🎧🍌 Lessons From 21 Years of VC Fund Investing | Alan Feld (Vintage Investment Partners)
🎧🍌 Lessons From 21 Years of VC Fund Investing | Alan Feld (Vintage Investment Partners)
What Vintage looks for in new fund investments, how VCs waste founders time, fund size as the enemy of returns, the value FoFs bring to their LPs, and sustainable ways for VCs to differentiate
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Alan started Vintage 21 years ago, and has since grown the firm to over $4B in AUM. Our conversation spans Alan’s 30+ years investing in VC funds, secondaries, and growth stage startup investments.
He shares lessons learned from six downturns, including what drives VC returns, advice for raising and managing a fund, sustainable sources of differentiation, how Vintage adds value as an LP, and his non-profit work.
Timestamps to jump in:
03:53 What is Vintage
05:40 Why VCs adding value can waste a founder’s time
09:01 VC, where the asset chooses the investor
10:14 Fund size is the enemy of returns in VC
14:57 What people get wrong about FoFs
16:01 The value FoFs bring to their LPs
17:11 Why entrepreneurs drive VC returns
17:55 Vintage’s unique FoF model
19:05 Does replacing the founders with an outside CEO work?
21:39 Starting Vintage after the Dot Com Crash in 2002
23:41 Buying secondaries at 70-80% discounts
25:13 Biggest mistakes when buying secondaries
26:18 Research around what makes the best entrepreneurs
31:09 Lessons from six downturns
37:07 Advice for raising your first VC fund
41:16 The importance of differentiation
45:57 Sustainable ways to differentiate
49:05 What Vintage looks for in new fund investments
49:57 Advice for scaling a VC firm
53:47 Succession planning
57:50 Alan’s non-profit work post-Vintage
Find Alan on Twitter and LinkedIn
Transcript
Find transcripts of all prior episodes here.
Turner Novak:
Alan, how's it going? Welcome to the show.
Alan Feld:
Thank you. It's an honor to be here. I appreciate your inviting me, Turner.
Turner Novak:
It's an honor for you to be here.
First off, I wanted to say thanks for being investors in Banana. Really appreciate it.
Alan Feld:
Our pleasure.
Turner Novak:
So the first question I thought we could kick this off, we're going to touch a lot of different things, can you really quick just explain what Vintage is?
Alan Feld:
Sure. So I started the firm 21 years ago. We manage today roughly $4 billion.
About $2.3 billion roughly is funds of funds, so we invest in other funds, 85% of which is the US and Western Europe. Only venture. We don't do anything other than venture. Mostly early stage.
We have another billion dollars roughly in secondary funds where we buy positions in funds and in companies. And then we also have roughly another 600 million in direct investments. We have growth funds, but it's mostly co-investment with the managers that we're investors in. We don't believe it's the right thing to do is to compete against the funds which were LPs and so we do our best to cooperate with them and to co-invest with them.
In addition to that, we have a free service that we created called Value+ where large companies tell us what their technology pain points are and then we identify startups in our indirect portfolio, which today is about 6,000 companies, that we think can solve the problem for. So let's assume you're a big corporate and you're a CMO or a CIO or a CFO and you've got a certain technology issue and you'd love to be a customer of a startup that you're not aware of that can solve that problem. We basically play that role.
We've generated so far about 300 purchase orders, over 200 million in revenue for the startups, and we haven't taken a dime from anybody. So it's a way, frankly, we make our money more valuable to both the companies and to the funds.
Turner Novak:
So it's that value add thing every VC talks about, but you actually added and tracked what you've contributed.
Alan Feld:
Yeah. Well yeah, and I'll tell you why we're in a unique position because we're like a Switzerland of the industry. So when you're sitting on top of everybody's portfolio, it's not like you've got 20 or 30 companies you're promoting, you've got 6,000, and so the chances are there's something in there that a corporate would want.
One of the problems that I've seen with value add, and I feel bad for the entrepreneurs actually around this, is VCs are guessing what the customer wants and waste a lot of entrepreneur time sending them on wild goose chases, talking to guys who will never buy from them in a million years. They spend a lot of time, and a lot of time is wasted by entrepreneurs.
So what we've done is we've actually reversed it. We've said to the big corporates, what are you looking for? Do you really have an intention of buying? Do you have a budget? And do you have a history of working with startups? So today, one out of every eight introductions we make turns into a deal because we're pre-qualifying the customer not only pre-qualifying the supplier, the startup.
So we don't waste the time of the entrepreneurs. That's why a lot of the VCs which we've invested in and companies which we've invested in appreciate it because we're not trying to waste their time.
Turner Novak:
Yeah, that's definitely a big complaint I've heard from founders who don't like the whole value add thing is that it's the VCs forcing the value on the startups that don't necessarily need it yet. So that's a really interesting approach, maybe a way to get around that.
Alan Feld:
Yeah, it's more pull and not push. And once it's pull, you know there's real demand for it. So we don't waste their time. We made a bunch of mistakes at the beginning when we started offering it because did push and we realized, "Wait a minute, this is not founder friendly because we're actually hurting them and we're wasting their time. Let's make sure we know what the guy wants before we actually create the meeting, so that at least there's a chance to get a real deal." And then we track it, and it's worked. 300 purchase orders is not a bad number.
Turner Novak:
That's what startups should be doing, they should be doing customer research and development and finding exactly what their customers want.
Alan Feld:
Well, and VCs should be doing it. You shouldn't be wasting the time of your entrepreneurs. We're trying to do that for them.
Turner Novak:
Just so everyone's on the same page here, there's a lot of founders that listen to this, can you explain what a fund of funds is? It sounds like that's about 60% of your capital or strategy. If I've never heard that word before, can you just help me understand what that means?
Alan Feld:
So one of the things that's interesting about the venture industry, the really good funds continue to be really good funds over time. Why? In the public markets, you don't see a big gap between the best public market investors and the average.
In venture, the gap between the great venture funds and the average venture fund is huge. Why is that? Well, in the public markets, if I think you're a great entrepreneur, Turner, I can invest in you, there's nothing that stops me. In the private market, you pick who your investors are. You're picking. You as an entrepreneur are saying, "I want this fund as my investor."
So there's a selection issue, but the selection is dual. It's not just the fund picking the entrepreneur, it's the entrepreneur saying, "I want this fund."
Turner Novak:
I was going to say it's one of the only asset classes where the asset chooses the investor, right?
Alan Feld:
Absolutely, absolutely. Also, look, the other thing in the public markets, nobody has unique information. And if you invest on unique information, you go to jail.
Turner Novak:
Yes.
Alan Feld:
You go to jail, right? As a friend of mine says, "I don't look good in stripes."
And here you've got the really good venture funds, know a space exceptionally well and have unique information about what customers want or what a potential buyer may want, etc. So because of that, if you're a really good fund, you continue to be a really good fund over time.
The other side of it is venture's not scalable. There's a point at which you get too big and you're just never going to be able to generate the multiples.
Turner Novak:
So can you explain that really quick if I've never thought about that before?
Alan Feld:
Size is the enemy of returns in venture. There's only so many really gigantic outcomes. And if you scale your fund to a really gigantic number, unless you have multiple ones of those, and it's rare that you're going to have multiple gigantic outcomes to the same fund, you're never going to get a multiple because you're going to own only X percentage of the company that's probably going to get diluted over time because there's going to be other investors over here.
Our data has shown that 10% of the companies yield about 80% of the returns in the best venture funds. And because of that, if it's really a game of elephant hunting.
If you become way too big, what ends up happening is the size of your fund determines how much you invest in the company and not how much the company needs. It also basically causes you to push up your prices because you got so much money to deploy, but you can only do so many investments, and then the likelihood of you getting that elephant return goes down.
So the best funds tend to be... The most important factor is dollars per partners. So the more partners you got running after, and the bar is really high on investment, and you want to be the one that has that elephant, you want that threshold of quality to be super high, the more money you have, fewer partners you have with a lot more money, the bar starts lowering.
Turner Novak:
Is there a good ratio, like every $100 million you need one partner or every $500 million you need one? What's the number?
Alan Feld:
It's a function really of what the strategy is because when you're an earlier stage investor and a seed investor, you don't need the same amount of dollars per partner. When you're a growth investor, you're writing much larger checks for the growth, and of course the hit rate is higher, the multiples aren't the same but the hit rate is higher.
So anyway, bottom line is, so why do people come to us? Because they're saying two issues. One is if the funds themselves are capped in size, and they're really good funds, they're also picking their investors, just like with the entrepreneurs. "I can't take unlimited capital otherwise I'm going to hurt my returns, I could only take X amount of capital. Well, I want to take that capital from investors who are going to help me."
So by positioning ourselves almost as we call it the blue collar LP, the LP works for the GP, we're trying to make our money more valuable and therefore get into better quality funds than maybe the average investor has been able to access. That's one.
Second, this is all we do. We've made loads of mistakes, but we've also hopefully gotten a few things right. And from that experience over the years, when a new manager comes to us or a breakaway manager or something allows us to hopefully assess them better and our network allows us to hopefully better assess whether this is going to be the next a16zs, the next Sequoia or whatever, and that's our job. And what it does is gives our investors a diversified exposure hopefully to the better managers, which they can access or can select.
Turner Novak:
And then sometimes too does it help with size of portfolio and check size issues where if you want to invest $100 million into early stage venture it might be hard to get that in certain number of funds or you could just give it all to Vintage, and you'll-
Alan Feld:
Yeah. Exactly. And then it goes the other way too, which is if you're a smaller investor with $5 million and nobody doesn't really want small checks in their fund, yeah, we can give you the diversification. So yeah, it works for both cases. That's why a vast majority of our investors are institutions that say, "Look, take this money, put it to work well for us."
And we also by the way, help our LPs build relationships directly with the funds over time. So as the funds decide to scale or maybe add additional product, we'll have them do that directly. We're trying to be helpful to them in building their own programs.
Turner Novak:
What do you think is something that people maybe don't understand about the fund of fund model? Just when you think about that as an asset, what's something that people might not realize at first?
Alan Feld:
I don't think people realize two things.
One is how sticky being a good investor is. In other words, as I say, the top quartile tends to... It's not a random kind of thing. The likelihood of you being top quartile again is a lot higher than if you're a median fund and you're going to get the top quartile. And because of that, access is an issue.
People sort of say, if I’m in a bunch of "good names", that maybe haven't really generated the returns yet that somehow they're going to turn out to be better and I'm going to generate great returns, just because I'm a venture. Doesn't work that way. The median fund isn't that great. If you're not in the top quartile or ideally the top decile funds, you shouldn't be in the asset class. So that's one.
The second thing I think is, look, you mentioned this, you alluded to this previously, which is if you're a big institution you can't put a lot of money to work in each individual fund. Well, if you're a big institution, is that a great use of your time looking at five and $10 million checks into smaller funds? Or why don't you just give it to somebody else who can do that for you more effectively, and then know it's in hopefully good hands? That's what we've been offering as the value proposition.
Turner Novak:
I feel like in some cases there's a discovery component too. You want to have your own program, you love venture, you want to be a little bit more hands-on choosing small managers. But you don't know where to start, so Vintage can probably... You say, "We've invested in hundreds of funds."
Alan Feld:
Well, we track 4,000 venture funds today. And look, we have a team of 60 people. To do this really well, you need a very, very large team that can do it.
The other thing too is many of us come with either long-term technology investment experience or even operational experience. When we diligence a fund, we talk a lot to entrepreneurs and co-investors. It's much more important to do that than frankly... We do all the spreadsheets, but that's just the ticket to play. To do it well, you really have to be talking to entrepreneurs because at the end of the day, venture is all about the entrepreneur.
At the end of the day, the great venture funds are the ones who are magnets for great entrepreneurs. How do you make that decision? Well, how do you decide that unless you talk to the entrepreneur, especially if it's an early stage fund? You want to say, "Wow, is this a guy that I would back and do they know their space and are they realistic about how they're building the business?" etc.
We're somewhat different than all the other groups that are funds of funds, we divide by sector. So somebody who's got an AI story or somebody who has a FinTech story, or are AI or are FinTech, a partner does the diligence so they can talk intelligently to the entrepreneurs or to the FinTech entrepreneurs, etc.
Turner Novak:
And this is because it layers over. When you think about the fund investing strategy, the secondary strategy, the growth co-investing strategy, you have one individual like AI who does all three of those categories-
Alan Feld:
Correct, correct. But for the fund of funds, it's particularly important because you can have an intelligent conversation with the entrepreneur because you know their space. And then also, of course, we can be helpful to them too beyond that, because when we talked about the Value+, we have a team that does the value, but if you have an industry person who's tracking the company, you can give some real guidance to the Value team.
"Wait a minute, the real potential customer is this, not this. Wait a minute, we haven't thought broadly enough about this company. This technology is also very, very relevant for this sector too." So we could be helpful beyond that.
Turner Novak:
You mentioned something before we started recording. You've been doing this for 30 years, looking back at the data, when we were talking about betting on founders.
There's this concept of bringing in an outside CEO, replacing the founders, the entrepreneurs are so important. Does that work replacing them with an outside CEO?
Alan Feld:
It's very rare that it works. I have to tell you the lesson that I've learned from the good investments I've made, the bad investments I've made, if you don't believe the founder can build this into a significant business, don't invest. It's so much about the founders.
I know everybody talks market, market, but at the end of the day... I mean, look, Turner, you've done this also a bunch of time, how many people did you invest in that the exact business model they ended up doing in the end of the day was what they show you the first day?
Turner Novak:
I'm pretty sure it's zero.
Alan Feld:
Exactly. In 30 years it's been zero. So at the end of the day, it's really a founder who's going to go find the right market. They have to be able to pivot. They have to be able to understand their domain. They have to be able to really know where to go with the business.
So it's really people. That's why we're so crazily, and I know it sounds weird for a fund of funds to say this, but we are so crazily focused around checking entrepreneurs and entrepreneur quality. Because especially if you're investing in an early stage seed fund, you got to make sure that that person is getting great entrepreneurs into their portfolio.
Turner Novak:
You're basically buying a portfolio of great entrepreneurs. That's what you're doing. There's no real businesses there yet if you're investing in seed funds.
Alan Feld:
That's right. So if people are thinking in terms of, "You know what, this guy's a great technologist. I'll invest in him, let him go build the technology, and then I'll go find a CEO on top of him." Well, you really got to find that unique person or that team combination rather than forcing somebody on top of them. Having this great team combination or the one person who's got both of those aspects, it can really build a significant operation.
Turner Novak:
Yeah, that's the cheat code. It's just you understand the technology, you understand the industry, you understand the business side, you understand marketing, the numbers, you understand your customers. Hard to find. That's why venture, it's a driven business.
So then I guess one big question, so I want to spend a little bit of time going on this, going all the way back. You're from Toronto originally, how did you end up running... What's the largest fund to fund in Israel? It's obviously a little bit different. What's the journey to get there?
Alan Feld:
I moved in 1994. There was a US investment bank called Robertson Stevens and I opened up their Israel office in '94. I worked on a whole bunch of public offerings and M&A deals and other things, and really liked it here and got involved in the tech space, was a VC myself and then gradually, 21 years ago, started Vintage.
Turner Novak:
So you started Vintage, this was 2002, right?
Alan Feld:
Yeah, yeah. The markets were way down, as you know, the markets have crashed. And I learned the way you make money is do the opposite of what everybody else does. Everybody was down on tech in 2002, and we thought there was a really interesting opportunity to buy positions in funds and in companies, and that's how we started Vintage.
We actually started as a secondary fund, built the relationships with the manager through the secondaries. And then over time, we continue to do secondaries, we've got a billion dollars there as well in secondary funds, we also do direct investing. We have about $600 million there.
But the natural extension was if you're buying secondaries and fund some companies, then you want to do primary investing also, which led to our fund of funds and then also led to the primary direct investing into companies as well.
Turner Novak:
So this is actually something that I think our mutual friend Ed Sim brought up, he said even before secondaries... So you were serving on a board together while you were, I think, Vertex Ventures.
Alan Feld:
That's right. By the way, I love Ed. We've been investors with him for a while, significant investors, and he's a fantastic guy and a great investor.
It started with secondaries... And I had met Ed because we were on the board of a company together, answers.com, and got to know Ed and build a nice relationship and a lot of respect for him.
Turner Novak:
So what did you see at the time with secondaries, starting Vintage-
Alan Feld:
Yeah, no, the markets were down. In 2002, NASDAQ had crashed, people wanted out of their technology investments. I even remember there was an article that a professor at Harvard wrote in the early 2000 period that technology is becoming a... "It's like the railway industry, it's going to grow 6% a year and it's topped off," and we said that's ridiculous.
Turner Novak:
Yeah. iPhone wasn't even invented yet. Cloud wasn't invented yet.
Alan Feld:
So our view was, look, as somebody who believes in entrepreneurs and as somebody who believes in the ability to innovate, if everybody's selling, this is exactly what we should be buying.
Turner Novak:
So do you remember what was the pricing like then in 2002, 2003?
Alan Feld:
We were buying stuff for 70, 80% discounts.
Turner Novak:
Wow.
Alan Feld:
By the way, junk at a discount is still junk, right?
Turner Novak:
Yeah, yeah.
Alan Feld:
Which is why the important thing is again, understanding the underlying companies, understanding the underlying entrepreneurs. The fact that somebody put a ton of money into a company at a ridiculous price, even if you buy it at an 80% discount, you could still end up with zero. And we had enough of those too, by the way. You got to make sure that there's really a story there.
Turner Novak:
So what did you look at the time? Was there certain themes that you thought made sense or certain companies that you ended up making money on for the fund? What was the core of that first fund?
Alan Feld:
There were certain things that we thought were really interesting. But I think from the mistakes we made it was, and this is what we changed, when we did due diligence, we did a lot more due diligence on the entrepreneur.
We had a theme around healthcare, we had a theme around all sorts of different areas, but the results were... Fortunately we did well on those funds, but three times a year we beat up ourselves. So we go offsite and beat ourselves up about the stupid investments we made.
As Managing Partner, I always start off with the stupid investments I made. And one of the things that we were looking at was, what did we get right and what did we get wrong? And in a lot of cases, we just didn't get the entrepreneur right and we didn't spend enough time understanding that person. So we may have liked the space, but the company wasn't going to execute. We were too focused on the space and not focused enough on the entrepreneur.
Turner Novak:
I don't know if we've talked about this, what makes a good entrepreneur? What do you look for?
Alan Feld:
We've done some research around this actually and so I'll tell you what triggered the research.
I started Vintage, I'm the entrepreneur behind it, etc, and a couple years ago... My father passed away when I was very young, I was 11 years old, and he had a heart attack at home. My mother and I found him, and it was a horrible situation. He was a physician, and it was obviously a very traumatic thing. And I know how that affected me personally.
All of a sudden, I'm the oldest of three kids and my mother's a young widow at age 33 and had to deal with all sorts of challenges at that point. And I know that had a very big impact on how I developed as a human being and my ability to face a major challenge and address it.
I think one of the things that we do that's a mistake when we look at entrepreneurs, we think their lives begin at age 18, so we start asking them, "Where'd you go to university? Tell me about your work history."
But we don't ask about them as people really. Who are they? Where did they grow up? What were the challenges they faced even as children? Did they work as a kid? Were they competitive? We don't understand who they are as people, and I think one of the things that I started to do much more effectively in the last number of years is when I look at a company I try to learn who the person is. What's the entrepreneur? What did they have to deal with?
One entrepreneur, she’s amazing by the way, one entrepreneur, she told me that she had a situation when she was six years old her mother had a massive stroke at a very young age. And here she is, she had to deal with a lot of issues in taking care of her mother that made her who she is.
Another person told me he ran away from home at age 15 and he had to basically become totally independent at a relatively young age. He had to deal with huge adversity.
And all of a sudden you start seeing so many entrepreneurs who had personal crises or family crises, who got over those and you see how that affected their both interest in becoming an entrepreneur.
Another thing that we found was birth order. 50% of the great entrepreneurs we found, many of them were eldest child. Now, I actually thought the youngest child would be the one who would think out of the box. Actually, the eldest always wanted to take responsibility, wanted to manage, take things forward, lead, which was interesting.
So I ended up realizing, "Hey, we got to understand these people better and not start at age 18."
Turner Novak:
Makes sense. So a real focus on founders, what drives them, their psychology, and if they're going to be able to run the marathon or the ultra marathon of building a business.
Alan Feld:
You know what's interesting, also, by the way, Turner, we saw a lot of really good entrepreneurs were played competitive sports but interestingly not team sports, individual competitive sport, which was really interesting.
Turner Novak:
Yeah, you'd think it would be team.
Alan Feld:
There's this thing, it was tennis or it was squash competitively or marathon running as you just mentioned, or other things, which is interesting because I think maybe also because the challenges they had as kids, they ended up learning how to be very self-reliant, to a certain extent that also translated into their competitive side.
Turner Novak:
I can see that. Yeah, you've been disappointed or let down by the world and you just figure out whatever you need to do yourself to just get past it, so you become very individual in a sense.
Alan Feld:
But at some point they have to make a transition to learning how to rely on other people, how to manage a team, how not to do everything themselves but to learn how to delegate. And not everybody who's had that crisis learns how to delegate and to rely on other people.
For me it's meant is understand that ability to pivot, that ability to deal with adversity in a founder right through their lives, but then also to do the due diligence to understand that they know how to lead people and to delegate and to realize that there are people who are going to know something better than they do.
Turner Novak:
Is there certain ways that entrepreneurs shoot themselves in the foot, or avoidable mistakes? And maybe we can tie it back... We just got out of this Zurp environment, maybe there's a lot of lessons we can learn from the dotcom bubble and maybe there are even things founders can think about over the next couple years, any big things that stick out to you?
Alan Feld:
Yeah, one is put yourself into perspective. One of the things that I saw, and I saw this in... I've been through now, depends on where you count, I actually started my career in '87, so I've been through either five or six downturns. And you see a lot of the same stuff in the cycle.
One of the things that I saw a couple years ago was everybody's focused, "I have to be a unicorn. I have to be a unicorn." I don't think that was at all important. I think that's almost an ego play.
I think the bigger issue is how much money do you really need to build the business? Who are the right partners for you to work with to build your business? The fact that you can run around and say I'm running a unicorn or not is really not relevant.
We had the same thing in the 2000 period where again, people were way too focused on the ego boost of saying, "I raised money at this value." I think that's not important. That wasn't the right thing to do. So I think you got to be honest with yourself about where you are in that journey and realize there's a next day.
The other thing that I see with entrepreneurs is I know it's difficult to say what my midterm and longer term strategy is and longer term vision because the world's constantly changing. But I think a lot of people are too focused on the product today or the solution today, and not thinking where do they want to go. Too concerned about optimizing the short term and not optimizing the long term.
And at the end of the day, the really truly great companies are the people who integrate into you as opposed to you integrating into them. I think the end of the day is you got to be thinking about what's the broader story and always keep your mind on and the eye on the ball of what you do to build a much bigger story.
And look at each one of the products you're offering, doesn't make a difference what kind of business you're doing, as an interim step toward that. There's too many cases where I think people are just focused on the quarter, on the quarter, and not thinking on the longer game.
I think the third thing I've seen is, man, you got to find VCs who know how to be coaches, advisors, and not micromanagers. I've seen too many cases where the VC manages the business. When the VC manages the business, you may as well shut it down. There's a big, big difference between having a VC put up a mirror in front of you and a VC saying, "This is how you're going to run the business," and they're your partners.
So at the end of the day, again, when we bet, we're betting on the entrepreneur and we want to be supportive of them. Doesn't mean we have to agree with them on everything. We can argue with them, but at the end of the day, it's the entrepreneur's decision, and you've got to be respectful of that. And I think entrepreneurs have to be able to stand up to their VCs and realize they're the CEO and at the end of the day, they're responsible for the decision.
Turner Novak:
So then when you were raising the very first Vintage fund in 2002, 2003, would you say it would be a similar environment to right now or maybe two years after?
Alan Feld:
Well, I remember the markets had gone down by... The public markets, NASDAQ had gone up to about 5,000 points and overnight had gone down 80%, or largely overnight had gone down almost 80%, and it was ugly.
Turner Novak:
So it was almost like 2022 but it never recovered, it just stayed-
Alan Feld:
Right, and it just kept going down.
Turner Novak:
It just kept going down, okay.
Alan Feld:
Yeah, it just kept going down.
The other thing too, remember, look, the difference today is if you look at a lot of the companies today and then compare it to then, a lot of these companies were... Companies were going public with $25 million in revenue. You could take pretty well anything that had .com in the name public.
Turner Novak:
That's crazy.
Alan Feld:
A lot of the companies that even got whacked with what's going on right now still are real companies. They weren't capitally efficient because people threw money at them and they tried to "buy" the business instead of building the business. One friend of mine said they were chief equity officers instead of chief executive officers. But there's still a business there. There still was a story.
Back then, there was a lot of stuff that they weren't really businesses. Internet penetration then was tiny compared to where it was. And I know that for some of your listeners, this sounds like prehistoric times, but this was before the iPhone.
Turner Novak:
I'm sure there's some listeners that weren't even born back then. We've got some young listeners, too.
Alan Feld:
First of all, if you had a mobile phone, it was about the size of-
Turner Novak:
Like a laptop. It was massive. They were like bricks, right?
Alan Feld:
Yeah. When I was an investment banker 30 years ago, I even actually raised money for one of the first email companies.
Turner Novak:
Wow. How did that go?
Alan Feld:
Yeah, it was great. It was great. It was a company called Com Touch. It went public at one point, but as you can imagine, nobody wanted to pay for email after a certain point. But yeah, it was a very different time.
Turner Novak:
So how did you raise the fund? How did you approach it? Did you find an anchor investor? Did you have some individuals that had supported you for a long time? How did that fund come together?
Alan Feld:
So the lesson that I learned when you're starting a fund from zero, you should basically get a close done. Doesn't have to be huge. Get a few deals done, show that you can deliver on the model you presented, that you can do interesting investments, and then when the investor then for the subsequent close come in, they can see, "All right, it's not a total blank check."
They can see what you consider to be a good entrepreneur. There's something to diligence, and that's what we did. We did a few secondary deals, our investors could see, "Hey, these are pretty interesting deals," and it was easier to raise. So I keep telling people, just get the first close done, get some deals done.
Turner Novak:
So how do you do a first close?
Alan Feld:
Usually it's friends and family. It's private investors. Unless you're an investor or a VC with a long track record, it's really hard to get an institutional investor into your first close or you've got some special relationship with that institution or that corporation.
Usually it's family offices who are willing to take a chance on you. And what I would say is get the family offices wrapped up, get a few deals done, and then go to the institutions.
Turner Novak:
Would that be 10% of your target size? 50% of your target size?
Alan Feld:
You want enough of a close that you can actually do some deals. So it's typically, I would say, 25% to a third of your target close.
Turner Novak:
Okay. And then how do you recommend people to run a fundraise process? If they're a VC raising one of their maybe first couple funds or still new at this? Can you talk us through if I've never done it before, how would you advise me to approach it?
Alan Feld:
Well, first of all, you got to decide you really want to do this. If you look at the number of funds that it's rare that a venture fund is going to survive less than 15 years. The vast majority of venture funds last a pretty long time.
It's your name on the door, you're the one raising the money, you're the one who looked at everybody's eyes and said, "Put money with me," so you got to make sure you want to be doing this long term. I don't think enough people do that and think enough about it. They're excited, A, about being a venture capitalist, and then they realize, "Wait, my God, I'm going to be doing this for a long, long time."
Second thing is if you're picking a partner at the beginning, I don't think people spend enough time with the partners. One of the things I always recommend to people is spend time with a partner and their spouse. I get to know who they are as human beings. This is a Catholic marriage in many ways.
Turner Novak:
You can't get divorced, is that what that means?
Alan Feld:
Well, it's not you can't get divorced but in many respects it's a disaster if a two-person partnership falls away. How does it work? And then what happens to the team going forward and what happens to the firm?
You've got to be explaining all that all the time for subsequent fundraisers. You're much better off making sure that this is a person you want to spend the rest of your career with, and you really should do the due diligence in advance of that when you're starting it.
So I encourage people to really spend real meaningful time together and know that this is a person they want to spend the rest of their career with. Obviously, if it's a sole GP fund, as a friend of mine says, the advantage with the sole GP fund is you know the partners get along.
Turner Novak:
That's fair, yeah. Hopefully they get along. Hopefully they-
Alan Feld:
Hopefully they get along. But at the end of the day, you do want to make sure that this is a person who wants to be in your career. So if you have both of those, then the question is what do you want to be investing in? What's going to be your differentiator?
Turner Novak:
Is that a big deal? Being differentiated?
Alan Feld:
I think so. Because there's so many funds out there today and you want to show that you're going attract, you're going to have sort of a competitive advantage or a special sauce in attracting entrepreneurs. One of the questions we always ask a new fund is why are the great entrepreneurs going to come to you? Why are they going to go to you instead of going to the other seed funds that are out there?
Turner Novak:
Yeah, Sequoia, the Benchmarks. They might want a16z, it's a big checkbook. There's a lot of different things.
Alan Feld:
Correct, so you've got to have something different. You have to either know a space really, really well, or you can add a lot of value to the entrepreneur, around maybe product or around design or around something. There's some clear advantage or you're fishing in a pond that other people aren't fishing because of the relationships you've got in that area or with that founder. So yeah, you need some differentiator.
Turner Novak:
When you're just screening, thinking about a pitch from a manager that's pitching you their fund, are there any differentiators that you don't think are good differentiators or are not that durable that maybe wouldn't get you excited versus some that do get you excited?
Alan Feld:
Yeah. Everybody says, "I'm going to be super valuable." Everybody tells us that. Everybody's pitching us that. "I work really hard to get great entrepreneurs." Well, everybody's pitching this.
Turner Novak:
Yeah. Why would you say I don't work hard, "I just kind of work a couple days a week."
Alan Feld:
Exactly. So I think it's really okay. You as a GP, when you're looking at a company, you're also looking for something to differentiate it. You're looking for an entrepreneur who has unique domain and expertise or a unique technology or an outstanding background that is going to make them really become the leader in the space.
Well, the same criteria that you're using to decide an entrepreneur we're using to decide about a VC. We have a relatively concentrated portfolio. We want to be in hopefully the best funds. And there's only so many truly great funds. The question we're always constantly asking is “why is this going to be one of the best funds?” Why is this fund going to stand out above everybody else? Why is this fund going to get the best entrepreneurs?
And you need something other than I work hard and I'm a great guy and etc. You need some-
Turner Novak:
Are those pretty common? Is that common in the pitch when someone's raising a fund is, "I'm a really hard worker and people like me"?
Alan Feld:
"We're a hard worker. Yeah, I work harder and I'm going to be really added value." Okay, great. Everybody says that.
Turner Novak:
Yeah. Who would come up and say, "I'm going to destroy the companies on purpose and ruin things"?
Alan Feld:
"No, no, we're going to work harder than everybody else. We'll be with the entrepreneur in the trenches." Okay, fine. But first of all, I don't know if the entrepreneur wants you in the trenches, it's a different story. But everybody's saying, "We're going to be involved and we're going to be..." All right, that's table stakes. Okay, so what's the differentiator? What's going to make the next Mark Zuckerberg come to you? You know what I mean?
Turner Novak:
Yeah, that's good. Actually, I remember when I was raising my very first fund, an LP was like, "If the Collison brothers at Stripe were raising their very first round today, do you think that they would take money from you?" It was a good question. It made me think of like, "Oh, yeah." That's basically the point of this is you want to find those types of founders and you want them to like you and you want them to work with you.
Alan Feld:
Yeah, and chances are you're not going to be the only one trying to get those founders to let you invest. So chances are when there's really, really, really great, genuinely great founders, a lot of groups are going to be running after them. We're in a competitive business, so you got to say, why are they going to cut back this investor so I can get a piece?
Turner Novak:
So then what do you think is a durable competitive advantage there as a investment manager, as a VC? What do you look at and say, "That's a great answer to that question on what stands out"?
Alan Feld:
Look, there's no question that people like success. If you've proven you're a good investor in a certain space, people are going to want you because you're almost the definitive statement in the sector. You see this with certain AI investors.
So one of the things is getting to know a space really early and building a theme around it and being perceived as the go-to person for that space.
It could also be certain skills. It could be you've spent a good chunk of your time in product roles or growth roles, and you've seen a lot of different ups and downs in a lot of different companies, and the value of you being there and conveying that and helping the founder build their growth strategy or build their product strategy or something of that, that can also be a differentiator.
People are going to want, especially first time founders, are going to want somebody who's done this before that they can bounce ideas off of, "What am I doing? What am I doing wrong?" etc. Not to micromanage, but to use that experience to be helpful.
So you've got to almost put yourself in the shoes of the entrepreneur and ask yourself the question, why should they come to me? Why am I different?
Turner Novak:
Truthfully and it's defendable in court. People won't be like, "That's kind of bullshit."
Alan Feld:
We've been investors for quite some time in Andreessen Horowitz, and even with their reputations, and Mark being really literally one of the guys who-
Turner Novak:
Invented the internet.
Alan Feld:
... almost from day one. They still end up saying, "Wait a minute, what does an entrepreneur need? Let me build this massive services business essentially to support them. That's going to be our differentiator." I think they've done a really good job with it, by the way. But it's just like running any business, I'm in a competitive industry, my product is money, and I got to sell that product to the best entrepreneurs.
Turner Novak:
Who might not need the money, they might not need the product?
Alan Feld:
Frankly, in an environment like today where there's a fair bit of money out there, arguably it's even a commodity vis-a-vis the great entrepreneurs, well, what do you do to make your money greener than the next guy's? There's got to be some.
Now as an LP, I also got to figure out why your money's going to be greener than the next guy's. Otherwise, what am I doing? Why is this fund going to be a creative to me over everything else I've got?
Turner Novak:
Yeah, that's true. How do you think about adding a new manager to the Vintage portfolio?
Alan Feld:
Is it going to be creative to our returns? At the end of the day, we're being measured by how much we generate to our investors, we manage people's pension money, we manage foundation money. And by the way, we put in a bunch of our own money into this. And we take it very seriously that we're managing other people's money.
So it has to be really creative to our returns. And fortunately, it's gone well for us over the years. So the bar is super high. But, we really want to be with the guys who are getting the best entrepreneurs. And if they can show us that they're getting these phenomenal entrepreneurs, getting good, decent ownership and can add great value longer term, that's super important for us.
Turner Novak:
Yeah. So maybe I just invested or raised, or I'm on fund one or two-ish or maybe three-ish, I want to get to fund four or five, six-ish, how should I think about scaling my strategy if I'm a VC? Maybe we can think about of what you've learned or lessons from your side, but what should I be thinking about as I scale?
Alan Feld:
So first of all, the big question is do you want to scale and should you scale? Just because you're good as an early stage investor doesn't necessarily mean you're a good growth investor. So a lot of people have been doing growth funds on top of their early stage funds, but who's to say that they're going to be a good growth investor?
Turner Novak:
Have those worked? What have you seen in the data?
Alan Feld:
Some have worked. Some have not. I think the ones that have worked really well actually have been the people who brought experienced growth investors to match that portion of the capital, and it becomes almost a best of a... They're trying to build best of breed teams essentially for the different vehicles under the same brand. But that's one question.
Another question is there are two kinds of philosophies. There's some funds that look at their fund as a bunch of individual investors who have an allocation of capital and doing their own investments. And that's worked really well for certain groups.
My personal view is, and it's worked extremely well for certain groups, and we're in some of those groups. There's other groups that take the view, and certainly this is how we work at Vintage, that none of us has a monopoly on good ideas. And it's a good thing that we can challenge each other and we can be honest with each other and not be offended. It's not like, "Hey, I'll improve your follow on if you improve my follow on," kind of thing.
Turner Novak:
Okay.
Alan Feld:
I don't think that's a good thing to do. I think one of the key things is, can you maintain the culture of your organization if you scale? If you bring on additional partners, is that same honesty still going to be there? Is the same teamwork still going to be there?
What's interesting, Turner, is as VCs, we could do a much better job in managing our own businesses. In fact, I think some of the companies, if they managed themselves the way we as VCs managed our business, they'd go under just because of that. We're not sufficiently focused on what's the culture we're trying to build within the organization, what's the relationships we want to build between the partners, what's the relationships we want to build with our customers, the entrepreneurs and the LPs. We're too focused on the individual investments and less focused on how do we really want to build the firm?
Many times we're doing some of the same mistakes that some of the entrepreneurs have made, which is, "I need to be a unicorn. Well, I need to be a certain size, otherwise I can't be a player." No. What's the right size for you to make the maximum return should be the question, not what's the right size for you to be a player.
Turner Novak:
So sometimes smaller fun size actually leads to better returns?
Alan Feld:
Yeah, yeah. We're big believers that size is the enemy of returns in venture. And if you're going to scale it, you better have the right people to scale it and not lose the culture. I've seen too many cases where people scaled and lost the culture, and you could see that was going to happen and we didn't continue.
Turner Novak:
Yeah. I think one thing I feel like you've done a pretty good job at, or at least... I don't know if you've done a good job, but you talk about it. So maybe we'll see because you're in the process of doing it now, thinking about succession planning. How do you succession plan? What are the things to really think about and not mess up in this process?
Alan Feld:
So 10 years ago, I wrote a blog that said at age 62, I'm going to gradually cut down, and that's exactly what I've done.
Turner Novak:
You're 63 now, right? Yeah. Okay.
Alan Feld:
I'm going to be 63 this year, yeah. So I was already working on this 10 years ago, and I said, "Okay, I want to build two generations down of team members that could take Vintage forward for the next 30 years." So not only people in their 40, 50s, but people in their 20s and 30s that can be the next generation after that.
So one of the things that I've done is I've been looking for people who can... Just like entrepreneurs who can scale, I've been looking for investors who can scale into leaders, giving them the tools to become leaders.
I think we're also pretty unique at Vintage. Every single person, including our receptionist gets carried interest. We've been doing that since day one. I want everybody to feel like they're part owners of the business and I want... First of all, I want everybody to make money, but on top of that, I want everybody to feel like they're part owners of the business and feel they can develop within the firm. That's another thing.
Final thing is you got to realize at a certain age as much as you may like what you're doing, and I like what I'm doing, you're not going to be able to recruit really good people if you're holding on from the grave. You got to basically say that the right thing for the firm is that you've got to start stepping away.
Another thing that we've done among the GPs, we're an equal partnership. I think that's a healthy relationship to have as a firm, and it also means that you're having a very high bar to be a partner. It's not just saying you're a partner. And that also allows you to build for the future. I see too many guys hold on economically and otherwise and not letting go, and you got to learn to let go.
Turner Novak:
What's the danger of not letting go? What happens if you don't do that?
Alan Feld:
The firm can fall apart. I've seen too many firms that their good and younger people have said, "Look, this is crazy. I want to be the boss at some point. I don't want to be holding on forever and be the junior," and you lose great people.
Why is that important? Well, we talked about this before, a lot of these funds survive for 15, 20 years, who's going to manage it? You're going to do annual meetings in assisted living? You owe it to your investors.
At the end of the day, you have to make sure that somebody's going to be able to manage this thing. You're taking public money, that's a huge responsibility. So I think it's the right thing to do for the firm, it's the right thing to do for your investor base, to learn how to be able to let go and build a significant sustainable business.
Turner Novak:
Yeah, you're 63, but you're still involved, right? You're still-
Alan Feld:
Yeah. Yeah. At age 62, you stop raising new funds. So I stopped raising new funds. My partners have raised a new growth fund that we haven't yet started to deploy, we're going to deploy it sometime later in the year, that I was not involved in. I'm not on the investment committee. I'm not there running it. And that was a great test because they were able to do it with me.
And the other thing too, by the way, we said to our LPs six, seven years ago, "This is the succession process," and it's also going to apply to them. So our LPs have total visibility into our succession process. We don't hide it from anybody. We're very public about it.
Turner Novak:
Yeah. So then what are you doing next? You're still involved in Vintage, but what are some of the new projects you're starting to work on?
Alan Feld:
So there's a few things I always wanted to do, I'd love to do a doctorate in history, that's something I hope to do one day. But a lot of nonprofit related activity.
Fortunately, things have gone well and there's a number of issues that are super important to me personally, and one of them is trying to bring in more people from diverse communities into the high-tech industry in Israel. Where I'm based, it's particularly important. So we've done a lot around bringing people from the Palestinian, Israeli community into the high-tech industry and want to continue to do that.
The economic empowerment, maybe I'm crazy, but I'm one of these optimistic people who believe the vast majority of people are good people and I want us to be in a situation "It's for my friend from work and not my enemy." So we have recently... Amazing gentleman joined as the... Couple of months ago, we announced it in the summer, Haj-Yehia, who's a Palestinian-Israeli, who became the chairman of our international advisory board, we have people from the Palestinian community in our firm, and I think it's extremely important that we continue to build that. So I'm trying to do a lot of nonprofit activity around that. That's one issue.
Another significant issue is I think we have a lot of work to do to strengthen the universities in this country and university research, so I'm going to be working a lot around that. So we've got a bunch of projects right now that I'm involved in.
Turner Novak:
Yeah, that's exciting. I feel like sometimes the diversity, inclusion, all that kind of stuff, we can overlook certain aspects of it or lean too much into certain elements of it, but I think you were mentioning before it actually... Generally if you have a diverse point of views and team member experiences, the team actually performs better also.
Alan Feld:
Well, yeah, and I've seen it with us. I think having a diverse team is you get out of the group think, and I think it really helps a lot. We're seven partners, three of whom are women, and I think it has a big impact on how we make decisions and the perspectives we bring to the table. I don't look at it as like I've got to do a check mark. It doesn't mean go recruit diverse people just because you got to say I-
Turner Novak:
Yeah, checked a box.
Alan Feld:
Right. But I think what you got to do is you should go for the best person, and if the best person is diverse, great.
But I think one of the problems that we have as an industry is we don't look hard enough the find the great diverse people. And so we've made a conscious effort every time we recruit to make sure we have diverse candidates. Doesn't mean we're going to take the diverse candidate, but we want to make sure we have diverse candidates every time we recruit. And that's the only way we're ever going to continue to build the team, and I think we're a better firm for it.
Turner Novak:
Speaking about becoming a better firm, how did Vintage turn out differently than you thought it would back when you started? Anything that stands out?
Alan Feld:
Yeah. I never thought we'd grow to where we are. I knew we wanted to have a lot of different functionality and eventually get much more international and everything else, but I never thought... It's gone very well for us. I never imagined it would go as well as it's gone for us. And thank God, I'm grateful for that.
But I think a nice thing about it is you never know that after 21 years you're going to be able to say, "I love my partners," and I love my partners. I've been fortunate to work with phenomenal human beings. You see it up in the ups and you see it in the downs, and we can disagree on all sorts of stuff, but man, if I could do it over again I would do it with the same people.
Turner Novak:
Wow, okay. That's a very big endorsement for the current team then.
Alan Feld:
By the way, I'm an LP in the current fund, in the new fund that I'm not part of. I'm serious, in the new fund that I'm not part of I'm an LP. Not because I had to be. But because I think I'm going to do really well with them, and they're great human beings. You know what? It gets back to the culture point we talked about before, I want to be proud of the people I'm working with and proud of the people who I call my partner.
Turner Novak:
Yeah. On that note, I think this is a great spot to wrap up. This was an incredible conversation. Thank you so much for coming on.
Alan Feld:
Hey Turner, thanks a ton. It was really nice chatting with you and I really appreciate it. Continued good luck and continue the success.
Turner Novak:
Thank you.
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