430. LPs Seeking Alpha - Decoding the Myths and Mastery of Fund Structure, Size, Reserves, Access, and Selection (Alex Edelson)

This episode delves into the nuanced strategies and key observations regarding venture capital, particularly focusing on fund structures and the role of LPs in emerging markets.

1. Scaling Venture Capital: Scaling in venture capital is intricate, with a necessity to balance fund size with managerial efficacy to ensure optimal returns.
2. Role of Emerging Managers: Emerging managers play a crucial role in generating top-tier returns, although they also represent a higher risk due to their limited track records.
3. Qualitative Over Quantitative: Successful fund investment often hinges more on qualitative than quantitative analysis, especially when historical data is scarce.
4. Strategic Fund Structuring: Effective fund structuring requires a nuanced understanding of ownership stakes, investment timing, and fund size relative to managerial capacity.
5. Learning from Founder Feedback: Regular, detailed feedback from founders is vital for venture funds to refine their strategies and operations.

1: Introduction and Background

Alex Edelson discusses his transition from law to venture capital and his reasons for founding Slipstream Investors. Nick Moran: "Alex, welcome to the show. Thanks, Nick."

2: Insights on Fund of Funds

Exploration of the fund of funds model, emphasizing its benefits in accessing top-tier venture funds and managing investment risks. Alex Edelson: "It's often these small funds that are generating the best returns in venture."

3: Emerging Managers' Challenges and Opportunities

Discussion on the paradoxes emerging managers face, including fund-raising difficulties despite potential for high returns. Alex Edelson: "You just can't get enough ownership in enough winners, and the wins aren't big enough."

4: Evaluating Funds and Managers

Deep dive into the criteria for evaluating funds and the importance of a robust network and strong founder relationships. Alex Edelson: "You really need to understand venture."

5: Concluding Thoughts

Reflections on the future of venture capital and how current changes will shape the next generation of VC firms. Alex Edelson: "I think about this all the time, like, what is the future of VC?"

1. Diversify Investment Strategies: Consider both emerging and established managers to balance potential risks and rewards.
2. Focus on Qualitative Analysis: Develop frameworks for evaluating managerial competence, especially in scenarios with limited quantitative data.
3. Enhance Founder Relations: Regularly engage with founders for feedback to refine investment strategies and operations.
4. Monitor Fund Size and Structure: Ensure that fund structures align with the managerial capacity and strategic goals.
5. Stay Informed on VC Trends: Continuously educate oneself on evolving trends and strategies within the venture capital ecosystem.

Alex Edelson of Slipstream Investors joins Nick to discuss LPs Seeking Alpha - Decoding the Myths and Mastery of Fund Structure, Size, Reserves, Access, and Selection. In this episode we cover:

Evaluating Emerging VC Firms and Co-Investing Opportunities Overcoming Challenges in Investing in Emerging Managers with Limited Track Records Evaluating Venture Capitalists' Competitive Advantages and Sustainability Venture Capital Incentives and Non-Consensus Investments Fundraising Challenges for VCs, With Advice on Structuring Fundraising Efforts Using Reserves in Venture Capital Investments How a GP Can Pitch Themselves to Limited Partners LPs to Build a Successful Partnership

People

Nick Moran, Alex Edelson

Companies

Slipstream Investors, QED Investors

Books

None

Guest Name(s):

Alex Edelson

Content Warnings:

None

Alex Edelson
Welcome to the podcast about venture capital, where investors and founders alike can learn how VC's make decisions and reach conviction. Your host is Nick Moran, and this. Is the full ratchet.

Nick Moran
Alex Edelson joins us today from Bethesda, Maryland. He is the founder and general partner at Slipstream Investors, a firm investing in early stage venture capital funds that are difficult to find, evaluate and access. Prior to slipstream, he was COO and general counsel at QED investors. Alex, welcome to the show. Thanks, Nick.

Alex Edelson
Thanks for having me. Always a pleasure, sir. So tell us a bit about your backstory and your path to becoming an investor. Yeah, it doesn't honestly make a lot of sense. I practiced law for seven.

Yeah, I practiced law for seven years. I tried to get out of law for most of those years. I finally got out. I joined a friend's two year old fintech startup. That company didn't work out.

I then fortunately found my way to QED. I started there during fund five as Nigel Morris's chief of staff. I became the COO and the general counsel. I was still as chief of staff and decided to leave towards the end of fund six at the end of 2020 and started slipstream in 21, based on the experience and observations I had at QED. Tell us more.

Nick Moran
What was the insight? Why did it compel you to start your own fund of funds? You know, there were just some eye opening learnings there. And the first was, as we grew, it just became clear how hard it is to scale venture, and not like QED isn't well positioned to do it, but it's hard. You just can't get enough ownership in enough winners, and the wins aren't big enough to continue outperforming on these bigger funds.

Alex Edelson
And so it was like, oh, these big brands, they can generate great returns. They can be consistent, top quartile performers, and sometimes even better. But often the majority of the highest performing funds in any vintage are these emerging managers. They're small, early stage funds with limited track records. Of course, it's only fair to also acknowledge they are some of the worst funds.

Like, I don't mean to suggest, like, you know, just go invest in emerging managers and you're going to do great. Like, it's hard, and it's not like. Startups, Alex, you can't do them all. Yeah, exactly. And so.

Or you shouldn't. You definitely shouldn't do them all. So that was the first, like, sort of surprising observation was that it's not the big brands. It's often these small funds that are generating the best returns venture. And the next thing that was happening was that I was realizing, like, a lot of people struggle to evaluate these funds because they've limited track records, and so you're evaluating them based on qualitative criteria.

You really need to understand venture. And, I mean, I was learning venture QED's way. It's not the only way. I was learning from the investment team that had ten years of really successful investment experience before I started and learned from them a variety of ways, just like being on the job, but also like a lot of internal reflection on what works and what doesn't and what we've done well historically and what we didn't and could have done better. And just like talking about topics internally that we thought impacted fund level returns.

And we're getting founder feedback from our founders, like every two years or so. And we had that going back ten years, and I was responsible for collecting that with an executive coach when I was there. And it was really rich feedback. So if you were just to step back, I think just being at QED was helpful and, like, gave me a pretty unique perspective on what it takes to succeed in venture. But, like, those internal conversations at QED was like kind of going to venture school for me.

It was like sitting in a venture class, and then we're talking about like, well, how do you generate returns in venture? And then you're seeing this founder feedback and you're like, these are great founders. They're not all actually great. They haven't or they haven't all been successful, but there are a lot of them, like, over a long period of time. And they're kind of telling us, like, what do we expect from a great venture firm?

Why did we pick these firms? Why did we work with you? How is it going? How can you improve? And so you're getting the perspective from those different groups, like a successful investment team and a big group of founders kind of telling you, like, what is it?

What does great look like in early stage venture? And then you realize it's all qualitative characteristics. Like, none of this is track record. And if you have a way to test for the qualitative characteristics, then you can probably figure out, like, who's likely to succeed and what does that require? That requires real relationships with the founders who know these emerging managers and real relationships with other VC's, especially at the next stage, who can help you test for the qualitative criteria that you're looking for in emerging managers.

And so simultaneously, we are working with emerging managers at QED. We're sourcing deals from them, we're bringing them into deals, we're doing events, we're doing a bunch of things with them. And what we're seeing is, like, I speak for myself, folks I thought were great. Like, my belief about their quality did not always correspond to their ability to fundraise. So I might think someone's great, but that doesn't mean they are able to raise their fund.

And so someone who was great would hit their target fundraiser. Let's say they hit their target fund size. Nine months in, that's really successful fundraise. Let's say, then someone else, this is true. Reached, like less than a quarter of their target fund size.

Took them many years, tons of nos. That's a great fund. And that was just confusing to me. Like, how is it so clear to us that these folks are, like, two of the best funds in a given category, but, like, their ability to fundraise is very different. And so it just felt like there was a big opportunity there, and maybe we had some, maybe we knew what we were doing.

And certainly QD has been successful for a very long time. And if you just apply that, like, kind of the learnings there, I speak for myself, like, my own learnings there. And you talk to the founders and the LRBCs, you know, you can figure out who has a pretty good chance of outperforming. And then, you know, if you reflect on that years later, we were right. Like, we did know the right funds, and we were working with them for years, and we had the qualitative data because we knew the founders they worked with, and we did deals with them, and we knew other VC's who did deals with them.

And I was realizing, like, oh, like, obviously a lot of LP's struggle to evaluate these funds. I've got this unique framework and this unique experience. I was building relationships with those emerging managers, too. And what was happening in some cases was that some of them wanted to talk about building their venture firms. They wanted to talk about portfolio construction, or team composition, or investor relations, or fundraising, or their investment process, or information that they might want to track now that after making an investment that could be actionable down the road or could impact their reserve strategy or impact whether they want to raise an opportunity fund in the future.

Just like sort of tactical back office stuff. Not all that is back office, but largely back office stuff. And the learning for me was like, I thought if you raised a fund as an emerging manager, you know how to run a venture firm, but the learning was like, no I think they started a firm because they think they can source, pick, win. Some of them think they can add value after they invest, but they didn't necessarily start a venture firm because they want to run a venture firm, and that some of them valued having help and a thought partner on that. And I was involved at QED in a time when we were kind of transitioning from an emerging manager to an established venture firm with like real institutional, outside Capital.

And I think people just thought I could be helpful. And I was kind of confused. I was like, I'm just a lawyer, but over time, like, I was building a little flywheel in the community here of emerging managers. And I was realizing like, oh, they seem to want me involved and they seem to think I can help and maybe I can build my own flywheel here. Like QED builds a flywheel with founders in the fintech community.

And so those were the main observations. There were also co investments. Like we had co investment opportunities and we're learning that many more lP's said they wanted to co invest than actually co invest. And that felt like an opportunity from the inside where you're like, no, these are great companies. So it seemed like maybe I had a unique perspective.

Maybe there aren't that many folks focusing on emerging managers who've had my kind experience, like mine at a top decile venture firm. And yeah, like maybe that uniquely positions me. So simply, what is slipstream? Yeah, slipstream is three things. So we're a venture funded funds.

We invest in pre seed and seed funds, typically 100 million and smaller. But we invest in funds larger as well. Most of them are emerging managers first, three or four funds. Happy to dig deeper on that. We're relatively concentrated portfolio.

The next thing we do is we work with single family offices, multifamily offices, and increasingly institutions who are looking for help building out their venture strategy. To some extent, sometimes it's very complimentary, like, they have a team, they're doing it, but we help them with top of funnel. We compare notes and diligence. Sometimes it's a little more involved, like they don't really have a team or they're just early in building out a venture strategy and we help them find funds, evaluate funds, deploy more capital into funds. And then the last thing we do is we can use a portion of the capital and the fund to co invest.

And we also bring co investment opportunities to RLP's. So if they're interested, they can invest additional capital into the companies that are breaking out of the funds that we invest in. Do you have a standard ticket or a desired percentage of fund size? No, I'm very flexible. And some funds were very small LP, and some funds were pretty significant LP, and I don't have strong feelings on that.

Nick Moran
So, Alex, why should LP's invest in funded funds instead of directly in funds? That's a great question. So I think about this like, well, how do you get returns in venture? One of these, one of the ways is you invest in brand name firms. They can be very high performers.

Alex Edelson
They might have high minimums in terms of commitment size. Those can be very difficult to access oversubscribed funds, or you can try to find smaller funds. These make up a significant portion of the highest performing funds in the asset class, but there's a high degree of dispersion in venture, and so you really want to be in the right ones. And if you want to be in the right ones, you probably need to see a lot of funds, and you need to have a framework for evaluating funds with limited track records and a network that helps you test for that framework. And then it's also difficult because you might not be able to get allocations in these funds.

Sometimes these funds have trouble fundraising, and you could put plenty of capital to work, and sometimes they don't, and they're oversubscribed. Allocations can be difficult to get, and it is very hard for. It's hard to get exposure to the highest performing emerging manager funds, for those reasons. And especially if you're not focusing on this full time, this is hard to see enough funds and to know when you have a great one in front of you. And so, a fund of funds is a way to get exposure to hopefully top quartile, hopefully top decile funds.

And there are some fund to funds that focus on, like the larger brand name firms, and can get you exposure to those that you otherwise may struggle to get. That's not our strategy, but I've seen some fund of funds do that, and that makes sense. And some fund of funds focus on the emerging managers. It's usually all they do, or they have folks who are dedicated to those, to that part of the asset class full time. So they're seeing a lot of funds.

They have a framework for how to evaluate those funds. They're in the right networks to help test for that framework. Hopefully, they're good at picking the right funds, and they may have a better chance of getting allocations in oversubscribed funds than other types of LP's who are just like, less committed to less a part of the venture ecosystem and have less of a track record and less of a reputation as being an LP who gps want to work with. So then I think about this, yeah, I guess more specifically like, so who are the types of folks a venture fund to funds appealing to? So for me, it's a few different folks.

One is single family offices and multifamily offices and institutions who have some exposure to BC. They may have folks working on their venture strategy, but they want to compliment it with fund of funds and sometimes multiple fund to funds. Like, we have LP's who are LP's of ours, but they're also LP's of other funds. We partner with them to help them build out their venture strategies. We help them find more funds, diligence those funds, get access to those funds.

Some of them want to co invest in the breakout portfolio companies of those funds and we bring them deal flow. Some of them do it for like learning and insights. That's usually not the primary reason they're doing it. But you see a lot of funds, you see a lot of companies, you're learning about the asset class. That's a reason why some folks do it.

Some larger entities, you know, know that small emerging managers are some of the best performing funds, but they're too large to invest in them. And so they might do that through investing in a fund of funds focused on emerging managers and another group of RLP's. It could be high net worth family offices who made money in other industries. They would like exposure to venture, but they don't really have a way to get it. They're not really trying to get it.

It would be very hard for them to do that on their own. And it's not a good use of their time. For example, they don't know venture well enough to figure out who's good. They don't have the time to see a lot of funds. And so these could be lawyers, doctors, people in real estate, folks who made money in other industries.

And they're not getting into the big brand firms for obvious reasons. And they just like don't necessarily know how to pick from the handful of emerging managers they're meeting. So they'd rather get that exposure through a fund of funds. Yeah, it's funny to me. I've met with a bunch of LP's over the years, and a lot that may be newer to the asset class or not.

Nick Moran
Experts in the asset class, they want to see some track, they want to see some track records, some results, give them some confidence. This person knows what they're doing. They know how to select. But if there's a track record and. The funds at like fund four or five and you're getting access to somebody who's not deep in the industry, you kind of have to ask yourself, why are you getting access to this fund?

Right? Because the best ones, there is no access. Like fund five, those are oversubscribed. And then the ones you can get access to are like, funds one to. Three, and those are unproven.

The track records are super early, probably no DPI or limited DPI. And those are the toughest ones to evaluate for somebody without the expertise because there's very little proof. Right, right. Yeah, exactly. Exactly.

Alex Edelson
It's tricky. How do you overcome, you know, we have premium fees at Newstack and I have LP's that push back on that. Right. And I've got ways I overcome it. But, like, you've got an extra load.

Nick Moran
Fees on fees, fund of funds. Like, how do you overcome that? Objection. Yeah, it's a good question. So a few thoughts on that.

Alex Edelson
Like, the first is we need to be able to generate good returns net of our fees and carry, that's like, I think the most important thing. And you have to be honest with people about, like, what are reasonable returns to expect from a vehicle like this? Like, what's success look like? And if that's good for you, if that's like a good outcome for you, great. If it's not, like this may not be the right fit.

The second is like, for folks who aren't devoting a significant portion of their time to this and or who otherwise just don't know, venture that well, they're not seeing a lot of funds, they're not able to get conviction on them. For those folks, you're probably better off paying an extra layer of fees and carry for hopefully a pretty high likelihood of getting top quartile and top decile funds, you should wonder what's better at that point. Is it better that you make your own choices where the odds are not in your favor? In light of the dispersion of performance in the asset class, would it be better to just sit out the asset class or to get exposure in a slightly higher cost way, but to have increased odds of getting exposure to top quartile and top decile phones? Do they get that?

Nick Moran
Like the ones that, you know, get heartburn around the fees, you know, how do you overcome it? Like, how do you respond? Yeah, and one last thing I should say, and then maybe I'll be put a finer point on it, but like, some folks are considering, some folks we're talking to are at a point where they are considering hiring a team for this, to do this internally or working with fund to funds in like, more of an outsourced way. Got it. And for those folks, like, you could actually argue, like, the fees are cheaper than building out a team to do this.

Alex Edelson
And so, like, from a cost perspective, like, this may make more sense, but, like, when people are really pushing back on cost, like, there are a few other responses to that. The first is we invest through our fees and expenses. So, like, if we have $100 million fund for round numbers, not $100 million. We don't have $100 million to invest today because we have fees and expenses. But we are over committing.

So, like, we will commit $100 million to underlying funds that we invest in, even though we don't have $100 million to invest today. Because the time diversification of the strategy and the fact that related to the time diversification, some of these funds will be returning capital, while others are still culling capital, you can make up a shortfall through recycling. And so, to some extent, the fees and expenses argument is a little overstated. But if I were to be, like, very intellectually honest here, I'd say, like, well, if there were no fees and no expenses, then we could just recycle more. So instead of investing 100% of committed capital, we would just bake in that we're investing 115% of committed capital.

Right. So the fees and expenses are bringing down your ability to deploy capital into underlying funds. But it's not as clear cut as, you know, we're paying these fees and we're not getting returns on these dollars because we are investing through fees and expenses. Makes sense. So, you know, you've talked about this a couple times now.

Nick Moran
I'm curious, what are these characteristics you mentioned? Qualitative character, like, what are you trying to tease out in these emerging managers that gives you signal that they're special because the track records are going to often be very limited, I would assume. Yeah, yeah, that's right. So it's. I mean, I think about it in two ways, but the primary way is I'm looking for five things.

Alex Edelson
And the first two are, like, the most common reasons I pass. The first is just like a particular portfolio construction, such that you are getting enough ownership relative to your fund size, so that modest venture outcomes can generate meaningful fund level returns and great venture outcomes can generate excellent fund level returns. So we don't want to. I don't want to rely on if the bet is, hey, we need five or $10 billion exits to return the fund. That's typically, that's not the right fit for me.

The second thing is folks who have some competitive advantage unique to them that I think is sustainable if they execute at a high level. And that is the reason why they should see great founders and the best founders should want to work with them. It often, yeah, relates to sourcing, picking, winning, usually adding value. It could be some combination of domain expertise, operating experience. The third thing is, well, and I should say about that, they also need a strategy that is really built around their edge, like that competitive advantage.

The third thing is founders who love working with them and who are their advocates with other founders. The fourth thing is great VC's usually like, most importantly at the next stage, think really highly of this emerging manager, want to see their deals, think they see great deals, pick and win allocations in great deals. They want to stay close to their companies and when their companies are ready, they want to invest in those companies. It's like, that's great for us if the best investors at the next stage are investing in the companies we have exposure to. And the last thing is, just like, you want to suss out whether people are hungry and gritty and resilient.

Venture is such a long game and it's really hard. I think there have been times over the last few years where it has felt like, man, venture is just up into the, it's all up and to the right. This is so easy, but that's not my experience. And like over many cycles, I think, yeah, you realize just like how hard it is. And so people who are in it for the long haul and are ready and who are hungry, that's really important to me.

Yeah. And you're talking to founders, you're talking to other VC's, you're talking to people who know them to get a sense for it. I wish it were as easy. You know, there's, it's tempting to be like, oh, they've already been successful financially. Like how hungry could they be?

That is not a good test, we've all realized. So there's no easy way. Just talking to folks, how responsive are they, understanding how they found, how someone's source deals, how closely they work with companies, how thorough they are, you can get a sense for it. So that's one framework and that would be my main framework, but that sort of misses some things that are really important to me. So for completeness, there's another framework I think about which is like, what's this like a five tool baseball player?

Like what's the six tool venture capitalist? To me it's like someone who can source, pick, win, add value, get liquidity and get portfolio construction right. You mentioned this piece, sustainable competitive advantage. Is there anything sort of non obvious about that? I mean there are funds with certain networks and sector advantages, etcetera.

Nick Moran
But is there anything else that you would share with listeners about developing that or one that you've seen that's really good as an example? Well, I guess what I would say is like having a competitive advantage is like necessary but not sufficient. Like maybe that's the non obvious point, at least for me. Like having an edge is great, but being able to sustain it is different. And you like a fund, needs to have founders who love working with them because you could have an amazing edge.

Alex Edelson
But if the founders don't have a great experience with you and they aren't, you know, your advocates out there in the world, especially among other founders, the value of your edge can go away. It's just not, it won't be sustained because eventually people find out and you won't see the best founders and you'll get adversely selected deal flow and yeah, that's tough. So I would say like the most, maybe the most non obvious thing to me, or at least the thing I can think of off the top of my head, is that like having a competitive advantage is not enough. Like you still need to sustain it. And you got to pick, right?

Nick Moran
It's one thing to have the access, but you got to be able to pick the winners. No, that's right. And like, especially in a market like this, I mean it's so competitive right now. Folks who can, you know, sort of like non conformist, confident, have the courage of their own conviction and are doing deals that like others are passing on, are doing deals that may be overlooked or non consensus for some reason that's important. So, you know, especially a few years ago, a really common strategy was like, hey, I have these great connections to these tier ones.

Alex Edelson
I can invest alongside them and like they share their investment memos and I'm like really close to them and I have the benefit of all their diligence. And so we're getting great deals and yeah, I mean that can work. It's typically not what we're looking for though. Like we're looking for people who are really their own independent, confident, courageous pickers. That's really important.

And I think, like increasingly so in a very competitive market. Yeah, we got our start on Angellist and I had some debates with Nivi and Jake over there because, you know, the deals we put on the platform, if you had a big logo attached to it, like a lightspeed or an A 16 Z, then they'd spray it out to their entire network. But if you're somebody like us that, you know, our tagline is investing in outsiders. So they're super unproven startups that didn't come from like central casting. Those were not the ones that, you know, got heavily promoted on the platform.

Yeah, well, but like, major kudos to you. My, my guess is, and I'd be curious to hear about your experience, like, you know, what percentage of your deals that have gone well historically were from folks who were, yeah. More overlooked and which of them were just like very competitive kind of consensus. You did win an allocation and they turned out to be good. Like, I'm curious how that looks for you.

Nick Moran
I would say 85% to 90% of our deals are non consensus outsider deals. And then the ten ish percent that were more pedigreed have not gone as well. Yeah, that's right. So I mean, it's not like that's inevitable, but. Right.

It's just funny because over the years, like, we often felt fortunate when we got into a deal like that. And then, I don't know, you put on the rose colored glasses and you don't see all the problems as well. So I just, I like staying in my lane now, you know, focus on the undiscovered and we can really vet the heck out of them because they don't walk in with the silver spoon and the big ego like they are hustle in for that money. And what's interesting is like the incentives in venture, you know, are not always like to do the overlooked founders, right. Because isn't it great?

Alex Edelson
You can put these tier one venture firm logos in your day. Look who we invested alongside. Or, you know, it's like, and that gets people excited. And I get it. Not here to say it shouldn't, just more that it's not quite what I'm looking for.

But, you know, there are incentives to do that for folks. And it's tricky because in the long run, yeah, you do wonder whether that's like the short term greedy move or the long term greedy move. There are a lot of short term incentives in venture that I see people chase and yeah, I don't know. Depends on how long you're trying to be in the game. So, Alex, this is a little surprise question from Dan Immerling, a mutual friend of ours.

Oh yeah. Dan asks Alex, how do you get LP's to care about firms rather than funds? Yeah, that's a great question. I think venture is very personal. I think the relationships that VC's and founders have are very, very personal.

And I think the relationships that LP's and VC's have are also ideally very personal. And I think if you build that personal relationship upfront, you know, you're really investing with each other in a real partnership and in a perfect world, the VC cares about the LP's like they are aligned, they have a real relationship and it's long term because, just because of the life of a fund and vice versa, you hope the LP's like care personally about the VC's and are invested in them personally too because I mean, the success of a venture firm ultimately comes down to the success of its people. You want your gps and the funds you invest in to have the resources they need to be in the place emotionally, from a mental health perspective, financially to be able to perform at the highest level that's best for returns. I guess that's how I think about his question. That's a good question.

I haven't thought about that much before. When you do make a commitment to a fund, are you making a multi fund commitment? Is that how you communicate with the GP or are you like, look, we're going to try this out and we'll see about the next one? Yeah, I mean my hope is that it is a multi fund commitment until they, if they reach a point in terms of fund size where they are just beyond our strike zone, then it doesn't, then obviously we can't continue investing. But yeah, my hope is that these are multi fund relationships.

I don't commit to it usually upfront, but I want to be open about it upfront and so like I want everyone's expectations to be aligned and I wouldn't want to surprise them when it comes time to raise their next fund. I should have been managing their expectations along the way. I think in most cases that's possible and upfront before you make an investment initially, I think you do your best to be transparent about that. But I typically can't commit to multiple funds. We're going to do the work on every successive fund, but that is my intention.

Nick Moran
I'd like to get your opinion a bit on fundraising market. I'm hearing from a lot of friends that it's really tough market to be fundraising for VC's out there. Lots of fundraisers seem to be languishing and gps are kind of revising their target sizes down. Is that what you're seeing? And, you know, how do you advise the VC's that you're working with?

Alex Edelson
Yeah, I mean, I think, like, to some extent, it's always true with emerging managers, it's hard to raise with a limited. But, yeah, like, these last year or so has been really tough, and I've seen, yeah, sort of a few different approaches to fundraising. And what I have not seen generate much urgency is fundraisers that don't have structure. Like, unless someone has a bit of a track record and they're like, very clearly a consensus fund at this point and they know they're going to have no trouble raising and being oversubscribed, then. Typically, folks who build structure around their process seem to do the best in fundraising, where they give real deadlines, they stick to the deadlines, and they start with, like, their minimum viable fund size.

They might target something bigger, but, like, they acknowledge that there is a minimum viable fund size that they can that will work for their strategy. And if that's where they get, like they should, they might want to stop and just deploy it and sort of live to fight another day in terms of fundraising. Do your best on that fund and move on. Because the challenge is that if fundraises take too long, you start investing out of a fund that you don't know when you don't know the size of it. And so it can be hard to get your check size and portfolio construction generally right.

So it's like, you have to choose. Like, should I err on the side of going more conservative, in which case I'm going to write smaller checks before I've raised my full fund. But if I end up raising the fund I'm targeting, these checks will be too small, and these companies may not be meaningful to fund level returns. So that's not great. And then if I write checks that are too big and the fund size I ultimately raise is not my target fund size, it's less than my target fund size, then the risk is like, I'm too concentrated, I don't get enough shots on goal, and so it becomes very hard to.

It's hard to invest out of a fund of an uncertain size. Like, what advice do you have on that? Because I've been in that scenario, I did smaller checks on fund one because I hadn't raised it as much. You know, at first close and then fund two, we got it right. We just went with full check size from the start.

Nick Moran
But yes. So a few things to finish. On the other question, and let me come back to that, I think that if you start early enough, so let's say you start six to twelve months before you're ready to start deploying, hopefully, and you build structure into this process, you're like, we are doing a closing at this time. We are going to start investing at this time. If we reach a certain fund size by then we are done fundraising.

Alex Edelson
Like, that's the time to fundraise. Technically, our legal docs allow us to fundraise for longer, but that is not our intention. And you can kind of get some momentum towards the closing. Now, of course, the risk is you don't get to your minimum viable fund size and you need to keep fundraising. But that I have seen work starting early enough and having real deadlines, not like faker deadlines, to create urgency and doing, if you're going to do multiple closings, making sure that they're big enough closings.

Like sometimes you'll get an email, it's like, hey, we're closing on 14% of our fund. And it's like that to me makes it sound like I have a lot of time. That doesn't create urgency for me. I mean, that's great. Sometimes as a practical necessity, you need to get in business.

You see a deal you want to do, you should do it, you should do a closing. But I might not celebrate it in the same way publicly. Sometimes it just makes me feel like, oh, I have a lot of time. And so I do wonder whether things like that can backfire in fundraising. But getting back to your question, yeah, there's not one answer.

Like, you have to decide what risks you're comfortable taking. And yeah, the risk of one being like, this investment is not meaningful to the fund and the other is that you're going to have fewer shots on goal and you kind of have to project out, like, what's your likelihood of getting to your target fund size? And you have to figure out, like, what's your minimum viable fund size? And I personally think, like, if you, and this is like all sort of, in my own humble opinion, like, you know, this is how I think about it. If you start writing checks that would make sense, or getting a target ownership or getting a certain ownership that would make sense for a certain fund size, then you should drop your target fund size to that.

Like, that's one way to solve this problem. But yeah, I like, tend to be drawn to folks who kind of lean in and they go high conviction and they risk being a little more concentrated and they say, look, like, I think I'm going to raise this fund. And if I don't, I'm very high conviction on this investment. Like, the level of conviction I have to be to make that investment, that's a scary investment when it's, like, kind of too big for the fund you've currently raised. Like, my hope is that people, people are at that level of conviction when they're in that place and they maybe write the check size for the fund they want to raise and they think they can raise.

Nick Moran
I was talking to my team about this, like, a year and a half ago. You know, you make a choice to raise the funds or not. And, like, we made a choice and we can control, like, you have a product, you have an ICP, you have a target customer, and then you have top of funnel. And so, you know, we know we have a good product. We know who we should target in the LP community that's going to like this.

It's all about top of funnel. And so we just, you know, we built that muscle and we kept filling top of funnel until we filled the fun. Yeah, like, not everyone can get there for one reason or another, and, but, like, I mean, major kudos to you. Like, of course, like, you've been very successful in a variety of ways, and so, so I, my experience is that some people can do it and some people just don't get there. What are the tactics that you've seen that kind of backfire or missteps that you could kind of give as a warning to folks?

Alex Edelson
Yeah, I mean, actually, like, what I just mentioned, like, doing a closing on, like, less than, I don't know, 2020, 5% of the fund. I don't know. That's, it's a little harsh because, like, sometimes it makes sense to do the closing. I guess. Like, when I see someone, like, really celebrating that, like, it's obviously a milestone.

Do your first closing and your first fund. Let's say that's the hardest closing you'll ever do. Like, that's a big deal. But on the other hand, like, it's, it shows real momentum and progress when you're at closer, like 50% on a first closing. But if you have to get in business, like, do the closing, start investing.

How you talk about it with folks, I think, is what impacts how, whether it could backfire or not. I sometimes just, sometimes folks are just, like, very pushy or aggressive or, like, we're doing our next closing. Like, are you in or out? And it's like, you know, but this isn't your final closing. So, like, I.

Look, I have every reason in the world to be in your first closing. Like, I want to do that. That's best for my relationship with you. Like, those are the LP's you love, like, the ones who believe in you early. Yeah.

Want to do that. And sometimes I can't. Like, I don't have time or for any number of reasons, but people who are, like, really pushy about an upcoming closing that is not the final closing sometimes sort of strikes me as maybe missing it a little. Like, it's not going to move LP's who are in the market. Is there a good pitch that you've heard about getting in on the first close that made you speed up your process and get in on a first close?

Nick Moran
Cause, I mean, I have some LP's, one in particular, a really large LP, and he will always wait until the last minute, whether it's an SPV or a fund or anything. It's gotta be the last day in the last hour. Yeah. No, I mean, look, I don't see people using this, but I would think QSBs would be one reason. Sure.

Alex Edelson
So. But I don't, like, I don't push that. I'm not like, hey, now's the time. Don't miss out on QSBs. But, you know, that, I would think is on LP's minds who know venture, I think, no, it's very hard to get people to do a first closing.

For me, it's just the relationship, and it's showing conviction and believing in people. And sometimes, if they really want to do a deal and they need us in to do a deal that's meaningful to me, I want to support them in that. Like, the bar needs to be very high for them to be doing that deal, because they know they're going to be judged. If they're still fundraising, they're going to be judged on the deals they've done in the fund for which they're fundraising. So the bar should be really high for that.

And if they want to do something, then I want to support them in that. But for me, it's mostly the relationship and wanting to show early conviction and be supportive. And if you're listening and you're not familiar with the QSBs point for LP's that commit prior to that fund manager's investment in a startup, that LP will get the QSBs treatment, the deals done after their commitment. So if an LP waits till final close, and there was five deals done before final close, they won't get the favorable tax treatment for the early ones. Is that accurate, Alex?

Yeah, that's my understanding, yeah. This is not tax advice, I should say. We'll put a disclaimer in Alex. I'm curious how you diligence a fund manager's decision making. Like, you, you need to understand, I try to understand the round dynamics for the rounds they invest in.

Like, how'd you get there? Who got there first? Who got to conviction first? Did the lead bring you in? Did they share their diligence?

Did you bring in a lead? Did you lead this round? Were you there before anyone else? I want to understand, like whether it was competitive. I want to talk to the founders and I want to talk to the other VC's.

I want to understand, like, from the founders, like, did you, did these folks show, like, did they really get it? Did you have the experience as a founder? Like, these are one of the few VC's who, like, really got it. Like we were in next stage conversations, like, on our first call. Right?

Like, you want to hear thi. I like hearing things like that. That's not a prerequisite for me, but like, but that's great. That's people who are coming in with prepared minds, who are really thoughtful about the company and who are high conviction. Like, were they the first ones to give you a term sheet?

That's interesting. And then sometimes, like, the round dynamics are like 200 people passed on us. This was the only one that believed in us. That's kind of, those are interesting data points too, of course. Like, you need the courage of your conviction in that case.

So you want to understand, like, how rounds come together. And I also just generally want to understand how folks think about their investments. I want to understand what stood out to them at the time and what they're looking for now. Most of my ability to get the conviction on someone's investment judgment comes from talking to the founders and the other VC's who are in that round. And then obviously some from the VC too.

Nick Moran
How many reference calls are you doing on a fund before commitment? Yeah, I guess that's like, kind of. How do you define a reference? So when I'm just talking. So I'll do initial outreach to, like, mutual connections, like mutual friends.

Alex Edelson
I guess that's technically a reference. And I could do a bunch of those. Those are just like my friends. And if it's so, so, like, let's put that in sort of a light reference. Those are light references.

Those are mutual connections that I'm trying to get a sense for. Like is this a serious person? Are these people like, should I dig in here? What's so special? Like, what's the high level story on these books then?

Yeah, then there are references with like, founders I may not know and other VC's I may not know. Like later stage VC's. Often I know them, sometimes I don't. And yeah, it really depends. Like, there have been times when I've done a lot and there have been times when I built a relationship over many years.

I have a very good sense for this. You know, they're finally raising, but it's in two years. We've been building in a relationship for two years or longer. Let's say. I don't need to do that many references, but what I should caveat this with is like, this needs to be calibrated to, like, my check size relative to their fund size where they are in their fundraising process.

Like, for example, if there's some heavily oversubscribed fund, you're not like doing 20 founder references. That doesn't make any sense. It's not respectful to the GP. That's not so nice to the founders. Right?

Like you kind of have to calibrate this. So I would say typically, like at least a few founder references, sometimes like a lot. But I will be. I have to be open with the GP about what I'm doing and I want to make sure it's comfortable for them and so there's some collaboration there. Have you ever had a late game reference that came back as a surprise and caused you to hold off on the investment?

Oh, that's such a good question. I can't think of one where I had one at the end that was different, significantly different from like a representative sample early. Like basically I stop when I feel like I'm not learning new things and. But like, of course calibrated for, like I said before, like calibrated to what's going on with the fundraise. But no, I don't.

I can't think of a time when that happened. Got it. Yeah. It's funny you make that point about casual references. Cause I feel like constantly you're always picking up data points.

Nick Moran
And I remember we were catching up at a event some time ago and I think I asked you, you know, who do you like? And there was a bunch of VC's around. I was like, who do you like in the room? And you asked me the same thing. We were kind of trading notes and, you know, everyone's constantly sharing data points on who they know and who they don't.

Alex Edelson
And their experience. Yeah, it's funny because that is kind of the nature of VC, right? It's like VC's are doing that with founders, they're doing that about other VC's, LP's are doing that about VC's. VC's are doing that about LP's trying to figure out who they want to work with. So it's funny because this is an asset class where like we all have to mutually pick.

We all pick each other. Yeah. You know, the founder picks the VC's, pick the LP's. I mean, of course the VC's have to pick the founders and the LP's have to pick the VC's too, but it's mutual. So talk about reserves, right?

Nick Moran
There's no one size fits all, but what's your stance on reserves? What's the right, you know, percentage allocation in a fund and when should those be deployed? Like due diligence, kind of the mindset and the strategy around reserves and what's your preference? Yeah, so that's a big part of someone's portfolio construction is their reserves. And so, I mean, yeah, I can talk about this in a few different ways, but you're right that like, the big answer is like, there's no answer.

Alex Edelson
So it's got the strategy, the whole strategy, the portfolio construction is built around whatever's so special about the GP. And so this is part of that that should be tailored to whatever's so special here. I would say, like, if I were just to give you like a back of the envelope answer here. Typically funds that are like 20 million and smaller, writing relatively small checks into like precede and seed rounds, like preference for limited or no reserves. And it's like, you know, funds that are like 20 to 30, maybe $40 million funds, like kind of a gray area.

Like they probably have some reserves, they probably don't have one to one reserves, they have less than 50% reserved. And then funds that are like 50 million or more, funds that are like primarily leading rounds, which could be smaller than 50. To be clear, you know, more reserves could be up to one. And you do sometimes see funds where the reserves, even in the small fund world, where reserves, there's more reserves then, except for, is used for initial checks. So what if I were to.

And so like those, that's kind of typically what I'm comfortable with and seeing, but, yeah, like to be more granular about it. Like in a purely hypothetical world, the best outcome is like, get as much ownership as you can at the earliest stakes, like put as much money in as early as possible. So yeah, that's the dream. It's like lowest entry valuation, highest ownership, and get more shots on gold. Don't have all these reserves, just get your ownership upfront or raise a smaller fund, which is easier to generate great returns.

In a purely hypothetical world, I can make an argument that no reserves is probably better, just zero reserves, regardless of fund strategy and size. Just get it all up front. But there are certainly times when reserves are very meaningful to fund bubble returns. Reserved follow on checks can return entire funds. I've seen that.

And so you can't be like, so naive, right, to say, like, oh, just get it all up front. Don't follow on like. Then the question is, like, how do you use reserves defensively? Yeah, that's not usually the most exciting use of reserves. Like, this company needs capital.

They are not currently able to raise other capital. It doesn't make sense for one reason or another, but, like, sometimes that's the right move and those companies can go on to be great companies and generate meaningful returns, and that can help you buy up your ownership in a company. That may not be obvious yet, but I don't mean to say you shouldn't use them defensively, you should. We had examples of QED I can think of off the top of my head. They're like, great use of reserves defensively.

But as a general matter, you'd want to, like, be putting these into the companies you think are your likely winners. And not to say that when you use them defensively, it wouldn't be in someone you think is a likely winner. But. But it may not be clear yet that that is. And so people using their reserves offensively, that can be cool.

So, like, protecting or building ownership quickly, like in your best companies, like buying up ownership in between rounds, not always possible. But if you have very high conviction, that can work really well trying to buy up ownership in the next round. If you're really high conviction or just preserve ownership in companies you think are likely to be in sort of the top subset of your portfolio, I think that's really compelling. But then, like, the hard question is, like, when do you know you have a winner? When do you know that is likely to be one of the better companies in your fund?

Because if you could know with certainty, then it totally makes sense to follow on. The challenge is you may be presented with decisions to follow on or like opportunities to follow on, like a company's raising the next round before you've even finished investing, making all the initial investments out of your fund or like shortly after you have. So, like maybe your first few, one of your first few investments is raising its next round. It's hard to know whether your later investments in the fund, it's too early to know whether they're going to be great. And so then you're like faced with a decision about, like, do I follow on heavily when I'm not really sure yet who, which are the best companies in the fund?

And when I ask folks like, well, how long do you know? And like, are you right? Plenty of people would say, like, oh, I know really quickly and like, within six months of investing, you can tell. But, like, the most consistent answer I hear is it's hard to know in less than like two years which are the best companies in a given fund. And so we're all, so people are making follow on decisions, you know, without, often without knowing, like, they have some information, but that makes it trickier, right, to make follow on decisions.

And so when people have less than one to one reserves and their argument is we're going to use these reserves just to follow on to, like, our very few best companies. Like, that's nice if you could do it. I just find it's very hard. Like, not many people do that. Some do, though.

And if you can, then that strategy is great, but it's really hard. I'd contend it's reasonable to pick out the ones that will not be your fund returners within twelve to 18 months. The rest, though, the other basket, maybe the other 50%. You just, I mean, you know which ones you're really excited about, but you don't know. Yeah, I mean, I guess, like, I, right, I, let's keep the, let's keep the spotlight on you.

Like, in your experience, have your biggest winners been the fastest out of the gates? No. Right. That I, that is common feedback and so it can be a little hard to figure it out. So, so I totally understand having some reserves to follow on into the companies you think are best, but I just want to have like an honest conversation with folks.

But like, you know, how's this going to play out? Well, there's a tricky thing. I'm sure you see this, but there's a tricky thing in that we look at a lot of deals and we know which deals we can sell up to. Series A and the big logos. Like on paper, these founders doing this thing, whether they have traction or not, if they build a product, we can get this follow on in this graduation within twelve months.

Nick Moran
And so, but it's not always the right thing to invest in. And so it's a balancing act. Sometimes you get both and those are great. Like, oh, I can sell this up and it's the perfect. I love working with this team.

You know, they've got the it factor, they're force of nature founders. But it's, again, that point earlier about short and long term. There's a lot of short term incentives just to get the up rounds and show the progress. But those aren't always the best companies, they're just the most fundable. No, yeah, that resonates.

Alex Edelson
And one thing I should have added was like, there are some practical considerations with reserves. Like if you're leading rounds, especially like, founders would probably get some comfort from knowing that you can float, you know, you can put more capital into the company if they need it. You might need to do that for relationship purposes. So it might be important to winning a deal, it might be important for your relationship with founders and your reputation in the community to be supportive of them. Like, there are a lot of reasons to have reserves.

Like, I'm sort of coming down a little hard on reserves, and I don't want to ignore the practical realities because reserves have value that aren't purely like dollars and cents from that particular investment, 100%. And in addition, like, the one constraint that none of us can control completely is time. Right. And if you've got a winning logo in your portfolio, I mean, it's one thing to just say, hey, go out and do more deals or slow down your pace or whatever, but if you've got a winner, like best leverage for your dollar and your time is getting more ownership in it. Yeah, that's right.

I mean, but like there, there are trade offs. Like it's like, at what price are you getting that ownership at the, at the cost of how many shots on goal? Like what's your opportunity cost here? Like how many shots on goal are you missing out on? But yes, like when you have an amazing winner and you have really high conviction, when that works out, I mean, it is amazing.

Nick Moran
So are you measuring like average entry post money, average effective post money across your entire portfolio? Like the look through all the way down to. Yeah, I think about, yeah, I think about entry valuation a lot. That's important to me. And are you looking at that effective post money, which is the valuation adjusted dilution factor?

Alex Edelson
Yeah. So what I want to understand, yeah, the most important numbers to me are the, I guess, check size. Right? Like how big of a check did it take? You know, your initial ownership and your entry valuation, like, post money.

Those are obviously all related, but, yeah, that's really important to me. I am drawn to funds that are getting in at very low entry valuations right now. Like, if you're playing in the. I don't know. I'm just gonna throw out a number.

25 to 30 million plus post money entry valuation. Like, that is a. That's competitive. That is. There are a lot of funds doing that.

It's harder to get the ownership. I am looking for folks who are earlier. Can you give us a ballpark of, like. Yeah, the dream for me is, like, sub ten to $12 million post money entry valuations. Like, that's.

I love that. That's. I will invest in funds that don't do that exclusively, but that is at the top of my list in terms of preferences. Sorry. In terms of priorities, like, those funds that can get in that early are really appealing.

Nick Moran
Well, Alex, you've come to the right place. We're sub eight over here at Newstead. That's amazing. That's great. So have you invested in funds that don't lead, like, primarily lead deals?

Alex Edelson
Oh, yeah, yeah, I invest in both. You do? So how can you invest in a fund that doesn't do a lot of lead checks and still has, you know, sufficient ownership? Some of the other factors that clearly you're looking for at slipstream. Yeah.

So, like, we did. We did a $25 million fund that's getting mostly four to 5% ownership, which is great on a $25 million fund. I mean, that's the equivalent of a hundred million dollar fund getting 16% to 20% ownership. So. So which is hard to do if without the risk of adverse selection, especially.

And so, yeah, you can get very favorable fund math. Now, they may not contribute in the smaller funds that aren't leading rounds. So if you're in a $15 million fund, getting two to 4% ownership, that's great. And that can be. You can get more compelling fund math on smaller funds that aren't leading rounds then on, you know, small funds that are leading rounds.

Nick Moran
Yeah, it's like check size, percentage relative to your fund size, as opposed to just ownership in the company. Yeah, well, I think about it in terms of ownership relative to your fund size, but check size is important and, you know, that's why entry valuation is important. And solo gps versus multiple. Any thoughts there? Yeah, I mean, we do both.

Alex Edelson
You know, someone said this to me a while back, actually another GP, but I thought they were right on, which is like, what do you think is more likely that, like, over the long course of funds existent, like, two gps are going to break up, or, like, one of them is getting hit by a bus, like. Or a solo GP is getting. It's like, yeah, like, if you're worried about just that, the consequences are significant if gps break up and if the solo GP has some issue that prevents them from continuing to invest out of the fund or getting liquidity. Those are both risky, but I'm typically more comfortable taking the risk of someone getting hit by a bus. GPS break up all the time, and so.

And it's just such a long term game. Your relationship has to work for a long period of time. So GPS, if I'm investing in a team with. In a firm with multiple gps, yeah, I need to get comfortable that they know each other really well and that they're going to work well together for a long time. And unfortunately, sometimes there are funds that I love that I can't quite get there on because they just haven't worked together enough for me to get comfortable with the team risk.

And so it's got to be more of a, like, next fund for me once they've deployed a fund together, if they're going back to do it again and I feel better about it. But look like there are other considerations, right? Like, having a bigger team can put pressure on fund size. Like solo GPS can have smaller funds just because it's easier to support fewer people on a smaller fund. And.

Or I should say it's harder to support more people on a small fund. And so you need the. You need enough economics in it to justify having multiple people there. So often those funds get. Those funds can get bigger.

And then, you know, when it's a solo GP, you're like, how do you manage it all? You want to talk about how they allocate their time. There's a lot to do and there's multiple gps. You want to understand their roles and responsibilities and how they deal with disagreement and you're just kind of. You're diligent.

Slightly different things. Right? Right. So, Alex, you know, founders pitch to, VC's pitch to LP's, VC's pitch to founders to win deals. Do you, as an LP, ever feel like you have to pitch yourself to a GP?

Nick Moran
And if so, how do you do it? Yeah, I mean, I think I have to in every case. Like, even if. Certainly it's like there's capacity constrained funds, like, over subscribers, GP, pixel, they want to work with, but even if. Even if it's not, that's not the case.

Alex Edelson
Like they are picking you. Like they might feel like they don't have many great options. So like maybe they're not happy to pick you, but they still have to pick you. And it's important that we all want to work together. And so, yeah, and I feel that my, my on my end too.

Like, I'm also raising capital from LP's. I, I want lP's who I want to work with, who can be helpful or otherwise, like high integrity, good partners for me. And so, yeah, it's really important. I try not to be, I'm not like salesy about it, but like, I want there to be a real relationship. I want them to be convinced that I'm someone that they should want to partner with.

So, yeah, I mean, how do I think about it? I think about it in a few ways. Like, one way is I started this after being on the other side of the table. Like, I have strong feelings about, like, what's a good LP, what's a great LP, what's a not great LP, and how do great lP's interact? How can they be helpful?

How do you interact with folks in a differential and trusting way, but also be constructive and challenge them and help them improve? And so being on the other end of like, seeing that I think helps me kind of be the GP I wanted to work with. And actually it's funny because VC's often who have operating experience will make a similar pitch. Like, I'm the VC founders, I just want to be the VC founders I would have wanted to work with when I was a founder. Right?

It's like I'm kind of the same way. Like, I just want to be the LP that I would have wanted to work with when I was on the GP side. But there are other things. Like, yeah, I find that, like, I'm pretty direct and open and I challenge people on portfolio construction, on their strategy, on a number of things. And so we end up getting into real conversations and my hope is that like, you know, they value that and maybe it's helpful to some extent.

And I've often found that, like, I spend time talking to people about portfolio construction or fundraising or investor relations or information to track after they make investments that might be actionable down the road and could be weaponized somehow with founders or in fundraising or something. It's like because of the experience at QED, I think that gave me perspective that might be helpful. I don't like, assume people need my help to be clear and I invest, like, assuming they don't need my help but, but I find that, like, I end up having those conversations with folks and I do think that helps us get allocations. I do think it helps persuade people to work with Slipstream. I think I'd like to think we're adding value that's unique as part of the thesis for starting slipstream that other LP's aren't adding just because of the experience.

But that's how I think about it. So, yeah, like, I am, and there are other ways, like, I can help bring in other LP's. Sometimes it's sort of that simple. Sometimes our LP's want to invest in the funds we invest in and so we can help the fundraising. But yeah, it boils down to, like, this is personal and, like, you just want to work with people you like.

And so my hope is that, like, we all like each other, that's the best sales. It's like we have fun talking together, we're talking to each other, we trust each other, we want to spend time together. That there's nothing better than that. So I don't know if to some extent that's just natural. Like, you want there to be chemistry and you hope there is.

Nick Moran
You know, sometimes I go to these vc pitch events and they, you know, some fund managers just treat it so formally and they're like walking through their pitch deck page by page and, and like, everything that they don't like seeing in a startup pitch, they're guilty of doing when they're pitching LP's. I'm like, this is not how to raise money. Like, you're really selling yourself and you're really building like a relationship. Yeah, that's right. I mean, reminds me of two things.

Alex Edelson
One is sometimes I wonder if gps are thinking when they're doing something like interacting with me, if they would like it if a founder interacted with them in a fundraising context. You're usually in this setting. It's just like you're in a different seat. And I do wonder, would this resonate with you if it were a founder? And the second thing is just like, look, fundraising is hard.

Some people are not naturally gifted at that and it comes with practice and they improve and it gets easier when you get returns. But that is another thing that I think it's funny, this is not something I intentionally convey, but I have gotten feedback on this and I think it is a reason it does help to build relationships with GPS is I think they feel a lot of empathy for me, probably because, like, I was on that side and like, I have a sense for how hard it is and like, what they're going through and so I do think that is also helpful. Just like high degree of empathy for. Well, you're not just a money manager, you're an entrepreneur and you have to go out and raise money too. So like, yeah, you know, you can relate directly whereas no offense to like, larger institutions, but, you know, if you're pitching somebody there, it's just a totally different dynamic.

Yeah, I do think that impacts how I think about it, too. It's like in one call I'm the LP and literally the next call I'm the GP and I'm talking to a potential LP and I do think that that helps me in both directions. Yeah, yeah. Alex, how do you think the next generation of VC firm winners will look different and or how will they differ from the last generation of VC winners? Oh man, it's such a good question.

I think I try to think about this all the time, like, what is the future of VC? It's constantly changing. I wish I had, like one answer. The way I think about it is like, there are more ventures, there's so many venture firms now. There's so much capital in this asset class.

You need a real clear competitive advantage and there needs to be some reason, like the best founders will find you or you will find them and they will want to work with you. And like, I think 15 to 20 years ago you could kind of see all the good deals. There weren't that many. When you talk to people who are investing back then and even QED, like, when QED started, they would have said, like, we saw pretty much every deal and like 1015 years later, like, it's not possible to see every deal. And so you need to have, there needs to be some clear reason why you will win in a very crowded, competitive market.

And it's like, the way I think about is like, how will you find the best founders and why do they want to work with you? And it often has to do with, yes, some unique edge getting in a couple good companies, having founders who love you. And that creates a flywheel of seeing possibly selected deal flow and continuing to make great investments. Do you think we're going to see more of the big legacy firms die? I mean, yeah, probably.

It's hard to know. It's hard to know, but that would be my guess. I mean, there's so many capital, there's so much capital tied up there and there's so many relationships and so much career risk and inertia that it feels like it'll take some time, but I can't imagine some of the older legacy firms sustaining. I mean, just seeing the way that they operate on deals and stuff, it's just. It's going to be tough.

That makes sense. That resonates with me, and I think it's what is the essence of a venture firm. And I sometimes people say things like, I want to build a venture firm that outlives me. Like, I want to build the next, you name it, marquee venture firm. And that's cool.

And I totally get it. But, like, I'm investing in you. So, like, whenever we get to that point, I'll have to think about them. But I'm really drawn to is, like, what's so special about you? I'm not necessarily drawn to, like, who's going to be the next big marquee firm.

Like, my hope is just that, like, you're amazing, and this is a great fund. This is a great fund. And the funds that we invest in are great funds. It's funny because for. Yeah, I think about this all the time because people do talk like that, and I think some lP's that really resonates with and with me, it's more like, I think about this on a fun by fun basis.

Nick Moran
Alex, if we could feature one person here on the show, who do you think we should interview, and what topic would you like to hear them speak about? I mean, I always love listening to Mike Maples and Roger Ehrenberg. I think they're great. So thoughtful, amazing perspective across, you know, across many changes in the asset class. And so I always love hearing their perspectives on how things have changed, where they're going, who's winning, what was easier then.

Alex Edelson
That's hard now. What do you think is going to be hard over the next few years? What do you think separates, like, good from great funds? You know, I love hearing from them. Alex, what book, article, or video would you recommend to listeners something in recent memory that you've found informative or inspiring?

I haven't read this book recently, and I was recently asked this, a similar question. So not too broken record here, but, like, the book that is still the most impactful for me is Viktor Frankl's meaning of life. Like, I think about it often, despite not having read it, probably in 15 years. No kidding. Wow.

Yeah. All right. Fun managers out there. The meaning of life. Alex, do you have any habits, tactics, or techniques that are a secret weapon?

I am very open and I am very transparent, and I will talk to people about what's working and what's not. And, like, for example, why investing in slipstream makes sense and why it doesn't. And I think that when you're even handed like that, it builds a lot of credibility. And I find that some people just, like, want to convince you of a thing. And I find that I don't typically want to convince people of a thing.

I want to tell the story and I want to share my thoughts if they're interested in, like, pros and cons or what's working, what's not. But, like, to me, there's sort of an enterprise sales component, right? Or there's like a sales component to this. But, like, I don't think of myself as selling. I think of myself as, like, telling the story.

And if this resonates and if this is a fit, like, that's great, but, like, I'm going to tell you both sides. And I think that helps me build credibility with people. Amazing. And then finally here, Alex, what's the best way for listeners to connect with you and follow along with slipstream? I'd say, like, through mutual connections is great.

That may get, like, a quicker response. Like, I'll respond to all cold inbounds on LinkedIn or through our website or so. No, wrong way. He is Alex Edelson, the firmest slipstream. Alex, thank you so much for the time today.

Nick Moran
It's always a pleasure. Yeah, thanks again. I enjoy it. All right.

All right. That'll wrap up today's interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you.

I can't tell you how much I appreciate that. Some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same. A compliment goes a long way. Okay, that's a wrap for today.

Until next time, remember to over prepare, choose carefully, and invest confidently. Thanks so much for listening.