Episode description

We continue our VC Fundamentals series with Portfolio Construction & Management — how do you build and manage a fund's portfolio as a whole, beyond each individual portfolio company and investment decision? We brought in two of the very best people in the world to help us dissect this topic: Jaclyn Hester & Lindel Eakman of Foundry Group. Jaclyn and Lindel have been early and longtime LPs in some of the best venture funds in the world: USV, True, Spark — and of course Foundry — and now also sit on the GP side of the table at Foundry. Tune in for a master class on how the best VC managers think about generating and optimizing fund performance. 

Sponsors:

• Vanta

Topics Covered:

1. The bar for what "good" venture fund performance looks like in terms of returns:

• Where venture sits on the spectrum of capital allocation options available to limited partners
• The difference between "gross" and "net" fund returns and why IRR is still important
• The distribution of returns across venture firms & funds — how many hit the performance bar — and the importance of diversification vintage years

2. Portfolio construction: how do you allocate the fund's capital across companies?

• Why have a "portfolio" at all vs. loading up on a few high conviction investments — and what an LP's incentives are for diversification vs. a GP's
• How to determine overall $ size you should target for a fund
• Concentration vs diversification and the concepts of "shots on goal" and "groups" of high-potential companies within a portfolio
• Fund reserves planning — are you "making your money at the buy", or able to buy up over time in your winners?

3. Balancing playing offense and defense:

• The upside potential of "interstitial rounds"
• Whether it's possible to save a company with more capital, and if pivots are a good idea

4. Time allocation vs capital allocation within a fund:

• Understanding and managing your own cognitive biases
• Why time & effort allocation across a portfolio rarely matches capital allocation (and shouldn't)
• Why a firm's partnership dynamics are typically the most important driver of funds' outcomes

 Links:

• Foundry Group: https://www.foundrygroup.com
• Seth Levine's post on skewed VC returns:  https://www.sethlevine.com/archives/2020/10/vc-fund-returns-are-more-skewed-than-you-think.html
• Fred Wilson's posts on losing money and portfolio outcome distributions: https://avc.com/2016/04/losing-money/and https://avc.com/2012/07/the-power-of-diversification/