Alexa Binns 00:02
This episode, we have Benedikt Langer, if you are following the interaction of emerging managers and LPS at all you have heard of Benedikt, or at least his publication, embracing emergence. Today, we are going to hear from Benedikt the journey he went on working with a family office who realized they wanted to work through great managers, rather than looking for direct deals, as well as what He has planned for the emerging embracing emergence community, and how it could be helpful to you.
Alexa Binns 00:53
You have a very unique background that you also have trained to be a pastor. How does faith and finance and family office investing? How do you end up on this path?

Benedikt Langer 01:08
I think the best way I can start explaining that is one of the GPS that we have backed. Daniel skimmed with medicines. He once said this great quote on a podcast. He said, The best investors are 50% manager, 50% consultant, 50% rabbi. And I think that math actually ends up adding up. I think the truth is that a lot of times venture it is a very personal journey. It can be a journey that is really difficult and very hard, almost nearly impossible. And I think I really desire to walk deeply with people, and to, number one, be a person that people enjoy traveling with, and also, at the same time, be a person that can be helpful while other people are traveling. And at the end of the day, I know a lot of people say this backing GPS is a people business, and I think LPS need to be really good at seeing people for who they really are. And that’s also just, it’s just based on reps. It’s, it’s a craft, and I haven’t mastered it yet, but being a pastor definitely added a lot of reps to to that craft, because we all deal with the false self. And the false self is I tell myself and tell you guys something that I am, but deep down I might not be. And I think being able to look through that and telling, telling, who’s this GP really, on the on the surface, and also deep down, and being able to back that with full confidence and having a really firm understanding of who is this person, what drives them, maybe even, what are their insecurities? How are they brought up? What are their values? What is their what are their ideologies, all those things they build this mosaic of us being able to back a person with high conviction. So being a pastor somehow, somehow, just fits into the puzzle piece of, at least, of what I think I am good at as an LP,

Earnest Sweat 06:00
When you’re starting from scratch, talk to us about that story like, yeah. How do you even build frameworks? Where do you start? How do you learn? Tell us about that journey.

Benedikt Langer 06:27
I got to join the family office a year after the liquidity event that kicked off that journey for the family. And during that time, typically it is, it’s a lot of chaos. It’s a lot of things that are informed yet at the same time, you have a new type of pressure to deploy. So we had several different strategies that we’re pursuing, but because the family had the largest leasing and financing company in the tech sector that was independently owned, technology was something they were very comfortable with, and we had some initial network. So the venture was something that we were very interested in. I wanted to pursue it. The first thing that was that we pursued was direct investing. We did deals. They’re decent, they’re not, they’re not venture, venture worthy, though, to be honest. And we learned that, luckily, very quickly, that that was not what we were good at. And we eventually, even once, we dug into the deep networks, because we’re a family office in Dallas, we’re not cool enough to meet Travis before he starts Uber in a hot tub and play sports with him. That’s just the reality. And we got kicked out, out of a lot of rounds, even once we started to get to the best founders, because they get to pick the cap table, and we’re family office, you don’t really need us on your cap table unless we’re highly, highly strategic, and even then, maybe yes, maybe no, but we had backed an emerging manager who had backed a founder that we wanted to invest in at a later round, and he got exposure at a much cheaper pricing and way earlier. And for us, accessing that emerging manager was easy. Accessing the founder was super difficult. And venture is an access game. You also need to be good at picking but that skill goes out the door if you just pick that if you only have access to bad deals. So that was really then what we started to focus on and learn. We’re like, okay, the probability of accessing the best GPS versus accessing the best founders is incredibly different. We have a much better probability of being an LP to do that. We also started to learn a little bit more about the return profile of emerging managers, and not that you should go into venture with this mindset, but we did look at what is the worst case scenario here and worst case scenario with a portfolio of startups being a family office, they can all go to zero. However, the portfolio of a bunch of emerging managers, that portfolio going to zero is very low. This is not why you should go into venture, venture. You should go for top quarto, top decile returns, but at least it got us comfortable with being an LP, because we were able to somewhat pitch to the family the risk, return profile and the outlook, and at the same time, our ability to access these P these types of people. And then we also simultaneously spend a lot of time figuring out, what are we actually good at? Because we went from operating to investing. Those are two very, very different things. And in the meantime, we started another company, because we were just first generation, second generation, built the initial family business, and sold it. You can’t get that out. Out of the system.

Alexa Binns 16:01
once you realized you wanted to sort of build your own internal fund of funds, what was the strategy to select those managers?

Benedikt Langer 16:12
So we came up with a thesis that we are now applying to everything we do in the family office is we invest in people who invest in people. So the family’s business was operated for 35 years. The retention rate was something I’ve never heard about. The son I work with. He’s a pastor. I’m a pastor. The story of the family is being able to back people and give people an opportunity that maybe wouldn’t have one. I mean, I shouldn’t be doing what I’m doing based on my background, but they gave me a shot, gave me a shot at it, and it makes me run a lot harder just because I’m aware of that. So to be honest, that’s the strategy. Find really exceptional people who are insanely gifted at backing people like Steve, the most predictable pathway. People are the most predictable pathways to success for us, because we get that so backing GPS, who knows how to back founders, that’s really important to us the way we typically get it. Some of those insights are just unique questions. I think we, being a pastor, we’ve learned what questions to ask to get to the core. Think Peter tee talks about asking questions to reveal value in hidden places, and that’s, I think, what we’re what we’re pretty good at. One question we always like to ask is, what do you look for in the founders that you invest in? Oftentimes, things like humility or grit, things like that, come up. But then we ask, Well, how do you define humility? And how do you know the founder has it? And then 90% of GPS don’t have a good answer to that, and that that’s just that just tells us that maybe they haven’t thought about these things often enough so we often that often leads us to know,

Earnest Sweat 19:43
I mean, when I first got exposed to your writing, I was enthralled with how you were articulating, in my opinion, perfectly, the nuance of the role of being a fund manager in venture So, in so many other careers and even in venture. A lot of people try to separate, hey, it’s professional. This is what my grit looks like professionally. This is what my track record looks like professionally. But I saw quickly in your framework, this blending of humaneness and professionalism, right? Could you talk about that and how your investment philosophy is steeped in that?

Benedikt Langer 20:23
emergence, this is why I call it the newsletter and the platform. This way emergence describes the phenomenon that the sum of the parts is bigger than the parts are by themselves. So I think for emerging managers, the really, really good ones, when profession, their professional side and their human side come together. One plus one is 10, and they’re not separate like you. Your career can have looked a certain way, your angel track record can have looked a certain way. You may, may have come from a firm that has looked a certain way. But if that does not match your ability to foster relationships, your thoughtfulness, your creativity, your emotional decision making, pattern, those types of things, then you might still be good, but you probably are not going to be top decile. We really think about those two sides. They multiply each other. So that’s the whole concept of emergence. And we really, we really believe in that. We just need to look at that holistically. At the end of the day,

Alexa Binns 21:37
you’ve, you’ve described a very qualitative process, initially looking at the emerging manager landscape like I’ll let you describe it. But this is a process that you know, you’re ranking people through pitch, book, data, etc. Have you moved? Is that almost like the first qualifying round? And then you’re going to some of these more qualitative observations, or has your process actually shifted where? Now this is much more you’re relying on recommendations from other GPS and other LPs, etc, for

Benedikt Langer 22:16
I think data and intuition are attention; they’re not always a balance. Like when people say balance, it often communicates harmony. I actually think data and intuition are just opposites, and you kind of have to always go back and forth between them. That’s how you end up in balance. So when we initially started, there was not a whole lot of intuition, because we didn’t have a whole lot of reps yet. So we went through PitchBook, we exported every single fund and startup that was listed on PitchBook at that point, and we formulated our own framework in terms of follow on investment, who were on their cap table, or what startups did they invest in, and how did their valuations go? And then we reached out to a humongous list of the top startups and funds that were on those lists. And being an LP, to be honest, that’s very easy, because if you tell people you know P, they most likely want to talk to you, and those, some of those calls, ended up in investments from us. And at the same time, I probably spent eight to 10 hours a day on Zoom for a year, a little bit more than a year. We just knew we needed to get repetitions in this, and you don’t want to learn with other people’s money. So we just really spend time learning. And we always say we went through a time where we wanted to do wine tasting, but first we needed to taste water, coffee and wine, to figure out what was wine. And then you can start tasting all the wines next to each other, and we didn’t even know what wine was. So the process you’re talking about just getting some more insights on data and who’s actually good that really helped us do that at this point, those rankings, they’re so, so outdated and not really representative, but they were good, good direction, at least to start out at. So we wouldn’t waste too much of our time at this point. I think the network that we’ve built really helps us find the best GPS we’ve invested in this year, who we’ve known for three years, and this is our first LP check to him. So we really, at this point, thrive off of the relationships we’ve built we’ve built over time. At the same time, we try to stay actively out there. We don’t want to just rely on past relationships, because funds are constantly forming, but embracing emergence helps us to find those GPS before they ever come out, raising so. Up answer combo.

Earnest Sweat 25:02
Now we’re going to take a quick break to speak with our sponsor

Alexa Binns 25:06
On the show today we have our stellar partner and industry expert, Shane Gowdy. He’s the leader of Sid Lee’s venture funds practice, and if you get value from this podcast, we have Shane and the Sidd team to thank for it. They make these recordings possible. We are looking forward to hearing from you. Shane, liquidity has been a huge topic the past few years. And could you share an example of something you’ve or your team has done with a GP of late

Speaker 1 25:34
to walk us

Alexa Binns 25:35
through what is finding one of these? You know, maybe it’s a secondary vehicle or Opportunity Fund. What does it actually

Shane Goudey 25:44
look I’ll get to a more specific example in a minute, but just an observation, kind of globally, about the just activity level and just the insight and the level of discussion we’re having with fund managers about getting liquidity now. Having a more robust M and A and IPO market certainly helps, but it doesn’t solve all the relative problems of the world. So I think what we’ve seen is a lot of fund managers establish much closer ties to the secondary fund community, just even if it’s just a diligence, you know, a relationship establishment, just basic blocking and tackling of being a good venture manager and creating channels for liquidity, just managing basic paths like that, even regardless of a more specific transactional structure, there’s just been a lot of dialog between the secondary world and venture capital, whether it’s company side or whether it’s venture fund side, people are having active discussions, and those have led to, you know, strategic acquisitions of certain strips of companies, you know, kind of onesie twosies, exiting of positions on some things. You know, the secondary players tend to like a bigger portfolio. They don’t really look at particular sector assets unless it’s AI, and then they’ll buy into one asset. And you know, hope, you know, roll the dice on the crap table, and hope to God that that, you know, particular company is really going to make it and break it, and it has succeeded for a number of them. And you know, obviously, a lot of the big issues are the valuations that come with these transactions, and what kind of real liquidity are you providing for your LPs? You know, the more exotic things that are happening, you know, are things like continuation funds. You know, those are really only happening at the very largest venture shops. A lot of that has to deal with just the fact that you may have to become a registered advisor and not be an exempt reporting advisor anymore. And there’s some real costs and consequences to exploring those channels. But one real interesting transaction that I worked on, obviously, the client will remain nameless, is we established a level of preferred equity in a fund within an existing fund structure where we somewhat reopen the Fund for a new or two new third party investors to inject some capital into the fund. Based on a particular third party valuation of the portfolio, we made a distribution of some of those proceeds to the underlying what were now common limited partner holders to gain them some liquidity. And then, on a go forward basis, some of that capital would then almost reopen the investment period to be able to invest in new companies, you know, a lot of conflicts, a lot of really funny issues, a lot of structuring, a lot of conversations to be had, to do something that exotic. But those are the kinds of things that we were looking at, you know, this time last year, to really try to massage and manage a way out and gain the kind of, again, gas in the tank that these venture capitalists need to be able to, from a track record performance standpoint, to create good relations with your LPs, but create your numbers. You know, we’re looking at Mike’s and tvpi and IR ARS, and you know we got to have, you know, we got to put points on the board. And so, you know, as you get launched into kind of these days, when maybe the apples are a little more bent towards the ground and easier to pick, you know, nonetheless, there’s still some picking to do. And, you know, those are the kinds of things that we were doing over the last couple years to really try to create liquidity for our clients.

Alexa Binns 29:18
Yeah, I can think of at least one friend who they just reopened their earlier fund for fall for additional investors recently, and it was interesting to look at the way they were positioning and messaging it. They said, We know what’s in here, and we know what’s really good.

Speaker 1 29:36
So you know, if you’re one of the LPS joining now, you have so much more information

Shane Goudey 29:41
for me. Yeah, and on the reverse side of that, you’ll see in particular, again, with the entree of this AI effect on everything it’s really starting to explore more robustly, things like opportunities slash annex funds, right? More when we’ve run out of the capital that we can spend on these great companies. You. It’s not necessarily even to think, you know, on the secondary front, it’s almost doubling up on the companies that we do have. And so seeing that kind of extra injection of capital, you know, because we saw a million different SPV of all shapes and colors, in particular on big AI deals. And, you know, a nine figure SPV is being formed. It was nuts over the last like year and a half, the kinds of things and the sizes of the deals, and that’s only continuing to proliferate. So you know, whether people try to be a little more collective and pool that capital for more of a blind pool vehicle, as opposed to onesies and twosies for these great deals of theirs that get negotiated to death and but nonetheless, you know, it’s been a very, a very interesting to see a sea to swim in for a long time and see all the wonderful sea creatures that pop up as we swim through it. It’s good stuff,

Alexa Binns 30:56
man, I would love to understand you just said these are getting negotiated to death. How many layers of people there are to negotiate?

Shane Goudey 31:07
Yeah, it’s a lot, right? And in particular, when you get the very large institutional investors, and then it’s, it’s almost like negotiating a main fund. It’s the levels of, you know, economics that they’ve got to pay, you know, this management fee, or that carry or, you know, are we tiering carry based on the performance of the company? And, you know, let’s pair with that. Yes, we’re forming an SPV, but we want even co-investment in the SPV, and it, a lot of it is just prescient in relationship management for the underlying fund managers, and it’s kind of our job to handhold them through that, you know. Here are the advantages and disadvantages of agreeing, maybe not the best economic term, but from a relationship management as you’re thinking about forming next blindpole vehicle and illustrating for the limited partner community about the access to the deals that you have and the willingness that you, you know are to hear their voices in what they want. You know, it’s not just the capital, but it really is the purpose behind it. And, you know, a lot of that really is just, you know, working with people to kind of see the forest through the trees a lot of the time. And, yeah, but it’s been crazy. I mean, there’s been deals where it’s preferred, you know, you get private equity concept, net, IRR, return, hurdles and all kinds of stuff discussed. It’s, it’s, it’s been, it’s been a hell of an 18 months. No doubt it’s been wonderful for me. As you know, again, I represent all different investors in the venture stream, but they’re venture investors, right? And we get up to the growth stage, you know, concentrated firms or growth stage deals that start to sprinkle on them, a lot of these private equity elements to them, having colleagues who, not only on the fun side, but on the deal side, just get it and can really sophisticatedly, add a lot of advice and content to the kind of consultation you’re doing with your venture clients. You know, these upstream deals get really complex, and having this kind of incredible horsepower here to our firm has been so accretive to our ability to really do these deals. Well, it’s been fun. It’s been fun.

Alexa Binns 33:13
And now back to our LP interview.

Earnest Sweat 33:18
I want to move to how you know, an emerging manager can actually start to engage with you and kind of other family offices, but first to even get into the funnel, I know we’ve spoken before, and you said that many managers focus too much on building a personal brand rather than a reputation. Can you say why that’s a mistake?

Benedikt Langer 33:43
I actually wrote about this, and I brought this the definition of reputation in the Merriam Webster dictionary is the overall quality or character is seen or judged by people in general. So reputation is about character, and I think that pierces much more deeply than the personal brand. I think we have disguised the personal brand as a shortcut to fundraising, and that might work for some people, and I’m not saying a personal brand is intrinsically wrong, but a personal brand without a reputation, I don’t think that’s the way to go. A reputation speaks much more deeply about you, and it helps you. It helps you. Have other people speak more deeply about you, to people behind you where you’re not even involved in the conversation. And I’ve talked with Michael Streck. He runs allocator one, a fund of funds in Europe. They write anchor checks into first time managers before anybody ever invests. So it’s high, high conviction investing as an LP. And one thing he had mentioned to me, what sets apart the number 1% of GPS is they’re commercially minded. They build a firm. They really, truly build a company. And. Think building a firm is highly correlated to building a reputation, because you’re building something that is bigger than yourself. You’re building something that can last. So over the long term, a personal brand will be more fragile than a reputation, and I don’t think a personal brand is any there’s nothing wrong with it, but it’s not a shortcut to fundraising.

Alexa Binns 35:30
You’re spending so much time meeting with these folks who are fund one, fund two. Is your intention to find those firm builders and carry through with them or with your return goals, etc. Are you going to stick in a lane of first and second time fun?

Benedikt Langer 35:50
I think where we’re best at is finding people at an inflection point so that that does lend itself to fund one, fund two, however, we don’t really have a formulated framework. Or are we going to go to fund three? Fund four? We have done that. It also just depends on where the other strategies of the family are at that time, in terms of liquidity and cash flow and those types of things. So sometimes it’s a no for other reasons, and sometimes it’s a yes for other reasons. So I don’t know. There’s no There’s no recipe that we have to that it’s just in the moment decision

Earnest Sweat 36:29
how do you think about when you’re first meeting someone, and maybe their solo GP or two person team, and thinking about scaling, is there anything that you ask them on, even just like those transitions to like scaling a team?

Benedikt Langer 37:32
We haven’t asked those questions, but somehow it’s always worked out. For example, one fund we’ve backed is 1517 who back college dropouts. They ran the tee, Tee foundation that whenever we think about those types of funds, we always think about the firm name first before we think about the GPS. So maybe that’s just one association that helps us with that intuition. Then another one I brought up, for example, Dan, he managed to grow his team. And what we’ve always heard from him before he started hiring a lot of people, was his deep care for taking care of people’s families when they worked for him and that’s that is more so real, even now than it was back then. Yeah. So he always felt very responsible for his firm being able to provide for the people that work for him, and that does speak to somebody’s intent of hiring and staying there for a long time. And Daniel is somebody you’re like, I’ll leave it all out on the field, yeah. And I mean this one, these funds are the GPS baby, yeah. So, and some people care more about it than others, that’s just, that’s just the truth. And I think you’ll be able to find that out pretty quickly. If you talk to enough,

Earnest Sweat 38:49
I have to bring up something just because of your background, Benedikt and my background. My dad’s a pastor, obviously. But the naming thing, I know you’ve written about, like why names are important, but it made me think I’ve always thought it was weird when pastors named their churches after them. Oh, yeah, and last name, and I feel the exact same way about venture firms, right? Like there’s something there. And so do you want this to be a living legacy that lives after you, or is it

Benedikt Langer 39:23
just about you? Yes, it took me three months to name an embracing emergence, and my wife was so annoyed at some point, just a newsletter, just name it. Name it, whatever. But I wanted it to really communicate my convictions, what I’m about, what I want to do, and like bringing people together, and that’s the case for every business, like the name of your company, needs to communicate upfront what you do, why you do, and what value you bring. And why should that be different for a venture firm like i. I think a lot of venture funds don’t do a great job at including their name in what they do. I always do. J R Tolkien, he wrote The Lord of the Rings, which is arguably one of the greatest trilogies in the English language of all time. And when you read the books, you really enter. Enter his world. He gives people names, places, names. He developed language for the elves. You start breathing the air of that world because of the linguistic consistency he developed. Alexa Binns 41:35
Yeah, yeah, for you embracing emergence, yeah, I saw you just sort of redid the website and things, what’s next for what’s the vision? You started out just naturally writing, yeah, put a title on it. Now it’s sort of building a community. What’s, what’s the vision now?

Benedikt Langer 41:54
So the vision will always be helping LPS underwrite emerging managers better, because that’s the problem we have at the moment. That’s the biggest inefficiency, and the other biggest inefficiencies help emerging managers actually do good pitches, because transparently, probably 90% of pitches suck. Pitch decks are not very good, story storylines are not very good and it but it’s not the GPS fault. They often just lack insights. We talk to hundreds of funds a year, so when you do that, a lot of pitches just start looking the same.

, you need to have some sort of understanding of how you can stand out against the other funds that you’re basically competing with for capital. So that’s another thing I’m passionate about, but I redid the website a little bit to look more journalistic. I’ve started interviewing LPS that I’ve been friends with for a long time, and it’s like as if we were chatting, and I just transcribe our conversation, make sure everybody’s good with with what it looks like, and then I publish it because I want to give a window into what LPS talk about, if, as if they’re friends, because I am friends with the people that I interview, so that the people reading it, which a lot of them are emerging managers And LPs, can actually have a transparent understanding of, okay, here’s what some LPS actually are thinking, and what will come up a lot is, oh yeah, let’s call it what it is. We back people, we don’t back data, and we back ideologies, and we back values. And those things will come up through these interviews. So I want to be more journalistic in my approach, and I’ve gotten to have some GPS.

Earnest Sweat 45:43
We kind of opened this conversation by speaking about how difficult LPS roles are. And, you know, I don’t feel like that’s slowing down anytime soon. With more funds, more spin outs, lack of liquidity, could you speak to what you’re thinking is going to happen over the next 510 years for the LP function?

Benedikt Langer 46:08
Yeah, I asked this at an LP the other day. He started back in emerging managers in 2016 and asked him, would you rather go back to 2016 where there were very few funds, but no data, or invest right now with more data, but a ton of funds that are constantly raising. He wanted to go back in time, so I don’t know. It’s hard to predict, but what we’re feeling in real time as a family office is that our capital is becoming more and more valuable as a family office, specifically because the current environment is restricting a lot of endowments, larger ticket check writers. So our access is going up and up and up year over year at the moment. And I also think I call it the influence to check size ratio is also going up, we get to have a louder voice with the same amount of capital. So I think that just selfishly, it’s a great time to be a family office, and I think it will continue to be a great time to be a family office for the next 150 years, if we manage our liquidity correctly. So that’s partially why we built a cash flowing company. We have cash flowing investment strategies, but we’re also then in return, fine with our capital being locked up for a long time through venture, because we have other things like we just understand the function of venture is to produce outsized returns over a long period amount of time, and not look at what happens for a long time. We read the updates, but man, we’re like four, five years in, with some even, even the returns that are on there now they we don’t really, we don’t really talk about it too much,