Latest / The Learning Corner by Precursor / Episode #24: LP POV on Secondaries, CoreWeave/NVIDIA Growth Loop, Questioning Traditional Reserves Strategies

Transcript

Episode #24: LP POV on Secondaries, CoreWeave/NVIDIA Growth Loop, Questioning Traditional Reserves Strategies · The Learning Corner by Precursor

• 0:00
  The investing part of the fund manager job is only one third of what you have to do.
• 0:04
  You have to fundraise, then you have to actually run the fund.
• 0:06
  A lot of people who wanted to try their head of fund management quickly realized they like
• 0:10
  angel investing and the capital deployment side of the business.
• 0:12
  They did not like the fundraising or fund management side of the business, and it's a
• 0:17
  bundle.
• 0:17
  You have to do all three.
• 0:18
  It's the week of March 17.
• 0:20
  Welcome to the Learning Corner, a Precursor Ventures podcast.
• 0:28
  Welcome to the Learning Corner by Precursor.
• 0:30
  I'm Mia Farnham, and I'm joined by our GP and managing partner, Charles Hudson, where we will
• 0:35
  be talking through the articles in Goodreads that we found across the past week.
• 0:38
  Topic number one, and another great episode from Strictly VC download where, Kanye Loises
• 0:43
  chatted with Michael Kim, founder of Sidana Capital, around fund investing focused
• 0:47
  specifically on pre seed and seed stage fund.
• 0:50
  Sidana manages roughly 2,600,000,000.0 in fund investments across pre seed and seed funds.
• 0:55
  And contrary to most other LPs, Michael said that last year was among one of the most liquid
• 0:59
  years from a returns perspective.
• 1:01
  Diving deeper into liquidity success, Sindana's approach to secondaries played a huge role.
• 1:07
  This, of course, is a continuing thread that we have on the subject, but I felt that Michael
• 1:11
  shared a really great line of sight to the LP perspective around secondaries.
• 1:14
  Sendana recently launched a secondaries focused fund alongside Klein Hill, which is sort of
• 1:18
  private equity secondaries focused fund to buy positions in high quality seed stage companies
• 1:23
  from other investors in their fund portfolio.
• 1:25
  So through this strategy, the fund is able to see the winners early on, get consistent
• 1:29
  updates about them, and work in tandem with secondary experts to ensure that exit is done
• 1:34
  in a timely manner.
• 1:35
  I'd love to get your perspective, Charles, on how the Syndonna team is approaching
• 1:38
  secondaries.
• 1:39
  And is this something that every LP should be thinking about?
• 1:43
  So partnering up with secondary specific funds, or what are the attributes of an LPA that make
• 1:48
  this actually a stronger strategy than others?
• 1:50
  In a lot of ways, Sundana is one of the first to probably best know fund to funds focused on
• 1:55
  sub hundred million dollar fund.
• 1:56
  If you're a limited partner for these small funds, when you get a winner, you might own
• 2:00
  eight or 10% of a company where your pro rata is gonna just really outstrip what you can
• 2:04
  possibly fund out of the funds.
• 2:06
  So your options are SPVs or opportunity fund.
• 2:09
  But at some point, you might wanna sell those positions, not because you don't believe in the
• 2:12
  companies, but because you want liquidity.
• 2:14
  And I think for the Sundana team, it makes a lot of sense to have a vehicle where if a
• 2:17
  manager, we already have an LP in the fund, has a position that they wanna sell, you could use
• 2:22
  that vehicle to buy it.
• 2:23
  And I think it's really complimentary.
• 2:24
  And so I think it's it's really a really smart strategy.
• 2:26
  And I continue to believe that for sub $250,000,000 funds, secondaries are gonna
• 2:31
  continue to be probably the primary way that we deliver liquidity back to our LPs.
• 2:35
  Mhmm.
• 2:35
  In the near term without IPOs and mega m and a, like, I don't know how you get the money back.
• 2:39
  I think it's a very complimentary product to what they already do.
• 2:42
  It makes a lot of sense.
• 2:43
  Probably calls into action though LPs to build even more of a higher touch with their GP.
• 2:48
  So I guess I'm just trying to think of like, how do you strike that balance of making sure
• 2:52
  that you're not being overbearing, but you are getting the best information about the winners
• 2:56
  early on.
• 2:57
  And if you think about it, if you're a sadona, you sort of have two ways to play.
• 3:00
  You could do a direct secondary.
• 3:02
  Michael Pfeiffer also in the podcast.
• 3:03
  A direct secondary into a company that you believe in.
• 3:05
  Or you could find a family office or a small limited partner who's got exposure to a fund
• 3:10
  that has a company that you care about.
• 3:12
  I think he used the example of mucker.
• 3:13
  Well, we know what's in that fund.
• 3:15
  If we could acquire more interest in that fund, we would buy it.
• 3:18
  And so because as these fun lives get get longer, you're gonna have LPs who at year 10,
• 3:23
  well, might say, I know this is a great fund.
• 3:25
  I really need the cashback, and I'm willing to sell my stake and give up the upside in order
• 3:29
  to get that liquidity now.
• 3:30
  And I think that is gonna be an increased trend as companies stay private longer.
• 3:34
  Michael also expanded on the concept tourist fund managers, folks who just wanna try on the
• 3:39
  fund manager title as opposed to be
• 3:41
  able to
• 3:41
  just live and breathe it.
• 3:42
  Yeah.
• 3:43
  So he talked to Connie about backing founder magnet funds.
• 3:46
  Fund is where founders are simply drawn to work with the fund managers through their strong
• 3:49
  reputation and experiences and knowledge.
• 3:51
  And my question is, I'm sure actually all tourist fund managers claim that they are
• 3:55
  founder magnet funds.
• 3:56
  So what actually stands out when you're looking at fund managers the best?
• 4:00
  This is something that comes up a lot in the work I do at Screen Door on the investment
• 4:03
  committee.
• 4:03
  I almost always ask people why are the founders that are perfectly inspect your strategy gonna
• 4:08
  choose you instead of someone else.
• 4:09
  And I think in 1920 '20 '1, we met a lot of founders who are executives at high profile
• 4:14
  companies who said, you know what I'm gonna do?
• 4:16
  I'm gonna use this position I have as a VP at such and such company because my company is
• 4:20
  hot.
• 4:20
  People are coming to me for advice and interest.
• 4:22
  I'm gonna use that as a lever to start a fund.
• 4:25
  And I
• 4:25
  think what a lot of people realize is the investing part of the fund manager job is only
• 4:29
  one third of what you have to do.
• 4:31
  You have to fundraise, then you have to actually run the fund.
• 4:33
  And what I've seen is a lot of people who started operator funds on the side or wanted to
• 4:37
  try their head of fund management quickly realized they like angel investing and the
• 4:41
  capital deployment side of the business.
• 4:42
  They did not like the fundraising or fund management side of the business, and it's a
• 4:46
  bundle.
• 4:46
  You have to do all three.
• 4:47
  Ironically, we're also seeing some of those folks realize, hey.
• 4:50
  I like the fund management.
• 4:51
  I like the full bundle.
• 4:52
  Let me scale this up.
• 4:53
  But there were a lot of people who tried their hand at it.
• 4:55
  I think that's fine to try their hand at it and realize this isn't for me.
• 4:58
  What would you say for founders as they're diligent, saying maybe different fund managers
• 5:02
  to lead their rounds?
• 5:03
  Like, what are the flags that you'd say are there to kinda signal maybe they're not best
• 5:07
  long term partners?
• 5:08
  It's probably a bit self serving, but I would say someone who's doing this as a hobby or as a
• 5:12
  side project who's leading you around, there's a chance that the demands of their day job will
• 5:16
  pick up, or they decide they wanna do this.
• 5:18
  And then the person who wrote you the biggest check and ledger around is sort of out of
• 5:21
  picture.
• 5:22
  So I think the better role for those folks is as supporting capital, but founders gotta make
• 5:26
  their own decisions.
• 5:27
  Our next topic is an article by Corey Weinberg and Anissa Cardisi from The Information
• 5:32
  discussing NVIDIA's role and the growth and success of CoreWeave, a cloud infrastructure
• 5:37
  company specializing in high performance computing and AI workloads.
• 5:40
  More specifically, the article sheds light on how NVIDIA played a pivotal role in CoreWeave's
• 5:46
  growth using a mix of strategic investments, GPU allocations, and cloud rental agreements to
• 5:51
  fuel its rise across the AI infrastructure powerhouse.
• 5:54
  So the article shares there were circular funding arrangements between Nvidia and
• 5:58
  Coreweave.
• 5:59
  Nvidia didn't just invest in Coreweave from an equity standpoint, nearly a hundred million
• 6:03
  dollars It bought back its own chips from the company and accounted for nearly 15% of last
• 6:08
  year's sales, ensuring Coreweave success while keeping its own supply chain in check.
• 6:12
  It's important to note that CoreWeave is productive to IPO in the near future, but
• 6:16
  findings from this article call into question how sustainable its own revenue base can be
• 6:20
  beyond major customers like Nvidia and Microsoft.
• 6:23
  So CoreWeave have positioned itself as an alternative to hyperscalers like AWS, Azure,
• 6:29
  and Google Cloud by focusing on high performing computing and AI workloads.
• 6:33
  But when you look at its backers, NVIDIA supply GPUs.
• 6:36
  Microsoft is a key investor, and even NVIDIA renting cloud services from CoreWeave.
• 6:39
  No.
• 6:40
  It just raises that question, is CoreWeave truly competing with the major cloud providers,
• 6:44
  or is it just becoming another arm of the same dominant AI cloud ecosystem?
• 6:49
  I'm very curious to see how people respond at its s one because it feels very circular.
• 6:54
  And I mentioned this to a friend of mine.
• 6:55
  He goes, well, it's all circular because Jensen and NVIDIA are making all my and so all of the
• 7:00
  money kinda rotates around GPU access.
• 7:02
  And if you think about it, building data centers is really expensive.
• 7:04
  And if you find yourself in need of capacity, if your choice is like wait till you build it
• 7:09
  yourself or pay a premium to get capacity from someone who has it on demand, even if they
• 7:13
  charge you a pretty penny, just where we are in the AI cycle, I think a lot of people are like,
• 7:17
  I need the access more than I need to save money.
• 7:19
  And I'm very curious to see how Wall Street responds to this.
• 7:22
  But if you're NVIDIA, it totally makes sense.
• 7:24
  You want people your hardware, and if they can't get it from you and they can get it from
• 7:29
  a partner, why not support that partner?
• 7:31
  So I'm very curious to see how this plays out.
• 7:33
  Because if you look at the data, while there are the hyperscalers, NVIDIA has been the far
• 7:37
  and away principal beneficiaries.
• 7:39
  Boom.
• 7:39
  It hasn't really trickled out.
• 7:41
  And I'd be remiss if to not mention another article that the information wrote, which was
• 7:45
  the one about Klarna.
• 7:47
  We've talked about this internally.
• 7:48
  Parna has made a lot of claims about the g and a savings, and I read that article.
• 7:52
  I'm like, they certainly don't appear on the bottom line.
• 7:54
  They could be embedded elsewhere in the org.
• 7:56
  It doesn't look like those lofty claims about the AI savings they were getting.
• 8:00
  Another company positioned to go That's right.
• 8:02
  Public this year.
• 8:04
  We talked about actually the cons of having a monopoly or oligopoly a few episodes ago when
• 8:08
  we talked about advanced AI chat bots
• 8:10
  Yeah.
• 8:11
  And foundational LLMs.
• 8:12
  But this also clearly applies to AI specific cloud companies as well.
• 8:16
  So when NVIDIA, Microsoft, AWS, and Google are all funding, supplying, and effectively shaping
• 8:22
  who controls the infrastructure, they get to set the price and dictate access to compute.
• 8:26
  We're obviously already seeing this play out with smaller AI labs struggling to secure the
• 8:31
  hardware that they need to compete.
• 8:32
  Do you see a larger trickle effect into early stage startup plan happening?
• 8:38
  This is like a fundamental question I wrestle with, and I'm not a public markets person, so I
• 8:42
  don't have to wrestle with it the same way.
• 8:43
  We are right now in a moment where the inputs for air scarce.
• 8:47
  GPUs are scarce.
• 8:49
  Data center space is scarce.
• 8:50
  The power I mean, the big thing about Stargate's power.
• 8:53
  Like, all the things you need to scale AI are scarce.
• 8:55
  And in a world where things are scarce, if you can provide a buffer or if you can be a
• 8:59
  provider, maybe not last resort, but a provider who can bridge a capacity gap, there's always a
• 9:04
  need for that.
• 9:05
  But the question is like, what does that business look like?
• 9:08
  If and when the supply chains or access to these core inputs become less constrained?
• 9:13
  Are these businesses still as good?
• 9:15
  I don't know.
• 9:15
  I'll be very curious to see is Coreweave still a good business five years from now.
• 9:19
  If the supply of GPU's expands beyond NVIDIA and other people have ways to get access to
• 9:23
  chips, metal, and all the capacity, will these still be interesting businesses?
• 9:27
  Yeah.
• 9:27
  And it'll be also interesting because we might find out after it's hit the public markets and
• 9:32
  for when it's jumped in.
• 9:33
  So Yeah.
• 9:33
  That's something that I don't think we've seen similar models ten, fifteen years ago when
• 9:37
  companies go public.
• 9:38
  I mean, there was a time where, like, bandwidth and fiber were a constraint, and then we built
• 9:42
  all this fiber, and everyone said, oh, no.
• 9:43
  We overbuilt it.
• 9:44
  That wouldn't be done all.
• 9:45
  Our final topic, we're discussing a piece from Clint over at Hulu Ventures called questioning
• 9:50
  the conventional wisdom of the reserve fund, which literally does exactly what the title
• 9:54
  describes.
• 9:56
  Standard banking is that a VC firm should allocate a significant portion of its fund,
• 10:01
  roughly around 50% or more, to follow on investments in existing portfolio companies.
• 10:05
  This logic is generally straightforward.
• 10:07
  You double down on winners, protect across dilution, and you maximize returns from the
• 10:12
  most promising investments.
• 10:13
  But Clint argues that this approach is flawed.
• 10:15
  He suggests that reserves may not always deliver the best returns, especially when
• 10:19
  considering opportunity cost and the difficulty of consistently picking the right follow on
• 10:24
  investments.
• 10:25
  Instead, they propose that firms may be better off focusing more on initial investments rather
• 10:29
  than folding capital back for follow ons.
• 10:31
  We've seen and talked about this on the pod, how firms take different approaches to
• 10:35
  reserves.
• 10:36
  Some set aside quite a large pool.
• 10:38
  Others keep it pretty lean and rely on funds for follow ons.
• 10:42
  Given the data that's shared in the article, do you think we'll see a shift in how early stage
• 10:46
  investors manage reserves, or is there a more underlying reason why reserves are marked off
• 10:52
  and allocated that will continue to survive no matter what the numbers say?
• 10:55
  I think it's very hilarious we're having this conversation with Fayette Queens.
• 10:58
  That's true.
• 10:59
  This is an older article.
• 11:00
  I will post something out of the archives because I think for a long time, a lot of LPs
• 11:04
  were like, you're a seed stage fund.
• 11:05
  You should have reserves to, like, project your ownership and your winners.
• 11:08
  And I've always felt that if we're getting in at very low entry prices, I really think about
• 11:13
  what's the dollar cost average entry point for us.
• 11:15
  And the more we go into companies at the a and b stage on follow ons, the more we're kind of
• 11:20
  pulling up our dollar cost average entry point.
• 11:22
  And I talked to an LP a week ago who said, you know, we've realized one thing.
• 11:26
  As seed notes have gotten more expensive, if you're a seed fund that's 50% in the c and 50%
• 11:30
  in the a, you start to look like on a blended basis, much more like an a fund on entry point,
• 11:35
  but with seed stage risk.
• 11:37
  And does that coupling make sense?
• 11:38
  I do think though psychologically the argument makes sense, which is like, hey, if you're
• 11:42
  gonna make bets early, you should make sure you reserve a lot for the winners.
• 11:45
  And I said, well, that makes sense provided a few things are true.
• 11:48
  You can identify the winners consistently, which I have found is very hard to do.
• 11:52
  Early on.
• 11:52
  Early on, you get false signal.
• 11:54
  Two, that you are willing and have access to writing your full or rata check or whatever
• 11:59
  check makes sense of the content.
• 12:01
  Also not always the case.
• 12:02
  And third that you're actually right in the end.
• 12:05
  And I think as important as reserves are, it's one of the easier ways to blow a gigantic
• 12:10
  collater fund is to pile into companies that either have momentum or you think are working
• 12:15
  only to later learn that they don't.
• 12:16
  So my philosophy has always been, if you keep your funds small enough and your first check
• 12:20
  underwriting is good, you can have a fund where the first checks can really drive performance.
• 12:25
  And I always worry more about underwriting decisions for reserves.
• 12:28
  They're just influenced by so much.
• 12:30
  How well you know the founder, how big the position is, your perception.
• 12:33
  And look, we underwrite its seed.
• 12:35
  I don't know as much about underwriting at series c.
• 12:37
  That's not what you get paid to do.
• 12:38
  Yeah.
• 12:38
  Even just at the point you raised about founders, you could have an incredibly high
• 12:43
  touch relationship with a founder and know so much about the business and maybe the
• 12:47
  information that we'll learn, it's maybe not the best thing to follow on.
• 12:50
  I know there's a lot of fund managers.
• 12:52
  They probably just feel like they've already crossed the line and they can't go back, and
• 12:55
  they've supported them so much that they have to follow on.
• 12:58
  I think that happens when you've already allocated a specific pool and percentage of
• 13:02
  your fund because you know you're gonna use it.
• 13:03
  I can't stress this enough.
• 13:04
  I think once you're like, this money is only available for this purpose.
• 13:08
  It's restricted, and he will find a way to put it.
• 13:10
  I've also felt like, you know, some of my friends who raise opportunity funds found
• 13:13
  themselves in the same predicament.
• 13:14
  Like, hey.
• 13:14
  I raised this pool of money.
• 13:15
  It's only for the follow ons of my winners.
• 13:18
  I'm either not getting access, not getting the same number of winners, or the amount of money
• 13:21
  I wanna write isn't in line with this fund.
• 13:23
  What do I do?
• 13:24
  Because you can't redeploy that back to the main fund.
• 13:26
  Yeah.
• 13:27
  And also there's this risk.
• 13:28
  What if you raise the opportunity fund and you actually figure out halfway through, I don't
• 13:31
  wanna deploy the rest of this into the things that I have.
• 13:33
  How do you tell that story to help you set and freeze it and set it aside?
• 13:37
  Clint makes the case that follow on participation isn't always necessary,
• 13:40
  particularly true for breakout companies.
• 13:42
  So once a company reaches talent tier status, investors are tripping for themselves to easily
• 13:47
  get in, and early VCs don't necessarily need to double down.
• 13:50
  But this was also part of their shorter list of exceptions to their broader argument that VCs
• 13:56
  shouldn't default to reserving capital for follow ons.
• 13:58
  One of those exceptions was supporting founders who haven't quite gained enough traction to
• 14:03
  attract new investors, but still have strong potential.
• 14:06
  Situations where maybe early VCs continued backing could be a meaningful lifeline.
• 14:11
  At Precursor, we've seen firsthand how not participating in a subsequent round can be
• 14:15
  incredibly painful for founders, and navigating that decision is often more delicate than it
• 14:20
  looks on paper.
• 14:21
  So how do you kind of think about that from our shoes?
• 14:25
  Well, I mean, there's, like, two things I'll say.
• 14:26
  One is I look at Koya's path with WhatsApp and just how much of that company they ended up
• 14:31
  investing in.
• 14:32
  The reserves in a big fund makes sense because if you identify a winner and you have exclusive
• 14:36
  access and they like you, you can end up owning a significant chunk.
• 14:39
  Chunk.
• 14:39
  Not only only a significant chunk of the company, actually putting a significant chunk
• 14:42
  of dollars to work in that company.
• 14:44
  I look at Andreessen Horowitz and Databricks is probably another example.
• 14:47
  But probably one of the hardest videos, you know, and we activate videos for our portfolio.
• 14:51
  Probably one of the hardest ones I made was I made a video for our portfolio company who
• 14:54
  said, listen, we don't keep a lot of reserves.
• 14:56
  And most of the reserves we keep are for the top 20% of our portfolio.
• 15:00
  And that is a moving target that's based on my subjective assessment of where we can make the
• 15:04
  most money.
• 15:04
  I've told people, you might come to me and ask for money, and I might tell you no.
• 15:09
  And if I tell you no, it means at this moment in time that you are not in that circle.
• 15:13
  Because to your point about having ring fenced reserves, it's too easy to be like, oh, we have
• 15:16
  the reserves.
• 15:16
  This company needs a bridge or an extension.
• 15:18
  We have a pool of money that we can use.
• 15:20
  It depends on your performance.
• 15:21
  It depends.
• 15:22
  But really, we're trying to keep that money for the top 20% of the portfolio.
• 15:26
  And that's a moving target.
• 15:27
  It's at any point in time when someone asks me, ask myself, is this one of the best investments
• 15:32
  we could make with these dollars?
• 15:33
  And because we don't hard ring fence reserve dollars, it's not like, oh, there's a pool of
• 15:38
  reserves.
• 15:38
  Do I want to dip into it?
• 15:39
  It's more like I have this check.
• 15:41
  I could put it into a new company.
• 15:42
  I could put it into this company.
• 15:43
  I could save it for reserves for another company.
• 15:46
  And, you know, Ashton did an analysis a long time ago where we looked at all of the follow
• 15:50
  on checks we've written and whether we were enthusiastic or maybe hesitant to write it.
• 15:55
  And it turns out we're generally right.
• 15:57
  If we were enthusiastic, it was on average, it was generally a good idea.
• 16:01
  And if we were hesitant, that hesitation was oftentimes well well founded.
• 16:04
  So my conclusion is the hardest part about the follow on reserves conversation is actually the
• 16:09
  relationship dynamic you have with the founder, not your ability to independently assess, is
• 16:14
  this company a good use of follow on capital?
• 16:17
  The number of times where we thought it was a good idea and it turned out to be a bad idea
• 16:22
  wasn't that large.
• 16:23
  And I think that's the hard part when you have ring fence reserves, it's like the temptation
• 16:26
  is to use them.
• 16:27
  But based on the analysis we've done, the underwriting decision is easy.
• 16:31
  The relationship and the delivery of the message is hard.
• 16:33
  And I've taken the approach, if we can tell people in advance this is how we think about
• 16:37
  follow ons, it doesn't mean it's easy to tell somebody no, but at least they have some
• 16:41
  context to tell them no.
• 16:42
  Well, we are all out of time today.
• 16:44
  Thank you, Charles, for joining us in Palm Springs at the Equity Summit.
• 16:48
  Thank you for our listeners for stopping by.
• 16:50
  Please like and subscribe, and we will talk to you with you all next week.
• 16:52
  Two weeks in a row, please.
• 16:53
  Bye.