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Sept. 12, 2023

E9: David Clark, Investment Director at VenCap | What Every LP Gets Wrong About Power Laws, Adverse Selection in VC, and What % of Startups Go to Zero?

E9: David Clark, Investment Director at VenCap | What Every LP Gets Wrong About Power Laws, Adverse Selection in VC, and What % of Startups Go to Zero?

David Weisburd sits down with David Clark, Investment Director at VenCap International PLC to discuss his viral post about his viral post regarding data from 250+ early stage funds and power laws in venture capital.

David Weisburd sits down with David Clark, Investment Director at VenCap International PLC to discuss his viral post about power laws in venture capital, manager predictability, adverse selection in VC, and what percent of startups go to zero. If you’re ready to level-up your startup or fund with AngelList, visit www.angellist.com/tlp to get started.

The Limited Partner podcast is part of the Turpentine podcast network. Learn more: www.turpentine.co



(00:00) Episode Preview

(02:40) David Clark's data set of over 250 early-stage funds

(04:40) Power laws and fund returns

(09:20) Survivorship data and challenges in emerging managers data

(12:30) Succession in VC

(14:36) Sponsor: AngelList

(18:43) How do you back the top 1% of companies

(21:30) Ownership percentages and returns

(29:00) Follow on that a fund should reserve at every stage

(36:30) Ten year predictions for VCs and LPs


X / Twitter:


@dweisburd (David)

@eriktorenberg (Erik)





SPONSOR: AngelList

The Limited Partner Podcast is proudly sponsored by AngelList. If you’re in private markets, you’ll love AngelList’s new suite of software products.


-For private companies, thousands of startups from $4M to $4B in valuation have switched to AngelList for cap table management. It’s a modern, intelligent, equity management platform that offers equity issuance, employee stock plan management, 409A valuations, and more.


If you’re a founder or investor, you’ll know AngelList builds software that powers the startup economy. If you’re ready to level-up your startup or fund with AngelList, visit www.angellist.com/tlp to get started.



Questions or topics you want us to discuss on The Limited Partner podcast? Email us at LPShow@turpentine.co


Episode Preview:  David Clark: One of the things we've learned again, doing this for 30 years is over that time, we've probably backed 110 different managers. And we found that the median return for all of those funds was less than two X, but there was a small group of managers within those 110 that were consistently able to outperform.

[00:00:27] David Weisburd: Good afternoon, David Clark of Venncap International, where you've been over 30 years and currently serve as investment director. First of all, I want to congratulate you on the recently massive viral post, sharing your return on over 250 early stage funds and shared by people like Jason Calacanis from all in podcasts and Paul Graham from YC welcome to a limited partner podcast.

[00:00:48] David Clark: David, thanks very much. It's a pleasure to be here. And I certainly wasn't expecting that sort of reaction when I put those posts up.

[00:00:55] David Weisburd: Well, you're very humble, uh, and your reputation precedes you. Uh, so good try. [00:01:00] Uh, but, but it's great to have you on, uh, and you've been invested in venture capital space for over 30 years.

[00:01:05] David Weisburd: You've seen the rise and fall and sometimes rise again of prolific funds. Let me ask you, can you share five things you've learned about venture capital over the past 30 years that you wish you knew when you first

[00:01:14] David Clark: started? I think the first thing with venture capital is it's, it's, it's such a fascinating industry to spend your career in because it just changes so quickly.

[00:01:21] David Clark: Um, so I, I feel really thankful that I've been able to, you know, see the rise and fall of a number of different technologies and industries and, and, and almost have a front row seat to that. You know, really when you look at the sort of the, the main learnings for, for what we've seen over the, the 30 years that, um, you know, that I've been doing this, really it comes down, I think, to two main things.

[00:01:40] David Clark: One is the, the power law nature of, of venture capital. And the second is the fact that the venture industry is cyclical. And I think everything else kind of falls out of those two key points.

[00:01:51] David Weisburd: You mentioned power laws. Uh, we have a drinking game. You have to, you have to take a shot every time you mention power laws on this limited partner podcast.

[00:01:59] David Weisburd: You've [00:02:00] actually had exposure to it over 31 years. What are some of the things that surprised you about the power laws?

[00:02:04] David Clark: I think it's really just how consistent it is and how much it actually drives performance for For venture capital. I think, you know, we, we talked to a number of investors who, you cover a range of asset classes, particularly those who spend most of their time and say private equity.

[00:02:20] David Clark: And they're coming from asset classes that have a more normal distribution of returns. And I think when they move into venture capital, there's normally a few kind of key things that they're really surprised by, and it can take the time to kind of adjust to that. And the main one ultimately comes down to the fact that there's just a very small number of companies each year that.

[00:02:39] David Clark: Eventually drive the, you know, the bulk of the return that comes from the entire industry.

[00:02:44] David Weisburd: So you had a large tweet storm about all the different types of returns. Can you take the listeners through what you found over your data set of tens of thousands of companies?

[00:02:54] David Clark: So this is data that is from June last year.

[00:02:57] David Clark: So slightly, slightly out of date. So [00:03:00] 12 months out of date. We're just in the process of updating the data for June 23 numbers. But because a lot of this is actually realized, we don't think the numbers will change materially. So this is really a breakdown of all the early stage funds that we've invested in at Vencap.

[00:03:17] David Clark: Starting in 1986 and then putting it off in 2018, obviously post 2018 funds are still relatively immature and we think it can change quite significantly. So we put the cutoff date to 2018 and underpinning this is over 11, 000 portfolio companies backed by 259 early stage funds. And I think a couple of things that, that really jump out of this analysis.

[00:03:42] David Clark: The first is that. Over 50 percent of companies failed to return capital. And again, if you're coming from a private equity perspective, you know, seeing that sort of loss ratio could be actually pretty scary. The second thing that really sticks out is only 1%, just over 1 percent of. [00:04:00] These companies ended up as fund returners.

[00:04:03] David Clark: So that means companies that have returned the entire capital of the fund that backed them. And these fund returners are really the crucial thing in venture. And it's where the bulk of the value actually gets generated from.

[00:04:15] David Weisburd: Let's dive down into the fund returners. You said 1. 1 percent. So out of 11, 000, uh, that's, you know, if I'm doing my math correctly, roughly a hundred companies, is there power laws within those a hundred or so companies?

[00:04:28] David Clark: Yeah, it does. Barry's the fund return is that we've seen. Um, I think the, the most significant fund return, I returned something like 27 times. The individual fund that backed it. And then obviously we have a number that are just at the sort of one X level. It's nice

[00:04:43] David Weisburd: to see the power laws in action, but that's not anything groundbreaking.

[00:04:48] David Weisburd: Let's talk about how you get to those power laws and those fund returners. What have you found is a leading indicator for a manager that has a fund returner?

[00:04:55] I

[00:04:55] David Clark: think this is the key question for anybody that's looking to invest in venture, because [00:05:00] again, you know, one of the other bits of data that, that we've, we've looked at is when we analyze the three X net funds, so funds that have delivered three X net returns back to us.

[00:05:09] David Clark: Do they have any common characteristics? And one of the things we found is that 90 percent of the, of the early stage funds have at least one company that returns the entire fund. So finding these fund returners is, is critical. Um, and, and there's lots of different ways of, of trying to do that. You know, you know, you see some people who are doing a lot of seed stage investing, backing emerging managers because they feel that's the best way of doing it.

[00:05:34] David Clark: One of the things we've learned again, doing this for 30 years is over that time, we've probably backed 110 different managers. And we found that the median return for all of those funds was less than two X, but there was a small group of managers within those 110. That were consistently able to outperform and the reasons they were doing that was because they were the ones that are consistently able to find these sort of returning [00:06:00] companies, these, you know, top wall sense of exits.

[00:06:03] David Clark: And I think that the thing that went again, when we looked at those individual managers, it was that consistency of doing it. And so for us, the biggest predictor of whether a manager. Has a higher than normal likelihood of finding a fund returner is how they've done it before. It's

[00:06:18] David Weisburd: intuitive that somebody that has had a fund returner is more likely to do that, but then you're really glossing over fund one fund twos.

[00:06:25] David Weisburd: And a lot of the guests that we've had on here, I really focus on emerging managers, smaller funds, there's a lot of. Empirical data that shows that small funds outperform larger funds, earlier vintages outperform later vintages. How do you reconcile that?

[00:06:39] David Clark: Yeah, I think there's also quite a bit of data that says they, uh, they underperform as well.

[00:06:43] David Clark: So what we've seen from our analysis is, is that if you think about it, the best performers in any vintages are likely to be the small funds that, that are able to find one of these top 1 percent companies. I think the challenge from an LP basis is how predictable is that? [00:07:00] And are they the same managers that are able to do that fund after fund after funds?

[00:07:04] David Clark: We know when it comes to the established managers that their predictability is relatively high. So for example, we have a portfolio of about a dozen core managers and 90 percent of all the capital that we've invested since 2010 has got to just. those 12 managers. And what we find when we look at the performance of the funds that we backed from those core managers is that around 50 percent of their funds are top quartile and less than 10 percent are bottom quartile.

[00:07:31] David Clark: So what they've been able to do is to capture the upside from investing in venture while minimizing a lot of the downside. And I think when you look at the data for fund ones and fund twos, I had merging managers and small funds. Yes, you see more managers at the top patent. But you also see a higher proportion of them that underperform as well.

[00:07:50] David Clark: The consideration perhaps you have to make as an LP is what's your risk appetite? Do you want to try and find that needle in the haystack, knowing that it might be [00:08:00] only one in 10 managers that, that delivers that sort of. performance and hope that the upside you get from that manager actually compensates for the poor returns you're likely to get from the rest of the portfolio.

[00:08:11] David Clark: Or do you take the approach that we have, which is that actually we'd much rather have that predictability and consistency of performance. And it might read the certain parts of the cycle where we slightly underperformed. It might mean that we miss out on the very best funds of any particular vintage, but when you look at it on an aggregate basis.

[00:08:30] David Clark: Actually, the performance we get from those managers is incredibly consistent and significantly outperforms the industry. I know LPs don't like talking about numbers and performance, but I think it's helpful because there's a lot of opinions out there. I'm always key to sort of understand how those opinions are underpinned by data.

[00:08:48] David Clark: And so when we look at our performance from our call manager portfolio, it's in excess of 3. 5X. And that's consistent, you know, whichever time period you kind of cut it over. So I think, you [00:09:00] know, for us, what we're doing is still accessing the best performing funds. Maybe not the very top percent of that, but we're doing it in a way that Massively reduces the risk of investing those underperforming firms.

[00:09:12] David Clark: And so on a blended basis, you're actually able to deliver strong and consistent performance to, to our investors.

[00:09:18] David Weisburd: For some de risking you're willing to sacrifice some of the, you know, power law, I guess, fund returns where you're getting the 15, 20 X on a 5 million fund. I think that resonates a lot with the LP community.

[00:09:29] David Weisburd: Much of the LP community, I like to remind people, are looking to preserve their wealth, are not always looking to double and triple and quadruple down, especially when you get into future generations. You also seem to imply that there's some survivorship data and emerging manager data out there.

[00:09:44] David Clark: Looking at some of the reports that have been published by the likes of Cambridge, and we also have a, uh, a good link with Tim Jenkinson from the, uh, the Oxford Business School.

[00:09:54] David Clark: Um, who's obviously produced a number of reports on the VC industry that look at, uh, the data [00:10:00] from Burgess. And I think when you look at both of those, you know, Cambridge say, yes, there's a higher proportion of emerging managers at those top 10 funds of any vintage yet, but they also make up a higher proportion of the worst performing funds as well.

[00:10:13] David Clark: And I think when we look at the Tim Jenkinson data, what we see there is. is, uh, certainly for Fung Walls, it's a relatively even distribution on a quartile basis. So around 25 percent of Fung Walls are top quartile, around 25 Q4. So I think, you know, the challenge is whether or not the emerging manager program To ultimately go over the course of an entire cycle generates the performance that we want to see from the industry.

[00:10:43] David Clark: I think one of the challenges is, is that a lot of investors have only been implementing that strategy for the last five to 10 years and have been doing it through a long term bull market. It's a bit like getting advice on how to run a barrister by somebody who's only ever run [00:11:00] a 5k. You know, you need to see the entire cycle of how your strategy performs through that entire cycle as the market goes up, as well as, as the market corrects.

[00:11:09] David Clark: And I think one of the benefits we have is obviously we've been doing this for 30 years and we've seen how those managers perform as the market corrects. In a downturn, everything's correlated, but it's how they come out of those downturns. And I actually can see that portfolios really accelerate and create values that I think, you know, really distinguishes them.

[00:11:28] David Clark: So I do think our strategy will slightly underperform where the market is very hot, but is it's going to be your small emerging managers that outperform? I think the big question for me is how do those managers then perform as the market corrects? And we'll probably find that out in the next 12

[00:11:44] David Weisburd: to 18 months.

[00:11:44] David Weisburd: And you certainly earned 30 years of performance, 3. 5 X. That's, that's phenomenal. I think it's the envy of everybody, including the Yale endowment. You focus now on a small core, you know, 40 or so core managers. Uh, let's talk about that and let's talk about persistence. What is the source of [00:12:00] persistence of returns and venture?

[00:12:02] David Weisburd: Uh, on a manager by manager

[00:12:03] David Clark: basis, we have a core portfolio of 12 managers, but those 12 managers will raise multiple funds. So it's about 50 funds across a three year cycle from those, from those 12 managers. Yeah. Tim Jenkinson has served some interesting work on persistence as well. And one of the things that, that he comes out with is that your persistence in venture capital is real, it exists, and it doesn't exist for things like private equity.

[00:12:27] David Clark: I think if you have a, a firm that is upper quartile, then the chances of your next firm being upper quartile are significantly higher. I think it's around a 45 percent chance, uh, but we could, we could share, uh, the actual research data with people if they're interested there. And so I think, you know, What that's telling you is persistence is real, certainly for the next fund.

[00:12:50] David Clark: There is some data that suggests persistence disappears over time, but what we've seen with, with our core managers is that they tend to be able to consistently [00:13:00] produce those top volatile funds, and they do that because they're able to reinvent themselves. They're able to bring through new blood into the partnership.

[00:13:09] David Clark: One of the key things that we've seen that pushes a top tier manager down is the fact that they don't handle succession well. There are plenty of instances of firms where the CEO partners who've been very successful in their own right are creating this space for the newer partners to come through.

[00:13:26] David Clark: And if you think about the average age of founders, Founders want to relate to, to VCs that are all of a similar generation. And so I think for us, it's really important to see that consistent flow at the GP level that new partners are coming through and old partners are creating space for that, but aren't disappearing out of the firm itself.

[00:13:44] David Clark: I think having experience of corrections, having that DNA within an organization is incredibly important because I think it means you hopefully don't make the mistakes that a lot of newer managers will make.

[00:13:58] David Weisburd: Turning point is when, uh, [00:14:00] GPs get their first large carry check. And then you have to, from first principles, decide whether you still want to work with their same partners.

[00:14:06] David Weisburd: And a lot of people are waiting for that large carry check to kind of move on to their life and work with people that they like to work with in terms of founders. There's a different dynamic because you only really have one liquidity, uh, absent of any large secondaries. I think one of the other things on persistence is you have to look at it from first principles basis.

[00:14:24] David Weisburd: Venture capital is not a passive activity. You're not investing in assets that you're not touching. You're not dealing with the founders. I think it ultimately comes down from the founder side to the top founders want to work with.

[00:14:36] David Clark: We'll continue our interview in a moment after a word from our sponsors.

[00:14:39] David Clark: The Limited Partner Podcast is proudly sponsored by AngelList. If you're a founder or investor, you'll know AngelList builds software that powers the startup economy. AngelList has recently rolled out a suite of new software products for venture capital and private equity that are truly game changing.

[00:14:53] David Clark: They digitize and automate all the manual processes that you struggle with in traditional fundraising and operating workflows, while [00:15:00] providing real time insights for funds at any stage, connecting seamlessly with any back office provider. If you're in private markets, you'll love Angelus new suite of software products.

[00:15:09] David Clark: And for private companies, Thousands of startups from 4 million to 4 billion evaluation have switched to AngelList for cap table management. It's a modern, intelligent equity management platform that offers equity issuance, employee stock management, 409A valuations and more. I've been a happy investor in AngelList for many years, and I'm so excited to have them as a presenting sponsor.

[00:15:28] David Clark: So if you're ready to level up your startup or fund with AngelList, visit www. angellist. com slash TLP. That's AngelList slash TLP to get started. Back to the show. I've been walking around Berkeley last year with a, with a GP for one of the funds that we back. Uh, and I was wanting to test the thesis with it.

[00:15:47] David Clark: And so I was saying, it seems to us there's like sort of three or four critical components of being a successful VC. You have to see the best deals. You have to recognize the best deals when you see them. You have to be able to win them. [00:16:00] You have to be able to then work them to make sure that you're creating an outcome that's as large as it possibly can.

[00:16:06] David Clark: And then you have to exit and you have to understand, you know, how to manage that exit process, because a lot of value can be destroyed if you hold on to companies for too long. And I was keen to get his, his view as to, you know, which of those was most important. And he said, any good VC will see high proportion of the best deals.

[00:16:25] David Clark: And they'll recognize which are the best deals and which are the best founders. The key for him is, is winning. And what makes the difference is if you can then introduce that particular founder to one of their successful portfolio companies and allow that successful entrepreneur be the reference. And, and that's the critical thing where he felt that that was what, what really flipped it.

[00:16:50] David Clark: And that's what gave them an unfair advantage. So it goes back to what we were saying earlier, that in our view, you know, the best way of figuring out which managers are likely to have [00:17:00] fund returns in the future or back those top 1 percent companies in the future is who are the ones that have done it historically because they have that cohort of founders they've backed who are now.

[00:17:09] David Clark: You know, household names that they can then go to, to provide the references when they're looking to get into these hot

[00:17:15] David Weisburd: deals. Let me unpack this from the other side. So if 45 percent or roughly 45 percent persist, 55 percent do not persist. I have a couple of theories on that being both a founder and then a VC and LP as well.

[00:17:27] David Weisburd: And one of those is people are corrupted by management fees. They stop focusing on alpha and start focusing on asset management. Two is, as I mentioned, the carry checks, they get a large carry check and they don't have a true north. That's when you learn, you know, I used to think, why do people care about founder passion?

[00:17:45] David Weisburd: Founder passion is what takes a hundred million dollar company and takes it to 10 billion. If every venture returner is looking for the fund returners, and you mentioned 90 percent of funds that return a three X have at least one fund returner. Another way of saying, if you want to have a three X fund, you need to have a [00:18:00] fund return or 90 percent of cases.

[00:18:01] David Weisburd: And I think same thing with VCs, you need to back VCs that actually are in it for the love of the game. There aren't just there to make money. We're all here to make money. There's no judgment there, but we need people that care about more than just making money. I think those are the ones that persist.

[00:18:15] David Weisburd: And the other things that I note is aging out of networks. You have a lot of founders, you know, uh, David Sacks famously had an incredible portfolio early on from just backing his friends. And now he continues to do really well with craft. But in the early stages, he was just backing his friends, which is really good way to de risk investments.

[00:18:34] David Weisburd: And I think Other people that are not like David Saxon do not scale up, uh, end up aging out of their networks and they're, especially if they're not consciously aware of. So that, that's my thesis. What do you think about

[00:18:44] David Clark: that? I think it's an interesting one. I think, you know, again, we, we've seen some academic research that suggests the first time you back that top 1 percent company is actually pretty random.

[00:18:53] David Clark: It's very difficult to predict who's going to be able to do that, you know, in advance. And so from an LP's perspective, you know, [00:19:00] it makes our job pretty challenging. But, but once you back that, the likelihood of, you know, being able to leverage that skill set becomes a lot higher. But I think the points you make are absolutely right, that you need to do it in a, within a fund structure that allows that next company to have a disproportionate impact on the overall return.

[00:19:18] David Clark: And so if you are suddenly going from a $50 million fund to a $250 million fund to a $500 million fund to a billion dollar fund, then it's a totally different gate. You know, what worked for you at $50 billion isn't gonna work for you at a billion dollars. Um, and so I think from a a GP perspective, I think you have to.

[00:19:36] David Clark: Find the part of the market in which you continue to be comfortable. You know, you look at the likes of the first round and Union Square that have kept their firm sizes relatively modest, despite huge success. And I think there's, you know, huge credit to the, to the GPs, that those organizations who are, who are willing to do that.

[00:19:54] David Clark: Having said that, I do think that venture capital is an industry. Kind of scale to [00:20:00] some extent when I started in this business, it was, you know, funding a few companies coming out of, out of Silicon Valley, maybe some healthcare companies at Boston. And the outcomes were a couple of hundred million dollars.

[00:20:11] David Clark: That was a, that was a good outcome back in the sort of mid nineties. You know, today, I think you're seeing companies that, that are capable of scaling to tens, if not hundreds. And I think one of the things that power law does tell us is that we tend to underestimate the impact of the best companies and how large they could get part of that is dependent on the market environment that they're reaching out into.

[00:20:37] David Clark: But again, I was having a conversation with a fellow LP yesterday, and his point was that, you know, these bull markets are not a boat, they're a future adventure. Just as corrections aren't a boat, they're a future adventure. So I think, you know, you do have to expect the outcomes, the very best outcomes will surpass.

[00:20:55] David Clark: Most people's expectations. And so, you know, optimizing [00:21:00] for those managers that are able to back that just becomes so important.

[00:21:03] David Weisburd: There's been several studies that show that if you miss the last three years of a bull market... And in many ways, you could, you could miss the entire returns of the bull market.

[00:21:11] David Weisburd: So even when things are getting overheated, there's a rational decision to stay in the market or at least not to liquidate. One thing that I think we should double click on is you mentioned fund returner. People get that confused with unicorn. Unicorn is not a metric and investing at 75 million and getting diluted 3x and getting a unicorn is not what you're looking for.

[00:21:32] David Weisburd: You're looking for fund returner, which is a combination of exit value times ownership. What are your views on ownership? It very

[00:21:38] David Clark: much depends on where you're investing and the size of your funds and how many companies you want to have in your portfolio. I think the earlier you go, the more sense it makes to have a more diversified portfolio.

[00:21:52] David Clark: Uh, as you start to get more towards the later stage of growth, then I think that the more concentrated portfolios work. I don't think there's a magic [00:22:00] number for, for what that ownership percentage has to look like. The way that we look at it is to kind of work back from, you know, fund size. exit size and ownership, uh, and what do we have to believe for those three things to come into alignment in order to generate fund returners.

[00:22:18] David Clark: essentially we'll go back and look at, what are the historic exits from that particular manager if we have to assume that they need a 10 billion exit in order to be a generate fund returner, if their most successful exit ever has only been 100. million dollars or a billion dollars, then it's a real leap of faith.

[00:22:35] David Clark: But if we've seen multiple exits from them at that range, then we get greater conviction that they could do that again. Similarly, when we look at ownership percentages, you know, we want to find how much of those businesses they're owning at exit and look to see, okay, if we apply a similar metric going forward, what does that then mean for the, the sort of the fund size that they need to be investing out of, and what does that mean for the exit size of the [00:23:00] individual company

[00:23:01] David Weisburd: One of the consistent things that every smart investor that I've ever talked to in the space talks about ownership targets, how it's so important to be able to have significant ownership targets. The math is a little bit confusing to that. Could you explain why ownership is so important? In other words, why is it so important to have 20 companies that have 5 percent versus 40 that have 2.

[00:23:22] David Weisburd: 5%? Why does it not add up in that way?

[00:23:24] David Clark: Yeah, again, it comes back down to the parallel nature of Venture capital and, and the fact that that parallel returns aren't equally distributed. If you have exposure to 10% of the market, it doesn't necessarily follow that you're gonna have exposure to 10% of the, of the fund returners or the, you know, the, the 1% companies that what you have to do is to make sure that when you get one of those companies in your portfolio, you own enough of it to make sure that it moves the needle at the fun level.

[00:23:51] David Clark: Now that number might be very different depending on whether you're a seed investor, whether you're an A round investor or B round investor, also the size of your fund. [00:24:00] As a general rule, we tend to invest in managers who are most active at the A and B level. We have a few seed funds there and some growth funds, but you know, typically when we're talking about early stage investments, we're talking about A's and B rounds.

[00:24:14] David Clark: And what we would typically tend to see is, is ownerships that are in the. The low to mid teens on that first check, and then they may get slightly diluted over time to perhaps high single digits. Having 8 to 10 percent of one of these companies as they do exit is incredibly powerful. Obviously, it depends on the individual company, because if you own 8 ByteDance, then you're in a really good position.

[00:24:40] David Clark: But owning 1 percent of ByteDance could be a return for most

[00:24:43] David Weisburd: funds. We talked off camera about adverse selection. You say if people are getting the full market, I think that's an enormous assumption. I think the vast majority of venture capital firms are highly adversely selected and the vast majority of LPs are [00:25:00] highly adversely selected, uh, to the degree that I think would shock people.

[00:25:04] David Weisburd: Let's talk about adverse selection. How do you as an LP avoid adverse selection? And how do other LPs that may not have the same access as you do, how can they avoid adverse selection? It's a

[00:25:14] David Clark: really challenging topic. One of the difficult things I think, you know, going back to what have we learned from, you know, what have I learned from doing 30 years of venture The diligence that we do as LPs is great for helping To identify who are likely to be the bottom kind of 25 percent of fund managers, because there's, lots of rookie mistakes that people make. There's, lots of pretty straightforward things that allow you to rule managers out relatively quickly.

[00:25:41] David Clark: What I don't think LP diligence is great at is predicting who's going to be in that top 25 percent because I think a lot of the things that LPs will traditionally look at tend to be necessary conditions of success. But not sufficient. And we've seen multiple [00:26:00] managers who've been able to tick the box on all of the things that LPs typically talk about wanting to see, but then when it came to, am I going to choose company A or should company B?

[00:26:09] David Clark: They chose company B and company B ended up being the second or third best company in that particular segment. And company A was the very best one. And the outcomes for the particular fund are just so dramatically different. And so I think with venture, there is such a high level of randomness in, you know, choosing that one individual company that actually the level of.

[00:26:31] David Clark: Diligence or the predictability from an LP perspective of doing diligence on managers is, is really tough. I'd be really interested to see if anybody has a data set out that, that shows that they can consistently predict which are going to be the successful managers at funds one and fund two, because we've tried to do that and we can't, I think

[00:26:53] David Weisburd: on the emerging managers, it is very random as a former emerging manager, as a VC.

[00:26:58] David Weisburd: Uh, you mentioned something really [00:27:00] interesting, which is all the data comes until you have the first fund returner. And let, let me try to shine a light on that. One of the reasons fund returners are predictive of other fund returners is because you start to see the level of quality to use a crude analogy.

[00:27:13] David Weisburd: Once you have a really great girlfriend, you're not going to go below that quality. You understand what is greatness. Once you have a really good, great friend, you're not going to come up with a, with a second tier. So yes, there's randomness. One thing that I remember from, from Naval Ravikhan, he said, I had a bunch of really talented friends and all of them became successful over 15 years.

[00:27:31] David Weisburd: You know, one company might have failed. One might have succeeded. It was hard to predict the individual company, but it was very easy to predict the individual. And I found that in my career, I started in 2008. I found that to be a very true as well, incredibly predictive way that, that, you know, all the data in the world would not be able to predict.

[00:27:47] David Weisburd: So that's my personal, that's my highly unscientific opinion. But I think there's something about seeing what is a top. Entrepreneur. We're an investor in Scott Painter for the autonomy. That's one of the top entrepreneurs. That guy has taken companies [00:28:00] public, but you see it. You know it. We're an investor in Joey Levy from better.

[00:28:03] David Weisburd: These are entrepreneurs are world class entrepreneurs, and I'd love for anybody else to say anything else. So whether this company will be 10 billion. Time will tell, but whether they're, they have that in them, I think is highly predictive.

[00:28:15] David Clark: There's pattern recognition that at the founder level, and I think there's also pattern recognition that develops, you know, at the GP level, you have to be a little bit careful with that pattern recognition that you're not ruling out.

[00:28:28] David Clark: People that are coming from different backgrounds, because I think that's one of the challenges that we do have as an industry, and it can be very easy to say, you know, all my great deals are white guys who went to Harvard. So I'm only ever going to do companies that are run by white guys who went to Harvard.

[00:28:43] David Clark: I think as an industry, we need to find ways of trying to, to look beyond that a little bit more, but it's, it's really difficult because, you know, as you say, patent recognition is, is, is a real thing. You know, sometimes being able to sort of see beyond that and take a chance on some other things is going to be a

[00:28:59] David Weisburd: challenge.[00:29:00]

[00:29:00] David Weisburd: Absolutely. 100%. You know, one program that I think has done incredibly well in this pattern recognition, that's race and sex blind has been the Teal Fellowship. The amount of success that's coming out there in terms of track records and everything, but the amount of diversity in that program and the amount of success uh, at an early age, I think the oldest Teal Fellow is 31 years old.

[00:29:20] David Weisburd: Uh, it just is mind blowing to me how well that, that program has, has both been diverse and also high, high performing. Let's switch to a topic I don't think I've ever heard, uh, talked on a podcast, follow on. You focus on series A, series B. There's also pre seed and seed. First question is, what is a good amount of follow on that a fund should reserve?

[00:29:39] David Weisburd: Let's call it at the preceded seed and maybe you could break it down by stage. There's no

[00:29:43] David Clark: one answer that sort of fits there. You can't be doing VC by the kind of road that says, you know, X, if you're a seeded manager, you need to reserve X percent for each company. I think it's part of the skills of recognizing, you know, when you have one of those top 1 percent companies.

[00:29:58] David Clark: And it's interesting, you know, when we look [00:30:00] at our core managers, how does that portfolio break down by number of companies, you know, less than one X, three to five X, five X plus, and how does it break down by the capital that they invest? What we have seen is that they invest less capital into their less than one X companies than the percentage would be for the number of companies that are in that category.

[00:30:22] David Clark: And they're able to funnel a higher percentage of that capital into the 10 X and funnel returning companies. So I think being able to recognize when you got one of those high potential companies and being able to lay a capital in is very important from the upside. But there's also a downside protection point to this as well, which is something that.

[00:30:43] David Clark: Again, I, I don't know how many managers have faced this issue over the, certainly not over the last 10 years. But when I look back to 2009, 2010, and also 2000, 2001, we would see [00:31:00] pay to play rounds We were seeing funds that didn't have any follow up capital left, who weren't able to do their pro rata in the next round, getting converted to common and essentially washed out to zero.

[00:31:12] David Clark: And so from a defensive perspective, having some capital to make sure that you're able to back your best companies during the most difficult times and help them survive. But also to make sure that you're preserving your ownership there. And, and, you know, we see with some of our best managers over the last 12 months, actually leading it quite aggressively to some of their portfolio companies, uh, because they recognize it's an opportunity to, to actually increase their ownership.

[00:31:41] David Clark: at a part of the market where people are hesitant to put capital to work. I think that's one of the reasons why we've tended to see our call managers outperform as the market starts to recover, because they've done all those things through that downturn and made sure their best company, they've got the capital to make sure their best companies survive.

[00:31:58] David Clark: And they've been able to lean [00:32:00] into those companies aggressively on a very selective base.

[00:32:03] David Weisburd: Being both defensive and offensive in nature. I think the arbitrage between the headline and the reality is a persistent financial return in every sector. In terms of follow on, I do want to give our listeners very specific and granular data on that.

[00:32:18] David Weisburd: When you have a Series A fund that comes to you, what is the range? What is the 80 percent range that you'd like to see reserved for follow on? Let's give a specific number. We don't want

[00:32:27] David Clark: to be too prescriptive here. You know, we're not going to say to a manager, this is what you should be doing. This is what we don't want to see you do.

[00:32:34] David Clark: You know, I think our view of how you do venture best is to pick the manager and trust them Trust them to play the game on the field Don't try and second guess. There's a reason that, I'm an LP and I'm not a GP. It's because I can't do that job. You know, what I could do is I can vocally select managers at a level that's, you know, slightly better than the market, but what I wouldn't profess to be able to do is to then tell those [00:33:00] managers how they should be managing their fund.

[00:33:01] David Clark: And so for that reason, we're pretty agnostic when it comes to sectors, when it comes to geographies, you know, we're not going to do sector specific funds, because I think by the time it becomes obvious to a, to an LP, which sectors are hot, the best companies are probably, you know, already being as well established, well funded.

[00:33:20] David Clark: Well on the road to success and, and you're there playing catch up. So I think for us, it's really a case of trusting our managers to play that game on the fields. And obviously we hold them to account. We want to understand why they're doing things they did. You know, a number of our managers would have invested quite aggressively through 2020, 21, and, and, you know, we'd like to see three year fund cycles.

[00:33:41] David Clark: So we'd have that conversation. One of the lessons we learned in, in 99, 2000 is that time diversity is really important. Orms. So for our own firms, we want to make sure that we put those to work over a three year period. And we like to see our managers do that. And we'll press them as to why, you know, if they're running at a faster pace, why that, why that's [00:34:00] the case, but we're not going to say, Oh, you're a manager who has a two year investment cycle.

[00:34:04] David Clark: We like a three year while therefore we're not going to invest in you. Ultimately, it comes down to, can you be successful with the strategy that you choose to

[00:34:11] David Weisburd: implement? You have guiding principles, but you're not dogmatic. Is your fund cycle then three year per vintage on a typical basis? We had a

[00:34:18] David Clark: fund that we raised at 99 that was invested at 18 months, and it was the worst performing fund that, that we've ever, we've ever raised.

[00:34:27] David Clark: And so I think, you know, one of the key learnings for us there is, is that we actually want to have three, uh, Um, investment periods for our funds, which is, which is challenging at times because, you know, you look at the funds often that was investing through 19, 20, 21, maintaining a three year investment period there was a real stretch because our core managers were coming back just like every other manager, they were coming back to the market at 24 months, 18 months, raising larger funds as well.

[00:34:54] David Clark: And so we actually, during that time, we cut the number of active relationships that we had. [00:35:00] Because we wanted to manage through that three year investment cycle. And so in a way, it's interesting when I hear people talk about, you know, wanting to reduce the number of managers that they back today.

[00:35:11] David Clark: Actually, the time we should have been doing that was two or three years ago when the market was at its height. So you were controlling the amount of capital that was going into the top of the market. Our sense today is that actually there's an opportunity to play offense. You know, we've gone from playing defense for the last three or four years to really now starting to lead in looking to try and increase our allocations with our managers where we can, and even perhaps looking to see if we can add one or two new managers to our portfolio.

[00:35:37] David Clark: Because it feels like these are the sort of vintage years where you do see the very best performance. We saw it back in 2009, 10, 11, after the financial crisis, you know, we were able to add a couple of new relationships there and those relationships have done exceptionally well. So I, I think, you know, trying to be, you know, slightly counter cyclical.

[00:35:57] David Clark: We talked about VC being a cyclical asset [00:36:00] class, but trying to kind of support move against the herd is, is something we, we have tried to do. And, uh, definitely something that, you know, in this sort of environment where it is a lot tougher for managers to raise capital, you know, we think it's an opportunity for the best managers to really start to differentiate themselves.

[00:36:17] David Clark: For us, it was almost impossible to figure out who's just being captured beta. Over the last five years have you actually been generating real output? We think the next four or five years, you know, we'll get a much better sense as to who's been doing what.

[00:36:30] David Weisburd: We'll be able to really gauge skill and talent in more tougher environments.

[00:36:35] David Weisburd: Everybody knows about the VC reset. A term that I've tried to coin is the LP reset, and the reason for that is there's an opportunity right now for. Maybe LPs that unlike you have been investing for 30 years and top managers didn't have access to these managers. And now's the time to act. Now's not the time to be on the sideline.

[00:36:53] David Weisburd: Now's the time to be bold. The famous Warren Buffett quote, be fearful when others are greedy and greedy when others are [00:37:00] fearful. You mentioned new managers and playing offense. In terms of the next 10 years, there's different theses out there. There's a thesis that there's going to be a disintermediation of capital.

[00:37:11] David Weisburd: Or that there's going to be, uh, in the last couple of years, there's been thousands and thousands of emerging managers. Do you see where on the pendulum of, you know, 15 funds being out there and 3000 funds, where do you see will pan out in the next 10 years? And as a side on that, what do you think about a spinoffs from traditional top quartile

[00:37:30] David Clark: managers?

[00:37:31] David Clark: Just in terms of the number of, of active VCs, it's felt to us that, that, you know, even though the industry is growing, um, and the outcomes are growing and the fact that technology is now applying to every individual sector and, and industry. So the, the market opportunity for VC backed companies has just exploded.

[00:37:48] David Clark: It still feels that the amount of capital and the amount of managers out there is unsustainably high. And so, you know, my sense is, is that we will see a contraction in those managers over the next, [00:38:00] in terms of raising new funds, I guess it will be the next kind of 12, 24, 36 months. But it takes a long time for a venture fund to wind up.

[00:38:07] David Clark: You know, I think certainly for seed or early stage funds, you're looking at 20 years for a lot of those funds to, to, to, to be, to be fully done. So I think it'll take time for those managers to finally disappear. But in terms of active managers in there, I think we'll see quite a significant contraction.

[00:38:22] David Clark: I think part of it will be a lifestyle challenge. You know, it's, it's great when you're a manager and, and, and things are going well, and you could, you talk about David Sachs, you're giving checks to your friends and, and you're the, everyone's favorite person when you're telling your friend that you're not going to give them another check and they've got to cut 50 percent of their company, it's a very different relationship.

[00:38:40] David Clark: And so I think, you know, we'll see some. VCs that came into the industry, figure out that it's actually not what they want to do long term because VC is really hard and it takes a lot of work. And there's a lot of periods where, you know, it looks like things are going to hell and back. And so I think that that will partly be a driver.

[00:38:58] David Clark: I also think LPs came [00:39:00] into the VC industry with unrealistic expectations of performance and an unrealistic understanding of, of, of what's reasonable to expect. Both in terms of ultimate returns, but how those returns are distributed and how long it takes to get there. You know, we will probably see some LPs pull back because venture isn't delivering what they expected.

[00:39:21] David Clark: I also think some LPs will be faced with some liquidity issues. You know, nothing's gone public for the last 18 months. There's no real liquidity coming through. A lot of investors need to have that liquidity to come through in order to fund future commitments. So I think that's partly going to be a driver of it as well.

[00:39:36] David Clark: And then the second bit around spinouts, it's an interesting area. We've had mixed results when we've looked at spinouts. So we've got one that was particularly successful. We've got a couple that were not successful at all. I think you'd have to kind of, again, understand why are those managers leaving that firm?

[00:39:57] David Clark: Are they leaving a firm that's vibrant [00:40:00] and continues to be one of the top firms? If that's the case, then, then are you actually getting the full story for why they're leaving? Are they jumping or have they been pushed? If you've got younger partners who are leaving a firm because the older partners aren't getting out of the way, creating space for them, then I think that's something that looks a little bit more interesting.

[00:40:20] David Clark: We mentioned previously something like Kleiner Perkins. You know, you look at Mahmood leaving social. Uh, and going to Kleiner Perkins and taking Ilya Fushman with him from Index. Something like that looks really interesting. Lemoon was moving from social because he felt there was a real opportunity to do something Kleiner Perkins.

[00:40:37] David Clark: So, I think you have to know the individuals, you have to know the dynamics of the old firm, and you have to know the dynamics of the new firm.

[00:40:44] David Weisburd: Share some secret sauce. How are ways that you read between the lines and diligence that? Whether the spinout is a top person or not. Have they backed

[00:40:51] David Clark: a fund return before?

[00:40:53] David Clark: It all comes back to this. We can take references from founders they've worked with. Unless the person [00:41:00] is, is terrible, you're not going to get a bad founder reference. But ultimately, one of the challenges we have is trying to handicap the quality of that founder. You know, is that a top 1 percent founder who's, who's giving us that reference?

[00:41:12] David Clark: Or, you know, where did they lie on the, on the distribution of founders? Founder references tend to, again, allow you to weed out those people you don't want to back. Certainly in our experience, it's been very difficult to use them as a predictor for who's ultimately going to be, you know, that long term successful manager, where we've tried that.

[00:41:31] David Clark: It just hasn't worked for us. Again, it may be that we're based in the UK. We're not plugged in socially to the Silicon Valley VC network. You know, it may be that our signal isn't as strong as some people who, you know, who, who live and breathe that I absolutely accept that, but actually the signal that is the strongest is when you look at someone like Mahmood, you know, who did he back at social, he has that patent recognition because he's backed a couple of those top 1 percent [00:42:00] companies.

[00:42:00] David Clark: He has the founder network. And then you're backing on someone like him to be able to go and replicate that at a new firm with a new set of partners for us, the odds are reasonably high that once you've been in that situation once, then you can do it

[00:42:15] David Weisburd: again. You don't want the media and a reference either.

[00:42:18] David Weisburd: If you look at the two most difficult managers and managers that many people hate to work before it was Steve jobs and Elon Musk. It also happens to be the two most people that people praise as being great managers. And the takeaway there is that the top people want to be pushed. They want somebody that makes them uncomfortable.

[00:42:35] David Weisburd: They want somebody that makes them work a hundred hours a week. In society, it's not very politically correct to talk about and people criticize hustle culture, but in venture capital, we're not trying to back the average millennium or Gen Z entrepreneur. We're trying to back the fund returners, the next Elon Musk, the next Steve Jobs.

[00:42:52] David Weisburd: I can't let you get away from the podcast without talking on market on GP terms. We had several GPs talk about [00:43:00] what they're seeing from management fees and what they're seeing from tiered carry structures. Are you seeing 50 to 75 percent of your fund managers still charging tiered carry structures?

[00:43:10] David Weisburd: And what are your philosophical thoughts on that? We're investing

[00:43:13] David Clark: in established managers that are the kind of household names, and they will all have premium terms, you know, some of them would be a flat 30 percent carry from the outset, some would start at two and a half x wrapping it, there's a variety for us, in a way, what it comes back to is what do we think the net net return back to us is going to be.

[00:43:32] David Clark: And so if you could justify a 30 percent carry because your returns historically allow you to charge that, you know, we have no issue paying that. One of the worst things you could do as an LP is to turn somebody down because of the terms of their fund. Because ultimately the whole parallel industry means that if they are successful, the success is going to be worth the fees of carry that they charge.

[00:43:54] David Clark: So clearly we'd rather they took less fee, charge less carry, but. You know, we recognize that that [00:44:00] actually the demand for those managers is so high in a lot of instances that they're potentially undercharging what the market clearing price might be.

[00:44:10] David Weisburd: And that's why they're oversubscribed. 10 times oversubscribed, you could say that they're underpricing their product.

[00:44:15] David Weisburd: One thing that makes LP's reluctance to pay premium carry even more foolish is when it's on a hurdle. You return a three X, four X, five X over that you get a premium carry. I think that that's kind of a foolishness, not, not to be willing to pay that to the top managers, managers that have earned that right, uh, over their careers.

[00:44:32] David Weisburd: From

[00:44:32] David Clark: a philosophical perspective, we have no issues paid for exceptional performance. I think we just want to see as much alignment as possible in those terms. But, but clearly, you know, with some of the very best managers, your ability to negotiate is zero. So you're, you're, you're price takers. And then it adds to, do you, you know, do you think the performance that you're expecting from these managers is ultimately worth it?

[00:44:54] David Weisburd: And it comes down to self awareness at that point and understanding the dynamics of the situation. [00:45:00] David, you've been an incredible guest. You've allowed us to really dig into, to your incredible tweet storm. It's not a coincidence that so many people, uh, shared it and not only so many people, but the most important people and the smartest people in the industry.

[00:45:12] David Weisburd: Uh, so you've been really generous with your time. What would you like our listeners to know about you and your firm?

[00:45:16] David Clark: Vencap, we've been doing this for 30 years. It's, it's all we do. We're not the, the most well known funder funds out there. We're not the largest funder funds out there. Um, because, you know, we're very focused on, on trying to build a portfolio that, that really optimizes for performance.

[00:45:32] David Clark: And we've done it in a way that, you know, we think works for us. And so, you know, if. People are interested in what we're doing. Happy to talk to them. If there were managers out there that, you know, fit our profile, happy to talk to them as well, you know, feel free just to

[00:45:44] David Weisburd: reach out. Thank you, David. And your reputation precedes you.

[00:45:47] David Weisburd: A lot of the, really the top Decel GPs have told me about you and, and the way that you've done business. And of course the tweet storm kind of was your coming out party in terms of the performance. But certainly that's 30 years of incredible [00:46:00] performance. Thank you for being a supporter of the industry and thank you for coming on the podcast.

[00:46:03] David Weisburd: I

[00:46:03] David Clark: appreciate those kind words, David. Thanks very much. I've really enjoyed it.

[00:46:07] David Weisburd: Thanks for listening to the Limited Partner Podcast. If you like this conversation, please like, subscribe, and review on YouTube, Spotify, or Apple. Thank you for your support.