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Good morning 👋
There are essentially two types of venture firms today:
Asset managers: The funds managing the most AUM who are forced to allocate and write larger checks to fit their model
Craftsmen: Smaller AUM funds who can take higher risk, push out the J curve, and bet more on the backside (carry) vs.the front (fees)
Like it or not, these are the two options.
It’s not our place to judge whether which one is right or wrong, but it is ironic that an asset class that prides itself on being the catalyst for change has not changed itself over the past 50+ years.
Matthew Ball (@mp_lew) has some thoughts …
P.S. ➡️ We’ve started working with a few early-stage companies to grow their business, become more investable, and increase their odds of success.
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Meta risks and the two-party venture system
The greediest investors will raise large funds to maximize AUM and enjoy their risk-free 2% annual fees. For what it’s worth, this is a phenomenal business model if the goal is wealth accumulation.
The proudest investors believe they’re more clever than the rest. They intentionally keep their funds small with the (mathematically correct) belief that a smaller fund can be returned more easily. Thus, the 20% makes up for a relatively meager fund size.
The “greedies” assume more risk upfront by maximizing their fundraises. Then, because the venture model breaks at scale, they are forced to accelerate capital deployment and opt for a less-idiosyncratic, beta-first strategy.
The “prouds” assume less risk upfront by capping their fundraises, but push out the risk horizon as beta strategies don’t work at small scales, so they must employ tactics to discover alpha.
As a result, there’s an increasing meta tension within venture and it seems that the only way to differentiate is to publicly swear allegiance to one of these camps and then make incremental improvements to the model. It’s a two-party system and you have to pick one if you want to play the game, whether you agree with all of the principles or not.
In venture, I want more options too. The only way to make that happen is to take risks within the asset class itself – to try new things that break free from the two-party system led by the prouds and greedies. It’s time for us as venture investors to take on meta-risk beyond just the portfolio level and roll it into the firm level by trying new things.
One strategy we’ve seen implemented is the idea around technology as an asset class on its own.
Crossover investors have cut across different asset classes to capitalize on broad technological trends. We’ve seen a barbel approach become more consensus where early-stage investments are used to generate alpha for publics across shorter time horizons.
LPs get a smoothing of liquidity and investors (theoretically) can recycle shorter-term capital gains back into various strategies. This makes intuitive sense and we’ve seen this approach really take off at crypto firms which have dedicated privates and liquid token strategies.
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With Voyager’s 82% IPO pop, defense tech VCs see a bright future for liquidity (Pitchbook)
AI-Powered Work Assistant Glean Lands $150M at $7.2B Valuation – 9 Months After Last Raise (Crunchbase)
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Vijay Pande, founding partner of a16z bio and health strategy, steps down (TechCrunch)
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- Clay
(Founder @ Confluence.VC | GP @ Outlaw)
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