frankly, what can you really trust, and there’s, there’s, you know, variation on both sides of that, right, but hopefully, like, the fundamentals stuff like these, like, you know, numbers or numbers, and hopefully, there’s some truth behind that, and, like, you know, not like accounting irregularities. But then, but then how the partner, you know, sort of discusses that information and shares and information is, is really important too in terms of how we think about underwriting. And then we, we try to bring it full circle, really, with the references that we do, you know, through the ecosystem with founders, co investors. And really try to assess, you know, how close the existing body of investment work really informs the go forward investment strategy.

Earnest Sweet 16:30
At the time, we’re recording this, Nate didn’t have the response, but like, we had a pretty big firm that just decided to go bye, bye. So I’m sure it’s making the assessment of firms very tough for allocators today.

Nate Leung 16:45
It’s absolutely, and those are sort of the issues that are particularly challenging to get under, right, the partnership dynamics, the individual motivations, right. And, and, you know, there’s only so much that that LPAs economics, you know, GP commitments and things like that, you know, only so far that they can go? Yeah, I think it’s been a really interesting time. And, you know, certainly unfortunate, but I feel like this is also, you know, there’s, there’s probably more to come. Yeah. But I think that also creates the space for the next generation of really great firms and managers,

Alexa Binns 17:37
Is there anything in those reup conversations that you can sort of shine light on what you’re thinking about?

Nate Leung 17:48
Yeah, so in, I think this is a step back and discuss maybe a little more about our process. Actually, whether new or re-up, we try to spend as much time as we can with the broader investment team, you know, in general, to really, like, assess some of these dynamics. And, you know, sometimes certain team dynamics are more call it obvious risk factors, right, like a team that’s never worked together or never invested together before might be different. Right, then, then then a team that had been, you know, making investment decisions together for a decade, right. And so, you know, certain times like those, those issues are more important. And, and then, you know, on the other side of this, like, where, particularly with established managers, where the, you know, there’s a question of sort of transition of economics, and, and, and, frankly, even like, transition of sort of investment decision making, like, it’s, it’s a process, right, it doesn’t, you know, it doesn’t just happen sort of overnight,

Nate Leung 19:51
And I think one of the trends that we’ve been observing is sort of a bifurcation in the market of like, You know, very large brands or large platforms, large firms, versus specialization, right specialization by, you know, vertical or stage or what have you. And maybe like a horizontal trend, you know, kind of that across both is actually the, the importance of an individual brand, right meaning meaning like an individual GP or investor kind of brand, like, what they stand for, and that person being the go to person, right, for referral or for inbound or whatnot. And those two, kind of overarching trends, I think, are driving a lot of the changes of what we’re seeing in the ecosystem and venture.

Alexa Binns 20:47
Yeah. Are you seeing that among your allocator colleagues as well?

Nate Leung 20:54
That’s a great question. You know, it’s anecdotal at best. But I think that is true, too. I think there are more. There’s increasing specialization in terms of allocators. Now, I’m not talking about like, you know, when, when, like, long standing endowments or pensions sort of shift their kind of staffing model, I mean, like just where, where capital is kind of going, and where talent is going. It feels like there is also increasing specialization, which is interesting, whether it be sort of, by asset class, by transaction or even, you know, firms kind of pursuing different, different strategies for exposure to space. I’m sure we’ll get into secondaries, for example. But that’s definitely been an area of tremendous growth and change.

Earnest Sweat 21:57
Yeah, I wanted to actually, since you, tee that up, love to talk about secondaries, given all the fluctuation in the market. And, you know, some emerging managers looking for liquidity in interesting ways or some of their, let’s say, newer allocators to the space looking for liquidity. It’s been something that we’ve seen from the fund level as well as at the individual portfolio company level as well. So you’ve had experience in your time in the Industry? What kind of guidance? Are you giving to what you give to other allocators and lps on secondaries?

Nate Leung 22:39
Yeah, I’ll take a step back and just think about, like the overall market context, which is, we’ve gone from a period of relative tremendous liquidity, right, like in, you know, sort of the peak sort of periods, right, like, in 2020 2021, sort of, like, you would see secondaries trade at a, you know, at par or premiums, right, like, it felt like there was a lot of liquidity in the ecosystem, and very quickly that liquidity evaporated. And I think where we are now is a bit in a normalization sort of period of like, you know, I think liquidity is going to, for a longer period, become harder to come by. And that is still largely working its way through the ecosystem. That said, over the past cycle, there has never been more capital raised into secondary vehicles, right, like this is across alternative assets, and you know, private assets, like there are $20 billion or larger, secondary funds. It’s, and you know, that that is more in buyout and private equity, for sure. But there’s also never been more capital chasing venture and growth and technology assets too so like, the ecosystem has kind of changed, you know, tremendously. And in terms of, you know, I think, advice for LPS, I think, I would, I would have conversations and just, you know, assess what sort of the, the kind of options are out there, you know, talk to folks in the ecosystem and really think about like, what your long term strategy is, frankly, like, I would I think about like, what what is your, from first principles, your long term strategy, like, what are the kinds of managers you want to partner with? How do you want your portfolio to be constructed going into the next cycle? Right? And if it makes sense to change, you know, what’s in your current portfolio in order to accommodate what makes sense in terms of, you know, your go forward portfolio, construction and investment strategy? And then I think, you know, secondaries are a great tool to really think about that. And to really be able to like, you know, take liquidity or reallocate, you know, from either certain asset classes or from, you know, certain even specific investments. Is

Alexa Binns 25:18
Is there anything else about secondaries that you feel like people are getting wrong? Yeah,

Nate Leung 25:22
I think there’s still I think there’s still a perception. And if this is so there’s there’s variability on both ends in the ecosystem, I think there’s still a perception that it’s, it’s still a bit of a gray area, a dirty word, right? Like, it’s still like emerging as a, a, you know, an appropriately liquidity solution. But that’s exactly what it is. It’s a solution. Right. So like, and this is where I think there’s going to be more sort of creative structuring, and, and, you know, more, more players, frankly, in the space. You know, we’ve, like, we’ve seen a tremendous respect for the team in Industry, for example, they’ve grown a lot, right, like, the latest secondary fund is 1.4B, I think, and when I was there, not too long ago, it was, you know, half that or smaller. And so that’s just it’s different. The but, but, but I think the overall ecosystem is, is moving in a direction where, you know, I think, hopefully, liquidity and liquidity solutions will be more commonplace, or more more widely accepted and adopted. And I think that, you know, on the other side of that, like, there’s been a lot of hype, right. In the end, I think there there’s, there’s, there’s been a lot of hype around secondaries being, you know, counter cyclical, right, or like being able to find incredible assets for cheap. Like, the reality is, most folks aren’t selling their incredible assets period, let alone for massive discounts. Yeah, right. And so the perception that there’s all this value to be had just hasn’t been, frankly, really been unlocked yet. But I think as expectations on buy and sell sides start to converge more. That I think, I think the overall market and, and, you know, the velocity of the market will start to pick

Earnest Sweat 27:33
up, you’ve been quoted as saying, I love being an allocator. So just as somebody who has been both a VC and now an allocator, what’s, what’s something that you’ve learned being on both sides? Or what are some of the misconceptions that when you were a VC that you wish you would have known about allocator?

Nate Leung 27:53
I think about and this kind of goes back to, you know, the, the, one of the principles kind of throughout my career, which is in the ecosystem, you know, investments are not transactions, they’re partnerships. And therefore, you know, bringing, like, closing an LP is not a sale. It’s the beginning of a relationship actually. All right. It’s a proposal. It’s right, that’s right. This is like this is the start, you know, of the marriage long term partnership. And, and I think it’s, it’s, it’s really important to kind of keep that in mind. Because I think, you know, when, when things were a lot easier, and in the prior cycle, right, like, everyone was moving fast, and not doing as much work and deep thinking as should have taken. And I think, you know, personally, I’m guilty of this. Right, so, so definitely. But I’m excited about going forward, and deepening relationships, and, and also building new ones and supporting, you know, new folks getting into venture as well. I think authenticity is also kind of a misunderstood thing and venture, right? Because I think there’s a tension, so much of what happens, or what drives activity can be around brand, right and around heat and around hype. Because you’re thinking about the future, right? You’re thinking really, like there’s a lot of discussion about potential. And, and I think, you know, it’s maybe a human condition, but we can get kind of carried away. And so the like, truth and authenticity, I think, gets sometimes undervalued. And then I also think this goes a little bit back to this secondary sort of conversation, but I think the duration of venture investments is also misunderstood, right? Like, we’ve anchored around a tenure, like fun life, you know, with two year extensions or whatever. Right? But like, the reality is things change, maybe in a shorter period, then it’s expected or like, maybe it takes longer, like a lot of times, you know, things take a lot longer than than 12 years to really realize value. And like, you know, I think different LPs different allocators have different time horizons, right? And I think, you know, same thing with GPs, I think folks have different expectations. Like, you know, frankly, I’ve been, you know, in this business as an LP for eight years. And that’s not even like, that’s not even close to a full cycle yet.

Alexa Binns 30:53
Yeah, you don’t know if you’re good yet, like data is still out. It’s still on paper.

Earnest Sweat 30:59
Now we’re gonna take a quick break to speak with our sponsor.

Alexa Binns 31:03
On the show today, we have industry experts and sponsors, one of my all time favorite founders, John Ling, co-founder and CEO of Canopy. Canopy streamlines the administrative process, think legal wires, taxes, etc. For private equity co investments and SPV. Thank you, John, for partnering on the show.

Alexa Binns 33:36
A lot of the LPS who come on the show are particularly interested in CO investment opportunities. In many, in many cases, they’re investing with or emerging managers with with the intention of putting more money to work in in, SPV is like, like, what you’re setting up any, any trends you’re seeing in the CO investment space to that that might be interesting or a takeaway for the audience? Yeah,

John Ling 34:04
I mean, I think, to iterate your point, I do think, you know, institutional LPs are thinking a lot about, like, why are we paying such expensive fees? Right to these, like, large funds? Like how do we get more direct access? I think, you know, as you talk to a lot of us, it’s just your piece, I think, you know, that will be a big theme, right? Everyone’s like, oh, how do we get more direct access? And I think, you know, from the GPs perspective, they aren’t like, against it. Right. But it’s just a lot of work, I think both on like, the legal component, right, getting like the financials, right, flow of funds, components set up, et cetera. Like, I think if they had a really easy way to do it, I think they would be willing to because at the end of the day, you know, for them, it’s it’s not necessarily free carry, but like, if you are under the sort of assumption that, you know, we’re investing in a really, really good company, it’s definitely gonna go up, then actually you sort of can think about it that way. Because the alternative is like, what? You can’t write it from your fund, right? So you’ll probably end up just like introducing the LP to the portfolio company as like a gesture of goodwill. But if you were to set up something that’s just like, hey, 10% Carry, like, you know, maybe like very, very low management fees, like people would just be like, okay, you know, that kind of makes sense. And actually, you can just pull more capital from your LPs. I think, a lot of the times maybe people are a little bit too aggressive, I think on their numbers. I think if you talk to institutional LPs, they probably give you the same feedback where like, why am I paying like, two and 20 on like, a co investment vehicle, like, that? doesn’t make that much sense. So I think like, you know, if people were just, hey, it’s really easy. It’s not that expensive. You know, we get a little bit of money, but like, obviously, the alternative is you get none of it. Like, I think that calculus is not super complicated to make?

Alexa Binns 35:59
Yeah. Do you see the carry? Are you seeing more than an average, is carry now closer to 10%?

Nate Leung 36:10
I don’t think it’s necessarily close.

John Ling 36:12
I mean, I guess it depends on how you think about our clients and our sort of like, the deals that types of deals that we do, right? So I think like, actually, we have customers who come on and do like 0% Carry, actually, because I think from the portfolio companies perspective, they were like, Okay, we want one check. We don’t want a bunch of introductions to your LPs, like, just tell us how much you’re able to do. And it sort of ends up functioning as a gesture of goodwill, right? Like, these LPS will pay for our fees, right? Like, just like the entire process. But at the end of the day, they keep all the upside. I think, like 10% is a fairly standard number, when you think about, you know, large scale co investments. Obviously, there are still people who charge 20, um, there are people who do side letters, right, I think our system is capable of, very easily configuring and automatically generating side letters for folks as well. Um, but yeah, I think like, to my point earlier, it just makes a lot of sense to not charge that much, to be honest, right? Like, I think everyone wins in the end. And there’s no need to say like, oh, how can I get that like, extra dollar? Right? And then you sort of like, build more goodwill when you like, go raise your next one. People will be like, well, actually, yeah, they didn’t really charge us to carry on. Maybe we have more opportunities to get exposure to really great companies through, you know, Alexa and her button, right? Like, I think that’s sort of how I would think about it. If I were building a fund, I don’t want to fund it obviously, but I think that’s probably how I would prefer to think about it, like a very long term game, right? The end of the day, like VCs, like, that’s just a 10 year asset class, especially if you’re like, very, very early stage, and you need the late stage capital to bridge your co investments, right, or your pro rata rather sorry, like that. Because if you have a really large fund, you probably don’t care about this, you’re probably just like, Okay, actually, why do we need to do Kylin investments? If we have like a $2? billion dollar fund? Right, it’s a completely irrelevant question. So I think like, if you’re like a really early stage investor, it really is about like, how do you, you know, have a lot of like, repeat, Win Win transactions with your customers? And I think that’s about

Alexa Binns 38:12
it. Yeah, yeah, absolutely. John, you clearly are out ahead on the future of venture capital. For those interested in using canopy software to set up funds, manage capital, and report performance, you can please visit hay canopy.com, backslash allocators, and then Earnest and I get credit for sending you thanks so much. And now back to our LP interview, are there any stories you can share of, you know, building a relationship with somebody over time or what that’s been like?

Nate Leung 38:44
I’ve been really excited and grateful to bring a relationship and a partnership full circle. So we’ll start with the group Workbench. I’m not sure if you’re familiar with them. Yeah. They’re an enterprise fund based in New York. And I had originally worked on a partnership with them in industry ventures, this is, you know, one of the one of my earlier deals, we restructured their first fund. The first fund was entirely owned by a corporation and we helped them restructure it and bought half of it. There’s some great assets in there that fun today is, you know, North reacts with like, grade pathways. And so and you know, that transaction was, you know, back in 2017. Right, so, like, this is like, really excited about that early return. We also came into fun too, as an anchor investor. And I’ve gotten to when I left industry and joined sapphire, continue developing that relationship you know, from a you know, admin it’ll be a bit more of a distance. But now excited to share that we’ve come into their most recent Fund, which hasn’t closed yet. So we’ve closed but there have, they haven’t, I don’t think they’ve done their final closer announcements. So again, all this after just asking them about it. But we’ve come in with a substantial, actually even larger commitment that we wrote and industry ventures. And, you know, it’s, it’s now been seven years in the making that, that there’s relationships developed, we’ve done co investments together. And I’ve just gotten to know them, as you know, as people like, share kid photos, all that stuff. And it’s an amazing, personal and professional kind of relationship. And I think they’re just getting started, right. So they just celebrated their 10 year anniversary. And we’re really excited about the coming 10 years or more.

Alexa Binns 43:14
Well, thank you. Any, any parting words? Is there anybody that you actually want to reach out to? Who Who What are the criteria of people who are our kind of people you’d like to talk to? And so that they know what you want?

Nate Leung 43:33
Yeah, two things. One is for emerging managers raising their first three funds in the US, you know, we’re excited and, and we have we actually manage all of the introductions and inbound through an inbox funds submissions at sapphireventures.com. So it’s fund submissions@sapphireventures.com. And then if any folks, whether they be LP GP, are interested in exploring, you know, secondaries or just just talking about potential liquidity solutions. I’m always excited to jam on conversations like that.

Alexa Binns 44:12
That’s awesome. You are a resource for me in all things, so anybody would be lucky to to pick up this thread. Thank you so much.

Nate Leung 44:23
Thank you.

Alexa Binns 44:24
See you later, Allocator.