Alexa Binns 00:12
On Swimming with Allocators today we have Frank Tanner of Morgan Creek Capital Management. He gets into their criteria for sorting and selecting managers, why he’s specifically focused on micro VCs and two very early verticals he sees coming up. If you are an emerging manager, Frank is actively investing in first and second funds. This is one you don’t want to miss.

Earnest Sweat 00:36
Today on Swimming with Allocators, we have the pleasure of speaking with Frank Tanner director at Morgan Creek Capital Management, which is in the private equity venture and real assets. Markets. Frank is responsible for sourcing managers co investments and secondaries, Morgan Creek venture arm invest primarily in early stage managers, typically micro VCs with fund sizes of less than 300 million, and often much smaller. We’re really looking forward to diving into this conversation. Frank, thanks for joining us today.

Frank Tanner 01:10
Yeah, thanks for having me on. It’s great to be here.

Alexa Binns 01:12
So nice to have you. Um, I think our first question is, if you’re sitting at your desk alongside these guys who are working in all the other asset classes that you handle for your clients at Morgan Creek? So I’m curious, what’s it been like being the venture guy the past 18 months?

Frank Tanner 01:51
Yeah. So we are in Chapel Hill. And that’s by virtue of our roots in the endowment world. So we came out of the USC USC endowment almost 20 years ago now. So this summer will be the 20th anniversary. So we’re excited about that. But yeah, we have invested across all asset classes historically. And that includes both public and private. So across alternatives, you know, private real assets, energy, buyouts, venture growth, you name it, we’ve probably done it. Over the years, we have specialized quite a bit. So I started as a generalist here at Morgan Creek 10 years ago. And, you know, have, have really kind of found a path within the firm, that one satisfies my interest. But more importantly, is what, you know, the firm and as an organization we’re most excited about. So I’d say venture as a whole. And this thesis is, you know, decades long and development, you know, has kind of evolved out of, you know, where our convictions lie, and the current setup and venture? And so yeah, I would say compared to the other major, major private asset classes, venture, specifically early stages, right there, right there at the top. And then yeah, across, you know, other initiatives, we have, you know, equal, you know, as high conviction as anything else that we’re working on at the firm. And I think, as the firm has evolved, which has become more and more focused and concentrated, and stuff, like venture and other specialized kinds of strategies.

Alexa Binns 03:29
Yeah. So now is a good time to be investing in a venture in your opinion.

Frank Tanner 03:35
Yes, not necessarily because of the reset, but I think it’s all it’s an evergreen asset class. One of the attractions to us about early stage is that, you know, it’s a bit, you know, startups are a bit agnostic to the macro environment, to a degree, like, there’s great, we’ve seen the data, there’s great companies started through different cycles. That said, you know, it’s not always a good exit environment like we’re seeing now. But if you’re a long term investor, you can kind of withstand that and you just have to have that, you know, long term time horizon to do so. But yeah, on the margin, absolutely. I think it’s a better time to be investing now than it was past couple years and we see that we have you know, some dry powder that we’re excited about, you know, putting to work and and yeah, you know, valuations are down general we can, you know, come back to that, but generally across the board, they’re down some seed stuff is kind of maintained pi evaluations but for good reasons. And double clicking on that is pretty interesting to do. But But yeah, now’s a great time, I think is one of the few asset classes if you look across alts in general, that you know, offers a degree of uncorrelated returns, and then also high degree of asymmetry and So, there’s not many asset classes, you know, that do that on an ongoing basis, mostly you have to be optimistic to, to get, you know, high degree of, you know, kind of uncorrelated returns or that asymmetry, just given how quickly that is arbitrage away. But the early stage I think is unique in that regard.

Earnest Sweat 05:20
Frank spoke about how this is an evergreen asset class. But how do we get to the point that we’re at today? Could you give us a brief history lesson on the evolution of venture? Yeah, so

Frank Tanner 05:33
Like, we were probably, on this call, you know, familiar with the origins of venture dating all the way back to the 1950s. And for the first 25 or 30 years, it really like any industry starts as kind of a cottage cottage industry, right? It’s bespoke solutions, very close relationships. You know, individual partners were typically synonymous with the firm name, right. And that was, you know, how it lasted up until probably the early 80s. From there, we kind of entered into this industrialization era, if you will, from kind of 1980 through, you know, early 2000s, kind of through the.com.com Bust. This is where a lot of iconic kinds of tier one funds were created that we all know and love. So folks like Menlo, NEA, Bessemer, Kleiner, Perkins, Sequoia, all founded kind of in that era, and you noticed a was a great, I guess, time to be investing in venture some vintages better than others, obviously, but overall, it seemed like it was the first opportunity for especially institutions to kind of put real dollars to work in the space, after the bust.com, bust, kind of early 2000s, mid mid 2000s. They kind of shifted to a like profounder, very profounder kind of mentality and approach to venture. And along the way, it kind of, you know, 2010 era, that profounder approach also had tacked on to it, kind of a services model. And that was with the aim of differentiating, and just winning over, you know, these founders and access and, you know, I think that was a, again, a great era to be invested in, in venture and the services model today, continues and is like, incredibly robust, right, like, if you look at any of the venture platforms, you know, there can go head to head or beat any other kind of consultant, like consulting type model or services model that a firm could bring to a startup. But perhaps what we got away from, and this was, you know, partly due to the growth of font sizes, during kind of the past 20 years, 20 plus years, has been that really one on one relationship, and what we think of as like a true venture model. And I think there’s a really great, you know, opportunity for institutions and asset managers to slash venture platforms, in that kind of scaled venture space. But in a lot of ways, it’s opened up an opportunity in space at the early stage, that first check kind of zero to one stage of company formation. And that’s where we were seeing this kind of rise of individual kind of atomization, kind of back to what the industry really started as a cottage industry and kind of one one to one relationships and building, you know, businesses that way.

Earnest Sweat 08:43
And Frank, I was able to read some research that your team produced about this next era that’s happening in which you entitled at the rise of keynodes, can you explain what this group of investors operators, who they are, and why they’re flourishing and why you’re real big proponents of them?

Frank Tanner 09:08
Yeah, so a keynode is kind of where we can get into kind of our criteria and selection and looking forward to that, but like, a key node takes a lot of different forms. But there’s a few kinds of core traits or attributes that we typically associate with what we’ve termed keynodes. And, you know, I think it’s the most apt term at this point to describe what kind of thing we’re after. And otherwise, the keynode is like, there, like I said, there’s kind of the shift away, and the core misalignment with large funds and doing, you know, seed and precede deals. And, you know, ultimately what founders are looking for in that partnership, going from zero to one and company building. And that’s where the keynode comes in. So it’s highly chaotic at the kind of first first check Stage of company formation. There are a lot of opportunities out there. And it’s not very scalable as a large institution to map and match the highest quality, you know, investor talent to, you know, these founders trying to start their, their, their business. So he knows kind of has two, two sides to the equation. So one, they have really strong downstream relationships with some of the scaled venture platforms. And on the other side, they have what we call founder preference, and a drawl and the founder ecosystem and an individual, oftentimes individual brand, or a duo kind of GP situation, but some one to one relationship that founders want to seek out. And in aggregate, it’s very much distributed architecture and the ecosystem. But in aggregate, we think of keynodes as forming somewhat of an organizing layer, you know, to serve up deal flow to these very, you know, important and helpful, kind of scaled venture platforms. So, that’s where we, you know, operate and where we try to, you know, access this innovation economy, we think it’s the most exciting place to play. But yeah, Keynode kind of sits in the middle of, you know, founder opportunity, like unique insights, you know, teasing out from founders and operators what the future might look like. And then taking a unique view, making selections, and then also generating signals importantly to, you know, those larger downstream investors that and when I say larger, that could be you know, folks coming out the series A and sometimes increasingly these days the seat but not necessarily like the first first Chuck and to accompany.

Earnest Sweat 11:51
Okay, that makes a lot of sense, because in reading that, I agree with a lot of those points, and keynodes being the integration layer, essentially, between founders and institutional investors. But I can see this going in a lot of different ways, especially in the current market, we’re in where there’s scarcity of capital, where if these megaphones continue to get bigger and bigger and offering a certain return profile, and going earlier and earlier, there’s a possibility where they, for those keynodes who have decided to become more institutionalized, as funds can get choked out. And we’ve already seen the time of us recording this, a number of up and coming solo capitalists, you know, just stop and shop right now. Yeah, throwing in a towel. No, but the other possibility, you can see is that, does this megaphone actually move? Grouping like or just like products actually lasts the test of time, and that could bring people back to, okay, there’s still a need for these key nodes. But these larger megaphones don’t need to go so early. So I can see both ways. I don’t know if you have a response to that. But that’s kind of how I feel like, what’s the battle? I shouldn’t even say battle, but there’s a number of kinds of multiverse situations that could happen.

Frank Tanner 13:19
Yeah, and I don’t have a crystal ball. None of us do. But um, I think the Yeah, it also time will tell, but I think the key node, like value proposition will remain like, one, there’s just, you know, the kind of economic opportunity cost for a really high caliber venture investor to sit within a larger brand. And not, you know, capture more of the economics for themselves and be closer to the founders and be a more meaningful kind of investment in their portfolio, right, instead of writing checks across a bunch of call options. And if it’s truly a craft that they enjoy and pursue, it’s, it’s better done in the context of smaller funds, ultimately, so like, and I think founders want that, like, we’ve all seen the pitfalls of raising to larger rounds, and kind of making yourself unattractive for future financings and founders not wanting to be call options and portfolios and signal risk of you know, that your fund doesn’t follow on, etc. So like, I think that there is going to be a continued need for key nodes and I think, on the megaphone layer. Yeah, I think that continues to exist as well. I think they serve a really great, you know, purpose and role and have done really well over the years obviously, and I think institutions have been happy with returns. And namely, have, you know, allowed for scale for the first time ever into an asset class that has been, you know, a cottage industry and and not, you know, attuned to accommodating large checks. Now it can, I think the the place that maybe gets in this might be, you know, to your question, like, the place that’s like gets a little bit tricky is what we think of as, like the messy middle. So folks that he knows that have done really well, and there’s already in what we’ve seen, kind of a gen two of like, really successful VCs that have come up in the past decade, but have already scaled beyond like, you know, 100 150 $200 million, which start to bump into a different, you know, set of like, competitive, you know, players in the market that, you know, they might get beat out by Sequoia or Andreessen in or someone in, in context of the rounds that they have to participate in to deploy their their funds, that are larger funds. So in some ways, like, you know, they started out in a, with a really great thesis and a good place in the market, but now I’ve kind of become what they set out to disrupt, originally, and have done so by, you know, making it putting themselves in a more difficult place to operate. From the competitive kind of landscape perspective. But, um, but yeah, I do think, you know, the top of the market, you know, process the microphones, as well as the key nodes and kind of that organizing layer, first check.

Alexa Binns 16:28
do you then, politely say, Oh, fund three, that’s not for us. That’s an interesting kind of conversation.

Frank Tanner 16:39
Yeah, it is interesting, it’s definitely unpopular. If that does happen. We try, we do our best to kind of tease out and understand the long term ambitions and goals of the manager. And I’ve had this conversation with, with so many GPs at this point, like, it’s, it’s almost irrational to want to say stay small, from a purely erratic or purely economic standpoint. If you just run the math, the management fees, you start collecting on increasing size of pools of capital, and namely the expected value of that, you know, cash flows, cash flows, essentially guaranteed, like quickly, you know, overtakes any carry that you can earn on a small fund. So it comes down to, you know, why, like, why are they pursuing this profession, this job, and this, this craft, and what we found more than more than not with, you know, early stage investors have stuck to it, and there’s not many that are highly successful on their fund four and five, is that there’s a, there’s just a passion for working with with, you know, startups and that craft is where, you know, why they wake up every day and go to work. And it’s not necessarily the draw of, you know, the, you know, Asset Management kind of AUM game that’s out there. And, yeah, I, you know, I think if we’re, if we want to operate in an early stage, which we do, we have to have that discipline, and saying, you know, if you want to scale, that’s, that’s great. We can still underwrite, you know, even a fund one or two, we do want to be long term partners, but we do re underwrite every fund. And if their strategy drifts, that’s something that we’re highly, highly sensitive to. And not that they can’t scale. But more often than not, you know, size is the enemy of returns. And it’s not a situation that we lean into necessarily.

Alexa Binns 18:34
Yeah, no, you’re your data that you compile it, guests, Cambridge Associates data, but you put it in a way that was very digestible, showing just the top funds that are returning are really the first and second funds. It’s nice, it’s not personal. It’s, you know, this is where you want to play. And it’s not loyalty. It’s not about loyalty. Yeah. Any other general advice, you’ve kind of laid up criteria of what you’re looking for in these micro VCs, just for anybody who’s listening?

Frank Tanner 19:08
Um, yeah, I guess maybe double clicking on some of these, like criteria or framework for selecting, and maybe this could be interpreted as advice out there and like, how to construct portfolios, and why, you know, what differentiates certain VCs from others. But yeah, ultimately, like, if you think about how we look for and select managers, we think about, you know, it’s an overused term, but first principles of what any good venture capitalist has to do well, which is source, select and support. And we kind of bundle up some, you know, other skills within those three terms, but you know, the three S’s are easy to remember within select, for example, you also have to access you can’t select anything you can’t access and then Um, you know, every follow on deal is also a, you know, additional selection. So, or following investment. So your ability to double up into winners is a trait of, you know, some of the most successful VCs, and that is kind of captured and selected. And then when we think about, you know, how we evaluate each of those categories, we essentially create a matrix of these different attributes that intersect or not with each of those three S’s. And they’re centered around things like, you know, brand, like I think it for any venture capitalists, regardless of size, that brand, you know, carries the day, and that helps across all three of those aspects. Their ownership, their founder residence, which, which I touched on earlier as being like one of the key attributes for key nodes, font size and construction, right, like, if you’re, you know, too large, and you have 300 companies in your portfolio, it’s gonna be difficult to have a one on one relationship and support all of those underlying founders in a real way. You know, similarly, if you’re, you’re undersized, and you have, you know, five deals in your fun. I’m not saying it won’t work, but you know, that you’re kind of decreasing your probability of, you know, meeting the market selection, right, you have to be highly, highly, you know, have a really high hit rate, essentially, to check that box culture philosophy and get into, like, what is the long term vision of the firm? Do you want to scale into a billion dollar franchise? Or do you want to stay small and do this craft, and then maybe most importantly, is your network and community like, and that factors into all three of those things. But ultimately, like, we, we lean less on kind of the the selection and prowess of a jeep, because a lot of times, there’s not data out there to build up to pick, essentially, but more kind of look into and do a lot of diligence on where they sit within the broader ecosystem, what their kind of, you know, GP strategy fit is, and in a lot of ways, like networks Filter Filter for the deals, and like that’s, and then in a portfolio that we construct, we get that diversification, but for any given network, or part of the, you know, venture ecosystem, startup community, like, we are kind of underwriting the VCs, you know, network to filter, the best deals. And that’s, that’s like where a lot of the selection, implied selection comes from. We’re not trying to necessarily bag folks boiling the ocean and selecting from that it’s more kind of network driven. So. So that’s kind of how we think about the universe and choosing where to spend time. And then there’s a whole nother layer of portfolio management to that, which we can also get into, but so yeah, I guess, advice, too. I wish I had foolproof advice here for new VCs. But you know, like, in a similar way to thinking about, you know, product market fit with startups? Like I think it was Mike Maples from floodgate that put it this way, but Product Market Fit kind of can be described as, like, what can you do that people are desperate for? And I think like, that’s a good way to characterize, you know, a cheap strategy fit for key nodes. So like, why are our founders seeking you out? to partner with you? And then what signal do you generate downstream? Investors? And I think that’s one of the key questions I would ask for any, you know, venture capitalists. And then on the LP side, you know, just understanding if folks are even in a position to allocate and what their kind of portfolio considerations and objectives are at this point in time, and like, that’s such a big driver, I think it’s under-appreciated. There’s a lot of strategies we like, but you know, we also have this top down context of what the portfolio needs and, you know, LPs objectives, etc. So, yeah, I guess all advice, take it with a grain of salt. But that’s kind of how I would maybe characterize that. But yes,

Alexa Binns 24:27
this advice that you should ask the LP you’re talking about, about their portfolio? This is a great thing. We joke that this is the podcast where the VCs try to shut up and the LPs are given a mic.

Earnest Sweat 24:45
Exactly. Although it’s often

Frank Tanner 24:47
we just dive right into the strategy. And it’s like, I mean, we look at everything almost and but yeah, it’s just like the wrong you know, moment in time. And that’s not uncovered until At the end of the call and like, you know, is what it is. But that’s maybe a starting point for us when we’re talking to our LPs, and then also for VCs when they’re speaking with folks like us.

Earnest Sweat 25:11
To that point. Frank, can you talk about some examples of fund managers who have done an amazing job of, you know, developing and cultivating that relationship? And displaying those three S’s your criteria?

Frank Tanner 25:32
Yeah, so probably the quintessential manager, and that fits this mold is Founder Collective, I’m just gonna use their name, they, they’ve stayed small, they’ve had incredible success. They, you know, claim and aim to be the most founder aligned manager out there. And I think like, I mean, this isn’t a downer collective advertisement. But I think they are the exception to the norm of, you know, GPS that do have, you know, incredible success and then go on to, to increase length, like scale their font sizes, and for host of reasons, the dynamic shifts, you know, from an alignment standpoint, both with founders and LPs, you know, the Aum kind of motivations that come into play, and then the portfolio construction and just like overreaching, what your brand power in the market can demand in terms of access and and sourcing. And so yeah, they’ve done an incredible job. I think, you know, there’s other examples out there, you know, still, even though some of the best examples still have their best funds at funds wanting to, but, like, if you look at and we’ve, we’ve done the work where you plot, you know, some of the most successful early stage funds, and then they’re growing font sizes, and then add an opportunity funds, which are essentially the follow on funds, you know, they raise alongside their core strategy, which, you know, you’re not supposed to, as an LP get too distracted with and, you know, they’re still focused on the early stage fund, that’s like, half the size as the Opportunity Fund. It’s less of a thing now, but yeah, that’s, I guess, had been the norm over the past few years, when capital was abundant, and free flowing into venture but probably expect that to pull back some so. So yeah, absolutely. They’re a great example. There’s a few others out there. But yeah, that’s one we’ve enjoyed to track. Morgan

Earnest Sweat 27:31
Creek also works with different organizations to help them analyze private opportunities and optimize their private asset portfolio allocations. Are there any misconceptions when working with those clients about venture? And that you would like to share with those types of organizations that would work with you all?

Frank Tanner 27:55
Yeah, so yeah, so just a little bit of context on Morgan Creek platform, we manage both in a kind of advisory outsourced CIO model for some clients. So full portfolio advice, and that across all asset classes, public, private, all its etc. And then we also have discretionary fund to funds essentially, in some direct finds that are typically always high conviction areas, themes that we want to express and can add significant value for clients that we’re, you know, advising on a portfolio level. I’m still involved in some of that work. We kind of steer them, we certainly do. We steer them away from early stage micro VCs, where I spend 90% of my day, because most of them don’t have a built out robust, you know, program for allocating the 10 to 20 managers in that space, which, you know, it’s, there’s some flexibility on what you know, that exact right number is, depending on the LP, but we do think there’s an advantage with, you know, given the distributed architecture of early stage, like there’s an advantage with the scale that comes with allocating early, early stage. So if there’s not that commitment there and we have visibility on that, we we won’t recommend, you know, the $25 million fund one and as a one off recommendation, regardless of how much we like them for our portfolio, just because it’s a you know, nine times out of 10 not a good fit for, for the client. What we do instead, you know, we do direct, you know, their venture efforts if they want to do a direct through more diversified like multi stage funds. Typically, if, if they’re top tier, I think that’s a great option as like a single or two fund investments that they can get exposure it’s going to be different right and then early stage but it does get them Um, exposure to a part of the asset class, we also have utilized secondary funds that do a really good job with not necessarily accessing growth later stage companies on the high flying like, you know, hyperscale venture track, but but still, you know, really solid companies often profitable, and just a unique angle to access these, these, these companies. And yeah, so those are like, we just we should, and we also do growth like, you know, lower middle market kind of growth buyout type funds for for clients, I think that’s a really good risk adjusted return, there’s a high bar there, given that cost of capital has changed, but that’s another, you know, area that we feel good about, you know, putting clients in on a one off basis, and not necessarily, you know, the early stage micro VC, unless there’s a long term commitment to it.

Earnest Sweat 31:00
Now, we’re gonna take a quick break to speak with our sponsor. On

Alexa Binns 31:03
The show today, we have industry experts and sponsor one of my all time favorite founders, John Lang, co-founder and CEO of Canopy, canopy streamlines the administrative process, legal wires, taxes, etc. For private equity co investments, and SPV. Thank you, John, for partnering on the show investing in all these assets we’ve generally been talking about for the most part, syndicates, co investments, SUVs. Where do you think technology is going? Is technology going to start playing in additional assets? Things like real estate? Or I

John Ling 31:40
really think about everything? Yeah, I really think everything I think, you know, you look at a whole lot of things, real estate investing, for example, is like a really big space where people, a lot of people still do it on like pen and paper, or they’ll hire a lawyer or something. And then they’ll hire like, maybe like an accountant actually, to do a lot of these things, right? It’s not even like a traditional finance admin, where it’s just like, oh, like five of my friends, we’re gonna go buy this property together kind of situation, right? So there’s definitely a lot of that. I think, like, obviously, on the commercial side, there are a lot of like CO investments that happen, but they tend to be much, much, much larger checks, right? So when you’re like, Okay, we’re gonna like, pool capital together to buy this, like, multi billion dollar portfolio like that probably, like technology is probably still pretty far behind there. Because like, most of that work is done and drafted by warriors and like relationships, right? And really, you end up with like a handful of players, really, who are doing that normally anyways, like, really, really large family offices really, really large, like real estate investment firms. And I think the air method of operating is probably pretty fixed for now. But I do think like, if you think about, you know, even like 20 years ago, when people were like, running up and down Wall Street with like, books, I don’t know, like, you watch movies, and like, people are running, running up and down, they’re like, Okay, we gotta get these photocopy machine running, so that we can print like 20 books for this, like, big merger conversation. And now people are more like, okay, like, where’s the PDF? Like, I think there is definitely like, a newer version of that on the horizon of like, actually, hey, you know, everyone has like, the same transaction memo, or whatever it is, right? I don’t really know what form to take. But I do think technology has historically always played a really big role in making these things, like, you know, more efficient, so anything

Alexa Binns 33:29
else that you think from where you sit, you could teach her or uncover for our audience of VCs and LPS listening?

John Ling 33:42
I don’t know, I will say that, like, you know, obviously, in the last two years, well, leading up to last year, right? Um, two or three years ago, there have been like, a lot of people who are like, like it be a VC or I want to be a VC to, or whatever it is. I never done that. Personally, I like don’t think that’s a good idea. I think like, it might be like, a little bit controversial, but like, I really don’t think that like, if you just because you think you can be a good investor means that like you should, because I think one it takes up a lot of time, I think we see a lot of people who are like trying to do this as like a side gig, right? Like maybe they’re like, relatively high up or senior and like, big tech company, or like, they are another founder, CEO, wherever, right? We’re like, hey, you know, my company is doing fairly well, whatever I see, I have a lot of friends that are also starting companies, maybe I should go run a syndicate. I’m like, not a big believer. And that model, I think, ends up you just do a poor job at both of the things that you’re trying to do. And I think most people don’t understand at the time horizon of like running a venture investment. It’s it’s like literally 10 years. It’s not like figuratively, a very long time. It’s like, literally 10 years like you’re gonna be like okay, we’re gonna have these LPS we’re gonna have to deliver reports or like whatever updates them For a very long time, and I think like a lot of people think of it as like, oh, this seems like a fun like amusement ride, I’m just gonna get on it. But like, it’s like, yes, you can, but like, you have to ride that ride like 1000 times, like, I just had to, like, understand that, like, from the very beginning. So that’s probably like, my biggest advice is like I, we’ve obviously worked with some of these types of people. So I don’t want like, obviously the customer to think that. I’m like, saying that they shouldn’t be doing what they’re doing. I think I’m very happy for them. Obviously, I think if you believe that, like, hey, actually venture is my calling, go and do it. But I do think that like for a lot of people who are out there thinking about it, you should really really think very hard.

Alexa Binns 35:40
Yeah, ya know, that they think, in some ways, a syndicate is a great sort of exam, you can live the life, it’s like, you’re picking at least one deal, you’re having to go raise, which you would have to do for fun as well. You have to write that memo and convince yourself that this is something that the people you know, in love ought to be investing in as well. You’re putting on the hat of a wealth manager on behalf of people. And I think you’re right, like after you do that 1520 times in order to build your track record. Maybe your conclusion at the end of the day is, oh, there’s something else. But this was a lot of work, and there’s something else that I’d be more passionate about doing.

John Ling 36:25
Yeah, I think that’s totally possible. All right. I think I think like running us kids, okay. I think like running a syndicate, running a fund are two completely different things, right? Because like, I think honestly, the kids are like a deal by deal basis, people know what they’re getting into, etc. But then like, we run a fund, there’s a lot more like, legal structure around it, right? You kind of have longer obligations, people will come to me and be like, okay, so what do you guys do? What did you invest in? How are our funds doing? Whatever it is? Where are they? I do think syndicates are more like, okay, hey, maybe we’ll just pull some capital together and buy a house with my friends. And like, you know, at least their software to make that very easy.

Alexa Binns 36:59
So totally, yeah, you’re officially a general manager, general partner, as opposed to I think the Syndicate, like you kind of can offload the final decision making to to have ever jumped in that. It’s like, it’s on you that you came in on this deal.

John Ling 37:16
Yeah, I think so. Yeah,

Alexa Binns 37:18
a little less responsibility. Interesting. 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 interviews, are there any other misconceptions or blind spots? You see clients have or you’re focused on this area?

Frank Tanner 38:16
Yeah. So I guess, coming back to that question, what people get wrong, I think is. So it’s rooted in the kind of structure like some of the return distribution characteristics of venture capital. There is a power law that, you know, defines venture capital more so than any other asset class. And the degree is to you know, that it does, it’s so extreme that even within our global diversified fund of funds across all asset classes, we’ve had venture dominate the overall returns. So I guess, what does that mean, for allocators? And where do misconceptions come up? I think it’s like, you know, we look at the power law, it’s strongest for the early stage, it’s been demonstrated with, with data, for different reasons. But if you’re now here, a lot of times you think you can kind of helicopter and be a little bit optimistic tactically, like now and when the market changes and gets some exposure, I think that’s a really big misconception. It’s a you know, an evergreen asset class, but you all it also takes ongoing commitment to the asset class to, to participate in, you know, what it can offer essentially and, you know, for example, like if you missed out on the returns, or were gunshot several years ago and didn’t participate in the past, you know, liquidity that happened over the few years, like what past few years, like, you know, you’re gonna miss out on a lot of the the returns to be had. So yeah, I guess trying to be optimistic and asset class doesn’t work. There’s also kind of network networking and relationships have set form around ventures that make it harder to be tactical. So if you’re kind of swooping in to get access to a top to your phone, that’s definitely not going to happen. And then even if you’re trying to source early stage funds that are less of an access play, you’re just not going to be in the flow to know who they are. So yeah, I guess, you know, alternatively, waiting in and out is one, the second would be kind of having too small of a, you know, aperture into the space and then doing kind of what comes through your door, if, you know, if you see 10 funds a year, some of those funds can look really great. But the thing that I’ve always been surprised by in this, especially early stage venture is like the caliber of the next VC that comes through. So I don’t necessarily, I get it, I get really excited about, you know, certain VCs and opportunities that are investing into that, and ultimately, the founders that they’re finding, but there’s always, there’s always, it seems someone that like one ups, and if you look at, you know, 567 managers that find you somehow, if you’re one of our family office or endowment, and pick two of them, that’s a very suboptimal strategy. So there’s this aspect of relative evaluation, and early stage, which matters a lot, not just from, you know, gauging overall quality and caliber of these managers, but also, you know, considering where you have diversification or not on a portfolio level in terms of network overlap, so that’s something else we look at. So you back, you know, three funds that all tie back to YC, Y Combinator, that’s not going to be, you know, a well rounded strategy, and you’re going to decrease your chances of capturing, you know, there’s outlier, you know, returning companies that are not necessarily going through YC, always. So you need that diversification. And maybe just to wrap up this, this last kind of misconception of like, you can do venture by, you know, rifle shooting a few a year and not really mapping the landscape. There’s been, I think it’s from Samir over, it Allocate. I think 2500 or so, you know, VC started since the GFC. And it’s, you know, maybe you see in the early 2000s, you could, you know, meet with 30 managers, that was all the early stage managers that were doing half of them. And that was a really great strategy. Today, like, you’re, you know, you’re not going to meet with all 2500. Right? And there’s a question on whether or not you can even if you did, if you could even select. So, I think, you know, the starting point is to, you know, at least start doing the legwork. And it’s a ground game. And we’ve done almost 450 GP meetings in the past year. And providing that context on, you know, where you want to spend time what networks are relevant, like, who’s on, you know, who is generating a signal to the downstream investors that back to the point of key nodes, and like, you know, you catch a one off, and they can look great, but when they’re put into context, it really kind of opens up your eyes to how exciting the opportunity is out there, and, and how much work goes into it?

Alexa Binns 43:30
Yeah, I interned with a big fund that made you stack rank at the end of the week. And I think you’re absolutely right, but like the thing you were excited about on Tuesday, somebody’s coming on Thursday. And that’s my number one. And

Frank Tanner 43:44
That is the hardest part of the job. And we ultimately try to build portfolios of, you know, 10 to 20 managers. There’s a lot of folks that clear the bar. So selecting, and we think, you know, 20 managers is sufficient for the diversification we’re looking for. But yeah, even selecting among those can be tough.

Alexa Binns 44:28
So maybe Earnest or Frank, what are those hype cycles that we are just entering? Like what’s percolating in 2020? For that? Right now, you see, like fin tech people are just like jumping off buildings. What are we just starting to already start to see?

Frank Tanner 44:54
Well, Earnest, if you have any?

Earnest Sweat 44:58
Well, I think the hype is around. AI, and everything AI and it’s similar to when you talk to more senior folks of the.com era. And it’s not like great companies aren’t going to come from that. But I think we’ve been able to see a jump from people going from one hype cycle to the next. And so going from, you know, web three now to like putting an AI on it. And so it’s, it’s our job as venture capitalists to really suss through what’s an actual business? And not what was an actual business and what’s not just a wrapper around, you know, Gen AI, so

Frank Tanner 45:49
yeah. 100% ai is, it continues to be the current, you know, hype, hype source for the, for the industry. They’re immune to any reset that we’ve seen across all other sectors, I think like, looking at, like, what’s the next one, I think is, you know, the big question, right, I don’t think AI is going away, it’s going to, you know, really disrupt some existing industry sectors, and in some really cool ways, and I think, like, there will be money made there. I think like, we’re probably moving to the application, you know, layer for AI, and how that maybe intersects with web three, there’s some really good, you know, articles papers written on on on that topic, but from an allocator, and kind of venture perspective, deep tech, is kind of probably the most obvious one that’s kind of next in line, and I’m still a little bit torn on like, or just undecided on, if this is a pure hype, and or what kind of, you know, how much there there is here? And yeah, I think like, the one way that this could be non consensus is that a lot of allocators/investors are restricted on this opportunity, in some ways, just given, you know, the past kind of geopolitical landscape. And, you know, how much, you know, politics do play into, especially for any type of public institution. The allocation policy, so like that, there might be some capital constraint, which is actually helpful from a return standpoint. And there’s just a lot of whitespace within deep tech, so like stuff like advanced manufacturing, or life sciences and, and tech bio, and, you know, other spaces like defense space, actually, like there’s a lot of areas that just haven’t had the, you know, the the time and kind of maturation cycles that like, you know, enterprise SaaS has had. And which, to me, speaks like opportunity. I think the one caveat, there’s, there’s serious consideration around the dollars needed to scale some of these business models where the VC platforms come in, I think that’ll be very helpful. But there’s still that kind of zero to one kind of seed investor that could capitalize on an opportunity. And there’s stuff that’s like way out of vogue right now, the obvious one consumer, right, so like, what, in the next 510 years, we’ll have something like potentially venture scale, big outcome, I think it could be consumer, like it’s been, you know, Shawn, for the past several years, and we have some really interesting stuff in our portfolio within the consumer, but to that point of, you know, finding value as a seed investor, and kind of going against the grain sometimes I think, like, is helpful from a return standpoint. So yeah, so incredibly exciting. Part brothers. I love being in space.

Earnest Sweat 48:57
Yeah. Oh, Frank. As a parting we just wanted to know if, obviously you’ve been meeting with a lot of managers and your firm is meeting with a lot of organizations that you serve as an outsourced CIO. If they want to reach out to you, how do they get in touch with you, and who ideally should reach out to you?

Frank Tanner 49:20
Yeah. Easy to find on LinkedIn, lots, usually lots of mutual so feel free to get a warm intro. And that’s usually a good route, my email is F Tanner at Morgan Creek cap.com. And the folks that should reach out, you know, anyone that’s looking for exposure to this space, from an LP side, absolutely can help. We have, you know, some educational content, those papers that, you know, share with you all, and others, like have been really well received. And I think there’s a really great conversation around this early stage opportunity that’s happening right now. So happy to be maybe somewhat of a guide in that discovery process. We also have, you know, products that we, you know, routinely launch and deploy. And then maybe most importantly, from the investment side if you’re a GP early stage, typically sub 100 million dollar funds are what we look for. Yeah, please do reach out like we literally process everything we’re set up to do. So we will look at a deck if you send it to us and discuss it in a week or two when our process and then yeah, more often than not, we take a call if you kind of check those initial boxes of size portfolio construction stage. And yeah, so any new GP and we do a lot of fun ones half the funds we’ve done are fun ones.

Alexa Binns 50:52
So helpful. Thank you, Frank. This has been a lot of fun.

Frank Tanner 50:55
Yeah, thanks. Thank you. It’s been great.

Alexa Binns 50:59
See you later, Allocator!