The LP Anti-Portfolio

The idea of an “anti-portfolio” reflects some of the great investments where you had the opportunity to participate but missed for one reason or another. There are many excuses, as you’ll see below, but the truth is that you completely screwed it up. This idea was first shown to me in the Bessemer Anti-Portfolio and I think many other VCs have since copied it. I don’t know that any LPs have publicly owned their own fund investing mistakes but some may be out there and I hope readers will point them out to me.  

This notion of the LP Anti-Portfolio came up twice in the last few weeks in conversations with managers and prompted me to go ahead and write this post. It’s an interesting, albeit painful, mental exercise to look back at decisions you made that turned out to be wrong. If you invest for a living, you’re going to have made A LOT of bad decisions. You can only hope to learn from them.  

Venture investing is a little different than other asset classes. I always say that you have to be BOTH lucky and good in venture and I think that I’ve been very lucky. Early stage venture, whether in directs or funds, is about picking the right people to partner with as founders or GPs. There is often less data available than buyouts, or growth, or credit, and the like when you make your decision. When you invest as a venture LP, it’s very similar to investing in early-stage companies. You are buying off on a team and idea with little proof. However, the passage of time provides more information and, now that I’ve been doing this a long time, there is hard data on how fund investment decisions turned out from earlier in my career. And with the benefit of more data, I think you can learn from your mistakes. So, I’ll lay out the most obvious ones here and try to throw in a few learnings too.

True Ventures II –  It’s only fitting that I start with True Ventures as they recently announced their new fund. We are happy to be investors in the two latest funds. And I was lucky to be an investor in every fund since True II while at UTIMCO and now here at Foundry. However, I can remember the chair I was sitting in when we decided not to invest in True II. It was late in the fundraise for them when we got in front of Jon and Phil at the little office on Pier 38. And there wasn’t as much capacity as we needed for a minimum investment (these should sound like excuses) which was a common problem and part of the reason I needed to move platforms. All that said, we knew that True would be a good investment but we didn’t make the exception for size, nor drop everything and pursue it. It turns out True II was a REALLY GOOD investment.  I’m glad we have the whole True gang as friends and partners, we’ve had a lot of good direct investments with them and hope to have a lot more in the future.

First Round Capital – I remember a walk from the St. Julien hotel in Boulder, Colorado with Rob Hayes. We were walking up Pine Street to my partner Jason’s house for a social hour post dinner. I remember the walk specifically but I can’t place the exact year. It had to be the 2008-2009 time frame. FRC was raising a new fund and it was already clear that they were building something special yet it wasn’t well-known to LPs. Rob and I had a very direct conversation about sizing being a challenge but it was perhaps the very first time that I internalized the challenge of scale for me as a venture LP. I remember how that felt, saying it aloud to Rob, and knowing that scale was the enemy of returns in this case. Rob and I have had a chance to stay in touch as friends and now fishing buddies (thanks @Ken) which makes missing those funds all that much worse!  Even so, we are happy to cheer for our friends at FRC to continue knocking it out of the park.  And congrats to Rob on his new role as Board Partner. I hope that means more fishing time too.

Lux Capital –  Peter and Josh came to see us when they were raising what had to be fund two or three? We were still in the old UTIMCO offices so I know it had to be 2003-4-5? They were doing something really interesting with their thought leadership via research and writing. However, they were super young (my age at the time) and we had a really hard time wrapping our heads around their success. The thing that made us pay attention was that Bill Conway had been involved and begun to personally mentor them. That, and they were doing some completely amazing technology investing. Mind-blowing, “can that actually work?” type of investments. They had recently done 3-4 deals with Arch at the time they came to see us and Arch gave them a strong endorsement. We decided not to make the investment from a top-down portfolio perspective. That is almost always a dangerous way of thinking. It should be an input but the bottoms-up view on the specific deal should be the heaviest weighting. At that point, Arch was doing a lot of physical sciences investing and we felt like we were getting some of the exposure already. That may have been true but we shouldn’t have passed. Peter and Josh were a special pairing of minds (and good humans). We should have backed them early and it’s proven out that they’ve built a special firm that continues to back really cool technology (that can actually work!). We are cheering for them and I hope we find a couple more direct deals to do together.    

Spark Capital Fund III – We were lucky enough to find Spark Capital as they raised their second fund. Mark Shoberg gets much of the credit for this one as he found and built the initial relationship. We invested in that second fund which turned out to be a great returner. It was also one of those funds where you could see early on that it had great potential. Interesting companies with early mark-ups and connection to our network of other funds that built conviction for us. Unfortunately, Spark came out to raise fund III just as the overall economy was dipping in 2008-9. UTIMCO had its own set of challenges in that period that kept us from making the investment. One of the challenges was that we had a lot of pressure on legal terms that caused us to push too hard as Fund III formed. We got sideways with Spark and they pulled the fund together without us. Ultimately, that was a very painful outcome. Fund III was a huge returning fund that we missed on. I’ll take some of the blame for that, as I’ve always struggled with the balance of terms in LPAs versus what we see in term sheets for company investments. That said, it was a learning moment. I think you should always focus on the cash flow terms in an investment (timing, order, splits) but the governance terms of LPAs are not where you should focus attention nor burn a relationship. There is certainly data in the negotiation of terms but it should not end up solely driving the outcome. I’m glad to say that the Spark team remains one of our favorite relationships and a big co-investor of ours at Foundry Group.   

The Column Group – The Column Group is one of those where we engaged, recognized there was something there but found a way to be too busy to get it done. This was a team that had the confidence to preach a concentrated strategy and the experience to back it up, even in a first time fund.  Mark Shoberg should get credit for raising this one to the top and I’ll take the blame for not focusing on it. I haven’t seen the actual returns but I’ve heard that they are pretty darn impressive. I had a hard time listing this one, or the next one, as I’ve never been a great selector of life science funds. I feel like we were very lucky with Arch, Sofinnova, and Sante in our life sciences portfolio at UTIMCO. Add in Terry at Polaris and you had some pretty good drug development investors there, even if it was all likely luck. Those funds all were accretive from a return perspective and were done based on special partnership dynamics, not our ability to really vet drug development or life science projects. That said, the next fund to mention is a life sciences fund as well.  

Flagship Ventures – Simply put, Noubar is a force of personality. We should have invested with him. There was a clear change of culture happening at Flagship when we looked at it and the partnership dynamics didn’t feel quite right. We felt that life sciences was going to be driving the firm but it wasn’t apparent in the partnership at that point. We also were really keen on Samir and weren’t surprised to see him leave. However, those are excuses. Sometimes you see a money-maker type of investor and you should invest with them. I’m happy to have seen Noubar prove the success of Flagship and glad that he and Bob at Arch have been co-investors on a few of the good ones.  

There are A LOT more funds where we should have invested and I’m sure that I will get more than a few notes that remind me of other mistakes. That is part of investing. You can’t do them all, nor will you get all of them right. Note that I’m only listing a few of those funds that were deeply considered and/or where real conversations existed. There is a long list of funds where we didn’t engage, usually because of size or bandwidth.

We were lucky to have such good access and opportunity sets. I’m always grateful to have the opportunities to partner with emerging managers (something all these had in common) and I’m sure there are many GPs that are thinking they should be on the list. I always cheer for other portfolios, even when we’re not invested.

Hoping this gives some more insight as to how/why LPs behave and it was actually fun to revisit some of these mistakes, a few that were corrected, and a few on-going relationships despite missing on some good funds!