Earnest Sweat 00:02
Welcome to Swimming with Allocators. I’m Earnest Sweat and each episode Alexa Binns and I give you a VC podcast from the LP perspective. You ready? Let’s dive in. So today’s episode on Swimming with Allocators we had David York. He’s the Managing Director and Founder of Top Tier Capital Partners. It was an amazing conversation today, where David, who’s had about 40 years of experience in this space, spoke about why more than ever, he’s bullish on the venture capital asset class. Also why it’s a great time to look at secondaries and how new allocators should approach the VC asset class. And with that, let’s dive very welcome again to Swimming with Allocators. And today, we’re excited to have another amazing guests. We have David York, who’s the Managing Director and Founder of Top Tier Capital Partners. Top Tier capital partners is an experienced investment investment manager that has fund to funds as well as coinvestor products based in the Bay Area. And so glad to have David you on. And we look forward to learning so much in today’s conversation. Thanks for Thanks for being here.

David York 01:27
Thanks, sir. I’m really looking forward to speaking with both of you guys. We’ve not met before, but it’s a pleasure meeting you. And I’m looking forward to the conversation this morning. Thanks so much.

Earnest Sweat 01:38
Firstly, level set. David, I would love to hear about how you got to top tier and founding Top Tier. So could you just speak about your experience? Sure. Sure. Class. Yeah. Yeah, the

David York 01:52
journeys have been a little bit convoluted and somewhat unexpected. If you think about it, I graduated with a degree in Industrial Engineering at a time when interest rates were in the high to low 20s. And which was some time ago, but he really became enamored of Wall Street and actually worked at an investment bank in Los Angeles that went to the University of Southern California. And that’s, that’s where we started our career. And then ultimately ended up running a business at Drexel Burnham in New York when I was in my late 20s. And that led me to working with private equity investors for the first time, then moved back to California after after a short stint with my family’s business, I went back to Wall Street and ended up landing a job at Hambrecht & Quist, which was a small boutique technology investment bank here in San Francisco. And I was responsible for covering the venture capital community. And that was my first real immersion into the venture ecosystem. You would call that, that responsibility of financial sponsor coverage business today, but we call it venture services. And our jobs were to attract as much deal flow to the bank as possible from that ecosystem, which included corporations, individuals, as well as funds and their limited partners. So I got to see the whole ecosystem there. And ultimately, that led me to be recruited after Hambrecht & Quist was bought by Chase by one of my clients to help them institutionalize a fund to fund products. Within that firm. It was that firm at that time called Paul Capital Partners. Most of you might not be aware of Paul Paul was one of the leading secondary firms at that time think late 90s, early 2000s, and the founder of that firm, Phil Paul, actually had a pedigree, starting with running the family office in the 80s for one of the leading investors of venture capital, which was the Hillman Company, and he sat down at Sand Hill Road and was responsible for being the lead investor at places like Kleiner Perkins, and NEA and US Venture Partners, and the like, help Kevin Landry spin out TA Associates when he was at Advent, and a bunch of history like that, that really made essentially launching that product within Paul Capital much easier. So we took my relationships and Hambrick inquest, which were many, as well as Phil’s history. And that’s how we got the firm actually started in 2000. With its first commingled Fund of Funds product. Prior to that Phil had landed a separate account with the government of Singapore, which was the track record we leveraged to get the fund to fund products off the ground. And then as we went through the early 2000s, if you remember, venture capital went through a very long, dry period, and at that period of time, we beaver away and continued to raise money in a way that was really driven by accessing top tier brands. Think of the very best venture firms in the industry. They were labeled as top tier firms and our first account was called Top Tier investments. Our second fund was called capital top tier investments. That’s kind of where the branding came from. In the mid 2000s, we had the opportunity to start to become independent, which, frankly, the partners of Paul Capital had plotted because they weren’t very enamored with venture by that period of time. And we were very excited about what we’re doing. And so we had a chance to start to spin out and ultimately became independent in April of 2011.

And we spent a lot of time trying to figure out how to come up with the proper name, Phil Paul was the name of the prior for and Paul Capital, Phil, we internally decided we didn’t want to name ourselves after an individual, we wanted to name ourselves after a thing. And if you think about the 2010 timeframe, the internet had essentially allowed every river stream mountain, you can name to be essentially branded as a financial sponsor, activity. And so ultimately, we own the rights to Top Tier. And so we capitulated and took on that brand as our new firm name. And ironically, it’s been quite beneficial in a way that we didn’t anticipate. And it’s been fun. Building, the firm around that brand is both limited partners, as well as general partners resonate with that descriptive, and it’s been fun to kind of live up to the expectation of that brand, which is one of the sort of tenants of how the firm got built was really providing good customer service. But that’s how we got here. Okay. And how early days,

Earnest Sweat 06:34
and you kind of mentioned it a little bit, you know, some of the partners at Paul Capital, were less enamored by venture. What gave you guys the confidence to start, you know, a fund to fund strategy alone, that gets he felt that he could stand still on his own? And how’s that strategy? Kind of? Or how is that thinking and perspective? Change? Yeah.

David York 06:57
Because you mentioned early on, we now are in the co-investment business, and we’re also in the secondary business. You know, technology continued to kind of reinvent itself. You know, we were fortunate enough to be in the first Facebook fund at Accel. And so, you know, we really had a very good understanding of what was going on inside our portfolios. And they were growing. And if you go back to the time when Lehman Brothers went out of business, nothing was growing. But technology was. And so we felt we had a hold of this valuable opportunity, even though people didn’t really respect it, that was gonna continue to do well. And we just needed to build a franchise around it. And the two tenants that we had early on around that franchise for customer service, both for managers, as well as our investors, so we set up sort of two different service problems to solve regarding our investors and our managers. And we’ve kind of kept that as part of our core tenants as we’ve grown the firm. And so we were about 12 years into that goodwill creation around those two tenants, in a way that it really felt like that was also taking hold, and we didn’t really want to lose, or squander that, you know, that, that, that those those goodwill components that, frankly, are part of the firm’s culture today and also part of the firm’s franchise. And then, as we looked at the opportunity set, especially around the global financial crisis, we really thought secondaries were really something we had a different view on than most people. If you go back in that period of time, people were selling everything and ventures didn’t really have any leg to stand on. And if you knew what was going on inside those portfolios, there were quite a few things that worked that were working. So remember, one of our very first investments we did a material size and the secondary business was in a partnership that had actually gone through two key man transaction problems that we had been instrumental in fixing. And so we knew intimately what was going on there. The LPs, frankly, wanted to walk away. And so we ended up buying a bunch of those funds, and actually tripling in one case, quadrupling our money at a secondary. And we thought, wow, this is performing better than some of our venture managers. Why don’t we do more of this? And so we started that blend that added that strategy into our fund of funds allocations in a way that became about 20% of our portfolio. And the whole premise of that was to generate cash flow on the front end of those portfolios to allow us the time to wait till the actual primary started to mature, which were typically you know, it early days, it would be year four, but usually it was six or eight years and you’d start to really see the benefits of the primary investments. And so the secondaries were generating cash flow on the front end of that one got us out of the J curve, but two got our funds at 1.5 1.6x very early on In a way that it helped our performance and helped us raise money, it helped with a lot of things health of our preferred return. So that was really the motivation to really start to build our secondary, and Co-investment business co -investments came a little bit after that. And that was driven really initially by, you know, Sequoia’s Black Monday PowerPoint after the global financial crisis and event and general partners, trying to figure out how much capital they needed to keep their companies alive and essentially coming to their limited partners and US in particular, and saying, Hey, if you could could you put a little bit of money aside to help us have enough reserves for these companies. And so that was the impetus to start our call investment business. There were some fits and starts there, I would say early on, we had some lessons learned. But today, that’s a very successful part of what we do. And we think of this is twofold one way to generate exceptional returns for investors, but two also to provide that value add service component to our underlying managers in a way that we can help them not only with their LPs, we help them with some of their GP problems, we also help their companies with late stage capital and our CO investment activity. And so that’s how the firm has evolved. And that’s really what’s been the motivation of us doing kind of a full stack solution for the industry. I don’t know if that answers your question or is, but that’s a lot of information.

Alexa Binns 11:36
I am curious compared to that, that, that Sequoia, that moment, that email, how that approach to secondaries and CO investment theme in your funding funds, you see a lot of parallels right now, or how are you thinking about things differently?

David York 11:52
Yeah, you know, of course, lots of people are asking me that, for better or for worse, I want one of the few people that’s been this my just starting my fourth decades. So we’ve seen various things. I when I was at Drexel, I literally was sitting on the trading desk when the market corrected 25%. I, you know, what’s different today, and I do think it’s different. There’s, there’s several things, one of them is this technology consumption, and the comfort with technology consumption, has been materially changed by COVID. So coming out of global financial crisis coming out of the internet bubble, in particular, those two corrections, technology still was a nice to have, not a need to have. And today, that’s a neat to have, in a way that you know, my my dad uses Uber, he’s 86 years old, he actually bought some Uber and in his stock portfolio, because he wanted this worth, you know, he’s that’s something that you didn’t do in the global financial crisis. And you certainly didn’t do it coming out of the the internet correction. So I just I really think we’re sitting in front of a technology cycle that’s going to be driven, why comfort and consumption. And then on top of it, what I would argue is kind of a massive rebuild of the technology stacks that we’ve been comfortable or gotten, you know, we’ve spent the last 30 years building. And so historically, those have been great times to allocate. Because you get to build a position through through a correction, it’s usually two or three years of position building. And then you’re really in a position to win as opposed to wishing you’d started two or three years earlier. And this is the tricky bit about investors buying, you know, as Warren Buffett suggests, when people are worried, versus when people are greedy. And I really think this is this period of time, the other thing is materially different. So technology consumes up, a huge technology cycle in front of us, and then ventures to its credit are continued to demonstrate. Statistically, it’s the best performing asset class in the equity ecosystem. So if that’s the case, then you need exposure. And so again, I think it’s a great time to be building exposure. If you went through the internet bubble and or the global financial crisis that wasn’t as obvious because what if you mean, one of the beauties of our business, which we talked about early on, is that it continues to reinvent itself. And it wasn’t quite as obvious. And those two corrections that we were going to have the reinventions that we have today. And so I, I just, you know, it’s one of those asset classes that has volatility, its ups and downs, but if you’re not in it, you’re not going to actually have the benefits of being in it. So you just need to participate. You need to find managers you trust, you need to find folks that have the sneaky sense of looking around corners. And there’s lots of reasons why they can do that. So it’s just the person but those things really I think sets you up to win especially in These types of environments.

Alexa Binns 15:03
A secondary market is something you know so well and others are just sort of realizing, Oh, this is where I should potentially be looking for deals. Is there anything that you see sort of allocators or even the media positioning? You just really well, you know, better? Or

David York 15:22
There’s two things, I would suggest there’s something that is the reason the secondary market is interesting, today is twofold valuations have corrected incredibly quickly. You know, if you look at the global financial crisis, it was roughly 18 to 36 months. During the internet bubble, the valuations were corrected, it took about three years. And then it really wasn’t clear for another three years, whether that was where the correction was or not. So there was this long desert. After the global there after the internet bubble, there was a relatively, you know, three years desert after the global financial crisis. Based on our reports and things we get from our managers, as well as what we know about what’s going on in the marketplace, we’re kind of bumping around the bottom today. And we do expect that there will be resets in pricing and valuation going forward. But it’ll be market driven, as opposed to just correction driven. A couple of reasons is that inflation has been transitory, it’s finally transitioned. And then that then affects interest rates and expected rates of return. In a way you can start to price things. And so companies will when they go back to market to raise money will be priced a lot differently. And if they’re, if they’re thriving, they’ll be priced kind of rationally, if they’re not thriving, it’ll be work and work provides investment opportunity, as far as secondaries are concerned, the other components, so we’ve had this correction, but it’s been quick. And then the other component is interest rates have really messed up investors’ balance sheets. And it’s not because they’re getting a higher rate of return. It’s because the fixed income portfolios, and the other fixed in oriented assets, like real estate and infrastructure that sit on their balance sheets have been repriced, because interest rates have changed the pricing of those assets. And so the asset allocation approach that most people use is out of schism. So there to get that right, there’s two things you can do, you can kind of slow down your commitment pace and hope that the market kind of pulls you through. Or if you can’t afford that, then you have to sell some stuff. And one of the more liquid markets is the private equity, secondary space, so and they right now people are selling things because they need they need liquidity, and they’re not going to go forward with the current batch of managers, there will be a period of time where they might have to sell stuff just because they have to sell stuff. And that’s where you get distress in the marketplace. Right now, the distress is really around, people just need liquidity. And it’s not as great as I think, you know, over the course of the next two years, I think we’re going to continue to see quite a bit of need for liquidity, because people are going to come back to market and raise funds, their balance sheets are going to be set up the support managers, the managers they want to support aren’t going to have room for for you know, they need to be in the room to stay stay, keep their allocation. So they’re got to sell stuff, to change that portfolio construction model in a way that fits with what essentially, you know, the people in charge want it to fit. So we think secondaries are gonna have a lot of flow that’s providing with this correction, price schism. Pricing today in the secondary market is between 40 and 60% off, frankly, you know, q4 and q1 valuations, which are pretty marked down. So you’re ending up buying, essentially at a discount to the discount, in a way that we think it’s a great time to be building a position. And that’s one of the ways to do it.

Earnest Sweat 18:50
How you mentioned a little bit about how the industry continues to evolve. And I’m just curious over your, you know, Top Tiers, you know, time and your experience, you know, has that, you know, really influenced your way and even diligence seen current relationships with managers as well as new, because this game, as you mentioned, it’s about like, being in it and access. But now we have way more firms, way more strategies. Not to mention all the macro things you just mentioned. Right?

David York 19:31
So, if you look at our distribution profile over the last 20 years, like I said very early on, we were originally buying brands. We still have very, very large exposure to a lot of the branded firms. You’ll find those on our website, but you know, one or two things have changed. One is the cost to start companies continues to go down and it’s Today probably costs anywhere from zero to $2 million, really to get a viable company up and running as well as start a product. And so that ecosystem really didn’t exist 20 years ago, it now exists today. It was because of technology, really, if you think about what Amazon’s done for storage or Google’s done for software. And so, you know, that ecosystem is generating very attractive, smaller firms that are really focused on the formation period of the company. And that formation period is where you get the best ownership and get the best entry price. And so as investors in this space, it’s forced us to really think hard about how we want to have our portfolio portfolios constructed. And so we set aside about 20% of our portfolios for that type of manager. And then we’ve set aside about 20%, for what we call late stage investing, which is some of it with managers, but a lot of it’s with our velocity, product, exposure and, and some healthcare. And then the middle is really focused on you know, more of those branded firms, or what we call our core managers. We do worry about font size there, we’ve done a bunch of work around font size, and it’s clear, if you want a 3x font, you really need a company to deliver at least a fund returner, or fund to deliver a fun returner. You know, the work we’ve done over the last 20 years would suggest you know, more than 85% of our managers that have 3x funds have at least one fund returner in that fund. And their exit or ownership and exit is roughly around 10%. And so that math would suggest that you need a fund that’s kind of less than a billion closer to 500, they really make that work. And so some of the larger large cap firms, I think, are going to have trouble with performance if their font sizes get too big. And they kind of know it. And so it’s not, you know, they’re going to have to have multiple outcomes to really generate a fun returner, and, frankly, multiple multiple outcomes to really generate three acts. And so it’s something that we worry about, think about a lot. And, and so the seed managers kind of counterbalance that in a way that we actually, we like that ecosystem a lot. To

Earnest Sweat 22:19
At that point, looking at the emerging managers, and I won’t share the name, I’ll let you do that. If you feel like she’s done great, you guys have done a great job of finding that next batch of great managers. Not all it’s just fund ones, but sometimes they are fund two, three, can you talk about that, you know, your sourcing and diligence practices and how you’re able to make those decisions on when to jump in.

David York 22:50
Some of it’s just tenure, you know, we see five or 600 managers a year. And that generates its own flywheel. And then some of it if you look across the investment team, especially the senior members of the team, we’ve been in the ecosystem, on average, about 25 years each. And so some of it here and some of it in other places, but in general, that gives us also a flywheel of relationships. But usually what we do is we’re really, most of the people we sponsor that are funds one through four, call it and I’ll describe the difference, but is our folks that we have, through our networks gotten to know usually have some other track record, that could be their seat track record on their own, it could be their history of doing various things. And that but the component of those two things, our relationship and their track record leads us to lean in. Sometimes that track record is just based on, you know, gravitas of where they weren’t before and knowing where they weren’t before and who worked there, we can back channel on whether it’s credible or not. But that’s how we get comfortable with leaning in. And then we spent a bunch of time in our network, making sure that this is somebody that’s going to go long, we’re we’re very much interested in helping someone start a firm and build a firm, because we think, you know, when we decide to invest, it’s, it’s kind of for life. You know, in a perfect world, it sometimes doesn’t quite work that way. But that’s how we approach it. And then, you know, the reason sometimes we don’t really lean in until funds three or four has to do more with how the manager is evolved. And so you know, I think the way I describe it is if you look at the seed ecosystem in general, usually one is there their own personal seed activity, as well as maybe some seed activity with friends and family. fund too, and that’s usually somewhere between zero and 10 million, maybe 15 mil in dollars, usually it’s less than 10. And that generates, you know, a 6x track in a way that they’re all excited. So they go out to their friends, actually their extended network of friends, and they raise a fund, it’s maybe save that first five to 6 million, the second one is 15. And then it’s off that 15, that they decide they want to actually do it for a living. And that’s when usually they’re looking for institutional capital, we usually like someone to be north of 50. To get started, because we want to write, we want to commit, you know, 10 to 15%. And at that size, we can actually, that that makes an impact on what we’re managing in a way that makes it, it’s helpful. What we’ve done on the right size, kind of institutional seed fund actually is north of 100. It’s usually in the 125 to 175 zone, where they have enough capital to actually reserve and move into their later stage successful companies in a way that they can actually kind of double down on ownership and get some compounding around the portfolio that’s working. And that generates more upside than just doing a whole bunch of bets, and then doing another fund with a whole bunch of bets. We found that ownership at the end of the day drives, frankly, the best outcomes and most managers that start by just buying a bunch of companies ultimately come back and say I wish I had more ownership. And we’re gonna concentrate more on the next five, and we want a little capital set aside to sponsor some of our winners, etc. And ultimately, lo and behold, they’re, they’re worried about having 10 or 15% ownership, which wasn’t where they started. They’re happy writing three or $400,000 checks. So, you know, that requires a little bit of scale, and also a little bit of track record and a little bit of institutional rigor around reporting and kind of understanding you’re in the asset management business versus just kind of that sexy guy in the corner with a wallet.

Alexa Binns 27:01
I think that’s a great excuse for why you need to invest more please. LP, well, would have been able to have more ownership.

David York 27:10
Yeah, well, I just got really good at seed investing. You’re like, damn, I shed more than that company. Guess what, we got a bigger checkbook, you might. So that’s how that kind of happened. So I started to figure it out. It’s almost, I can’t think of anybody that hasn’t ultimately come back and said they wish they had more ownership. One of the things that we learned, actually, not going into COVID, when you seed it was kind of six, eight years kind of a thing. There were a few we’re halfway decent at selection, you had an inorganic, sort of step up of about 1.6x with the a round. And so there are a lot of guys who are looking at my fund. I’m doing so well. And it’s kind of like, yeah, that’s because you’re average. And so it’s, it’s, it’s an interesting phenomenon with seed and I. But I do think one of the things that’s happened today, especially because the large cap firms have gotten so large, and they need to write such big checks, that seed is one of the places that you can actually demonstrate cap capital table control. Because the founder, really, doesn’t know who to trust, and the guy he trusts the most, or the gal is the one who put them in business. And so it is a preferred spot, it’s just, you know, it is tricky, and you have to have a kind of special approach to life to get to like it, and a lot of people do, but it’s going to be competitive. I mean, just one final thing on that market, I do think we’re gonna go through a period of contraction there, because there has been a lot of people that have started firms in the last five years that are kind of excited about what they’re doing, but they don’t really have capital in their, in their, you know, sort of viewfinder. If you think about the people that sponsor those funds early on in life and have that lack of capital, they will have to reinvent their capital basis. And in this market, people are gonna be a lot more picky about things. So I do see some contractions there.

Alexa Binns 29:15
How do you think about your reups?

David York 29:18
Well, we’re spending a bunch of time really trying to understand the underlying portfolios. And then, for better, for worse, through COVID People got a lot of people got rich, and let’s just be honest, there was a lot of money taken out of the ecosystem. I mean, even at our firm, we distributed, you know, a lot of money history with over 2 billion through that two year period from 2020 to 2022. You know, on a base of about five, so, you know, there’s a lot of liquidity. So people are going to call in richt, they might not be admitting it, this fundraise, but they really aren’t the same person they were beforehand and so we really tried to sort that out. And then we just want to make sure that the fund size of this strategy marries up with each other. You know, we have seen some firms, you know, admit that they’re going to reduce their fund sizes, but we haven’t, isn’t nearly as prolific as it was in 2003, where most people went from roughly a billion to about 400 million, which force them to change their firms, the economics, how they’re running their firms. And I don’t, I’m not sure that’s going to happen today, because I do think public markets still are reluctant to buy technology businesses that aren’t profitable. And so ventures in the growth rounds are going to hit that capital is going to be necessary. So that’s going to keep that activity going on for a long period of time. But I do think fund size is paramount as far as returns are concerned. So you’re going to have to really understand how they marry up. visa view, the comments I made earlier.

Earnest Sweat 30:57
In addition to the kind of fun size as part of the strategy, what other strategies do you think are really in favor of? generalist versus specialist? Or like, you know, crossword there

David York 31:12
is a tug of war that are going on, or it’s your right, yeah. And the specialists who will argue that the entrepreneur wants somebody to really, really focused on his ecosystem. The generals who argue that we have six individuals here that are focused on ecosystems just as just as intently as that specialist. And I think there’s a little bit right, what usually happens, and what’s happening right this moment is, you kind of get a reversion to the mean, which is that capital will find comfort and diversification, as well as in a generalist who’s an expert, versus a specialist who’s an expert, unless you have ecosystems that are big enough. We’ve we’ve done healthcare, through our whole history. And that ecosystem as percentage of GDP is, you know, roughly 20%. And that continues to be a really large market in a way you can rationalize, I think you can rationalize a generalist. We didn’t chase crypto, per se, because we just, we were starting to get enough in our portfolios in a way that we wanted to allow it to become big enough. I think at some point, it will be big enough. If you spend time with Chris Dixon, he will argue that that will be your next internet and the Internet will be what you do in your generalist funds. You know what I mean? We’ll see. I mean, it’s still early to tell. And obviously the regulators are have a lot to say about that. But there are some ecosystems that continue to become, you know, that are large. And you could argue a generalist would work like the enterprise software space, you can also argue the cybersecurity space is going to continue to be a big enough ecosystem that that could require an expert. But in general, if you think about portfolio construction, and think about what we do, most of our managers have these experts, and a lot of our book ends up having those best companies in a way that I don’t know if it motivates you to buy 12 specialists to get the same effect. And so that’s the tension you’ll see with institutional investors is, Do I need a specialist if I can get a blend of that and a generalist and have a portfolio generalist to give me the same sort of industry exposure? So that’s why I think you need scale and these industries,

Alexa Binns 33:31
generally, it feels like you were bullish in the past on venture when others were tucking about tails between their legs. What about now are there things to be optimistic and hopeful about? You sort of mentioned some of these sectors, maybe healthcare? Yeah.

David York 33:50
Well, I, you know, Moore’s law, Moore’s law, excuse me, is rampant as ever. And, you know, at the time he coined that, that was 30-40 years ago, you know, 18 months of doubling was kind of a reach today, it seems like 18 months is a little slow. So if you want exposure to that kind of evolution, there’s no other place to get it as an equity investor can’t really get much anywhere. And so it’s to me that it is part of your equity balance sheet, if you will, it makes a lot of sense to have exposure here. I’m excited about what’s going on with AI. Some of it’s because, you know, if my David York I’m happy to make money on I think the whole technology stack gets reinvented in a way that is, you know, as an allocator at the start of that it’s exciting. You’re gonna have fun. The large cap incumbentss control the data, but I don’t think they’re going to have all of the widgets that are going to make our world better. And if you get your head around what a copilot means, you can see co pilots for everything. So I’m very excited that it was no different than what happened as we started to get social media into the enterprise and change the way we thought as far as companies were concerned, and kind of no different and how we thought about going to the cloud. So you know, I, you know, so I get it, and I, that, that makes me super excited about buying in this correction, I do think it’s gonna change how we live our lives. And we just don’t really quite know how I do. You know, there’s some obvious places, it’ll change how we do healthcare. I think it’ll change how we do accounting and legal. It’ll change how we drive. You know, there’s a lot of sort of obvious things, it’ll, we’ll have to think differently, we won’t have to worry about, you know, the eight to five career, we’ll have to worry about the career that’s provocative. And, you know, I think all of those things are very, very constructive and exciting. So, you know, so I’m delighted to be investing. General, you know, and then, you know, we are fortunate and blessed to work with some really fun and interesting people. Earnest has seen some of that with us. And, you know, those people are, you know, all have certain traits, and so we’re just blessed to be exposed to them, and then, frankly, want to help them get better at what they do and a way that we can get better at what we do. So we’re excited about that stuff.

Earnest Sweat 36:39
One, tears,

David York 36:45
I know you’re listening to me go. Holy cow, you gotta have a church.

Earnest Sweat 36:50
No, no, no, that’s I mean, you have to be an optimist to be in this business.

David York 36:54
I am I’m drives by my colleagues, you were

Alexa Binns 36:57
right last time. So I think.

Earnest Sweat 37:01
Now we’re gonna take a quick break to speak with our sponsor. On the show today, we have an industry expert and sponsor, Renuka Kumar, the managing director of investor coverage at Silicon Valley Banks, a division of first citizen bank. Thank you to Renuka for partnering with the show. Glad to have you today. So Renuka. Could you lead the investor coverage group at SVB? How do you and SVB actually collaborate with VCs?

Renuka Kumar 37:32
Yeah, so investors are the engine behind a lot of what we do at SVB. Given our unique positioning in the space, where we have visibility into 10s of 1000s of clients, and relationships with the most active investors, a lot of what we do revolves around insight sharing, community building, and working with our portfolio companies. We’ve always been known at SVB as kind of that one stop shop for VCs. And, you know, that really looks no different today.

Earnest Sweat 38:07
So you’re having conversations with investors all the time on the regular? Is there anything you’re hearing, or gathering information that you’re gathering that might be counter to what people expect? And see kind of in those macro trends and, and headlines? Yeah, well,

Renuka Kumar 38:25
You know, you hear a lot of doom and gloom over the past year or so, especially coming off of 2021’s exuberance. I would say that there’s actually a lot more positive sentiment out there in terms of deals that they’re seeing, deals that are getting funded. What we’re seeing in Gen AI, of course, is truly transformational. And that has an impact across sectors. But then there’s also sectors such as climate and security, which are seeing a lot of activity. And I would say there’s also this feeling of, I don’t know, maybe it’s relief, but that there’s more normalcy in the market. We’re not running at this unsustainable pace. And, you know, just playing catch up with the market, investors are taking more time, for diligence, spending more time with their portfolio companies. Having more, you know, in depth conversations with the teams and thinking more strategically, there’s more of a focus on unit economics and fundamentals. So a lot of a lot of these core reasons are why investors got into this business in the first place. So there’s almost some, you know, there’s some positive sentiment around where, where the market is today in terms of that.

Earnest Sweat 39:44
Is there anything else to our audience of allocators, GPS and emerging managers that you’d like to share? Yeah,

Renuka Kumar 39:53
I would say, you know, obviously, there’s been a lot of news around SVB this year and We are now eight months into the acquisition by First Citizens. And we’re operating as our own standalone divisions still known as SVB. We benefit from a strong balance sheet under the First Citizens umbrella. And we maintain the same commitment to the venture ecosystem that you’ve always known from SVB. As our clients continue to tell us, they have not seen any difference in our commitment to their companies and our offerings. And we stand ready to help you and your portfolio companies any way we can.

Earnest Sweat 40:28
Renuka, you’re such a great partner in the VC ecosystem. Thank you for partnering with us. For folks who are interested in getting in touch with Renuka and SVB. Feel free to email her at rkumar@svb.com. And now, back to our LP interview. One last question I wanted to ask was, you know, a number of our audience is, is, is from the allocator community. Sure, those that have been experienced, those have been, you know, that are just entering it. What advice do you have for them, especially if they’re interested in changing all these things? They’re interested in not just having the core fund to fund venture funds, but also this, you know, co-investor and and in secondaries, what advice do you have for them on how to build that expertise.

David York 41:18
So there’s three ways to buy venture capital, you’re gonna invest in a company, you’re gonna invest in a manager or you’re gonna invest in a portfolio, if you’re building a portfolio from scratch, the least risky is buying a portfolio. So therefore fund to funds, the next least risky is buying secondaries in those funds. And the reason there’s risk there is because the assets are mature, and they’re established. So you have to know what you’re buying with a fund. To fund you have to know the manager, which is, in some ways, an easier exercise. We like secondaries, the way we do secondaries is really driven by our data in our managers and the underlying portfolio companies. So today, we have, I don’t know, we’ve done something close to 600 Different LP commitments over our history. These are buying, you know, secondaries of managers, you’re buying primaries and managers. It represents about 185 different firms. Over our history, we track about 250 firms today. We are investors on average, in our portfolios, on average of about 25 of those, so lots of bars and things, but there’s lots of data. And to have that data gives us essentially, almost an insider view on what’s going on and the stuff we’re buying in the secondary market. So we’ve tried to take as much risk out of that purchase decision as possible. You can do that on your own. And but I would argue that you need to really rely on your data and your relationships to have successful purchases or, you know, if you look at the buyout industry, a lot of the guys that drive the secondary market in general do buyout funds is because they own that company, through somebody else in a way that have a good good visibility on the underlying company that purchasing. And then the other, you know, final way to do it, or the next level is buying managers talking about my portfolios, buying managers, that’s, that can be a fool’s errand sometimes, because I don’t know a secondary fund that you sit down with, it doesn’t sound sexy. So you can get lost in that, that charm, in a way that if you make an investment, it sounds great. And then three years, and it’s a problem. And so that takes a lot of experience and time. So we tend to recommend new investors start with portfolios. And then part of our service is to help them develop direct relationships so that they can ultimately if they want to go off on their own, sometimes they say they do, and then they don’t, sometimes they do, it just depends. And we’ve done that for most of our history in a way that we have quite a track record of that. And then finally, you can buy companies, and that’s even more risky than buying portfolios or managers because at least with a manager, you get 20 or 30 companies in a fund. And, you know, that’s that unless you’re really informed, kind of a crapshoot. Now, you can build a portfolio of companies in a way that, you know, to have the 20 you buy actually work in a way that you actually bid at a reasonable rate of return. But it’s, it tells you the brain damage, and that is hard, and that’s why people buy managers and in our case, buy portfolios. So I mean that I wouldn’t recommend that with that little debt walk, portfolios, funds, then companies, which is kind of how we walked, we started with portfolios and then we started doing secondaries. And then we started doing co investments and then the other thing with venture capital is duration is your Achilles heel. And if you have to be ready for the duration and if you aren’t, it can drive you and your boss crazy as you put money to work and don’t see the outcome for six to eight years. So you have to be set up for that too, which is sometimes why secondaries become more attractive Because the duration is about half as long as a typical fund is or if typical portfolio funds about yo,

Alexa Binns 45:06
You’ll hear RIAs say things like, well, you know, most of my clients don’t have enough net worth to do venture correctly. Do you? Do you think that there’s a healthy sort of number? Or, you know, when you’re thinking about somebody playing in this space? Yeah. What percent does venture belong in your San Francisco every 30 year old, every single dollar they have They’re putting in a friend, a founder’s company. Right. Right. Right. So there’s a lot of debate on that topic.

David York 45:44
Yeah, let’s use just the 60/40 standard portfolio. So you’re 60% equity, 40%, fixed income or flip depending on who you are. But probably private equities today, if you look across, you know, most ecosystems are somewhere between 15 and 25%. Of that. And then if you look at institutions, private equity, venture capital is another 15 to 25% of that. So blended bases, they’re some, you know, on a high level, it’s 10% of a portfolio, which would be 6% to 10% of an equity portfolio, which would be 6% of that 60/40 mix. You know, and if that’s $60,000, I don’t know if it moves the needle enough to justify it. If it’s $6 million, then I don’t, it’s something you should consider. Or even, you know, $600,000. But, again, you’ve got to be in it for a very long period of time, and you’ve got to let it work for you. And that’s sometimes hard for individuals to get their head on, it’s sort of like, you’re buying, if you invest in vc, like buying a house, you think you’re gonna be in there five or six years, at least. And if you do it, well, you’re gonna buy it three or four times. And so it’s a 20 year old house, but it really starts to show up, and then it does show up. But if you do a decent job, we should triple your money in a way that you’re not going to really get out of other assets. So it’s just you have to have that frame of reference.

Earnest Sweat 47:29
What? Yeah, so there’s been over these last couple of years, an influx of new managers from diverse backgrounds, for underrepresented backgrounds. How do you believe that’s going to play out over the next couple of years and what’s the Top Tiers approach?

David York 47:50
So our approach, that ecosystem is actually not terribly different from our approach to our seat manager programs. I mean, we’ve been asked to consider minority Based Investing for a very long time, a lot of our early founders are sort of emerging managers, if you will, or funds 1234, etc, have a very high concentration of minority based individuals there. And, you know, frankly, most of that is not intentional. Most of it is really intentional, trying to find the best people with the best track records that generate the best outcomes. What’s been encouraging the last really three to five years and, you know, it’s unfortunate. George Floyd’s passing really accelerated the whole problem around diversity in asset management, and diversity around the founder ecosystem, in a way that I, you know, what we see going on today is actually very encouraging. You know, we spent a lot of time in that ecosystem, we spent a lot of time with managers and entrepreneurs in that ecosystem, we’ve, we’ve sponsored several. And it’s not because they’re minorities, but primarily because they’re, we think they’re going to actually be very, very good successful investors or very good, successful entrepreneurs. What I see going on there, though, is, again, this embracing of technology as a way to stimulate economic growth, both for the founder as well as for the community in a way that I just think that’s inevitable. And we’ll start to see very, very exciting, exciting companies coming out of that ecosystem, in a way that I think it’ll be a very attractive place to invest over the next 10 to 20 years. And I think it’s also an evolution of the country. You know, we’re starting to really grow a very, very successful minority base in a way that I just think that’s just inevitable in our manager base in general. The men and the owners of our firms today aren’t as diverse as the community would like. But I would argue that the principles meaning the underlying individuals, that those firms that are coming up through the ranks to ultimately hopefully run those firms are starting to profile in a way that I think the community will be happy with is just not as evident today. And then on the entrepreneur side, especially with women, it’s sort of like there’s no hold back. The women founders, and the women community in general is just growing rapidly. And I think I’m really creating some very, very exciting companies.

Alexa Binns 50:33
Yeah, we’ve seen a huge rise in the number of women graduating with technical degrees. And I think that well, sort of pattern matches a lot of what people typically look for. And

David York 50:47
We’ve seen the same thing in general partnerships, the individuals that are being hired today. You know, the third to 50% are minorities, either women or minorities. And you can see the excitement people are having around the blend of folks around the table, as well as the contributions that are coming from those people. So it’s something that I would say, by the end of this decade, I think it will be less of an issue in venture capital. I do think there are other asset management categories that will continue to struggle with what the communities would like to see as far as diversity is concerned.

Earnest Sweat 51:26
Any last parting thoughts for our emerging managers and young GPs?

David York 51:33
Yeah, it’s a marathon, not a sprint. You know, what I’ve learned over the years is the things that are most frustrating, sometimes sort of things that make you better. And that the other thing that’s clear is, it’s never clear what’s going to win. And so don’t don’t neglect anything. We’ve spent, you know, 20 years really building a lot of goodwill around our firm. And I remember in the 2007 timeframe, when I was beavering away trying to help everybody raise money and, and all the different things we were doing, I thought either I was gonna be the nicest guy in the world or the dumbest guy in the world. 20 years later, I now understand what that goodwill looks like. So just be patient with it. It’ll, it’ll work for you. Sometimes you don’t even know it’s working, and it’s working for you. So let it work. My pleasure.

Earnest Sweat 52:26
If people want to get in touch with Top Tier, how should they do that?

David York 52:29
I’m readily available either on LinkedIn or through my email address, which is d York at Top Tier t tcp.com. And, you know, the doors open. That’s kind of one of our customer service policies here. So if you don’t get to me, you certainly get to somebody. So don’t don’t hesitate to reach out.

Earnest Sweat 52:48
Thanks so much for being on Swimming with Allocators with us.

Alexa Binns 52:52
See you later, Allocator.