20VC How MIT Selects Venture Managers to Invest in The Three Categories of Check MIT Writes Into Funds How MIT Builds Their Venture Fund Portfolio How MIT Approach Direct Investing Why Being an LP Has Never Been Harder with Ryan Akkina @ MIT

Summary Notes


In a comprehensive discussion on "20 VC," host Harry Stebbings interviews Ryan Aquina, a prominent LP and member of the global investment team at the MIT Investment Management Company. Aquina delves into the nuances of venture fund investment strategies, detailing MIT's approach to categorizing venture funds into core relationships, emerging managers, and early-stage opportunities. He emphasizes the importance of not only identifying promising deals but also winning them and providing exceptional founder support. Despite the competitive nature of venture capital, Aquina highlights the challenges and evolving dynamics of fund size, deployment pace, and generational transitions within firms. Additionally, Aquina touches on the complexities of direct co-investments, citing successful examples like Coupang and Rippling, and underscores the delicate balance of maintaining LP relationships and making disciplined investment decisions.

Summary Notes

US Venture Portfolio Structure

  • Ryan Aquina discusses the tiered investment strategy for US venture portfolios.
  • The top tier involves core relationships with investments ranging from $50 to $150 million per fund.
  • A secondary tier includes investments of $10 to $20 million for less mature managers.
  • The smallest tier consists of $1 million checks for extremely early-stage ventures or those with no track record.

"So today, at least in the US venture portfolio, we probably have maybe six to eight core relationships, 50 to 150,000,000 per fund."

This quote outlines the primary investment strategy for core relationships within the US venture portfolio, indicating a focus on a small number of significant investments.

"And then after that, we have another bucket where the check sizes are typically ten to 20 million per fund."

This quote explains the secondary investment tier, which involves smaller investments in less mature managers.

"A third bucket we have now is things where basically we'll write a million dollar our check, because maybe it's extremely early and the person had no track record."

Here, Ryan Aquina describes the smallest investment tier, which is reserved for very early-stage ventures or those without a proven track record.

The Role of LPs in Venture Business

  • Harry Stebbings introduces Ryan Aquina, a leading LP fund investor at MIT Investment Management Company.
  • Ryan has invested in prominent venture firms like Sequoia, Kleiner Perkins, and Andreessen.
  • He also leads direct co-investments into companies like Coupang and Rippling.
  • Hive, Secureframe, and Remote are mentioned as companies providing services for private stock market access, information security compliance, and global employment management, respectively.

"This is 20 VC with me, Harry Stebbings, and I'm very excited to welcome a very special guest today, a brilliant partner to me and 20 VC, and one of the leading lps fund investors in the venture business, Ryan Aquina."

Harry Stebbings sets the stage, highlighting Ryan Aquina's significance in the venture capital world and his role as a leading LP fund investor.

Ryan Aquina's Career Path

  • Ryan Aquina shares his journey from engineering to venture capital.
  • He initially thought he would be an engineer, working on the titanium processor at HP and Intel.
  • At Stanford, he switched to management science and engineering and became involved in entrepreneurship activities.
  • After considering a career in venture capital, he chose to be a management consultant instead.
  • Ryan eventually found his way into the LP world by joining MIT's endowment management team.

"Originally I thought I'd be an engineer and I was lucky. I had this interesting job in high school where I worked at HP and Intel working on microchip design on this project called the titanium processor."

Ryan Aquina reflects on his early career aspirations and experiences in engineering.

"So I got to meet a lot of interesting vcs and entrepreneurs through that got to work with some interesting firms as well."

This quote highlights Ryan's exposure to venture capitalists and entrepreneurs during his time at Stanford, which influenced his career trajectory.

"But then, inexplicably, I decided to be a management consultant instead. So I did that for about a year."

Ryan shares a pivotal decision in his career, opting for management consulting over venture capital initially.

Changes in the Venture Capital Landscape

  • Ryan discusses the increasing complexity and competitiveness of the venture capital ecosystem.
  • The industry has transitioned from a cottage industry with high margins to a commoditized, low-margin business.
  • The challenge now is to find high-margin opportunities in a more crowded and diverse market.
  • He agrees that the industry will continue to attract more capital and attention, making it more difficult to secure investments in top firms.

"It's gotten a lot more difficult for a lot of reasons. I mean, if you just think of the strategy we used to have, and I think a lot of other large endowments had for some time."

Ryan Aquina points out the increased difficulty in venture capital investing due to changes in the industry's strategies and structures.

"But now it's probably every day there's an article in the Wall Street Journal or the FT about something in ventureland or startups."

This quote emphasizes the mainstream attention that venture capital and startups have garnered, contributing to the industry's competitive nature.

Fund Manager Evaluation: See, Pick, Win

  • Ryan describes the evaluation process for new fund managers, focusing on their ability to see, pick, and win deals.
  • The ability to win allocation in competitive deals and service founders effectively is critical.
  • He believes that likability and the ability to appeal to founders are essential factors in a GP's success.
  • The discussion also touches on the importance of track records, which can vary depending on the maturity of the manager.

"The way I usually try to bucket it into different areas for evaluation is see, pick, win, right?"

Ryan Aquina breaks down the fund manager evaluation process into three key components: seeing deals, picking the best ones, and winning allocations.

"But the final boss, so to speak, is, okay, can you get that entrepreneur to pick your term sheet over someone else who's really impressive?"

This quote highlights the importance of a fund manager's ability to secure commitment from entrepreneurs in a competitive environment.

"And a lot of the time we spend with GPS, I'm often asking myself, what kind of founder would this particular person appeal to and why?"

Ryan Aquina emphasizes the significance of a GP's personal appeal to founders in the decision-making process for investments.

Different Flavors of Entrepreneurs

  • Sequoia Capital has a diverse range of partners who appeal to different types of entrepreneurs.
  • This diversity allows Sequoia to cover a broad range of entrepreneurs and startups.

A different flavor of entrepreneur that they would appeal to.

The quote highlights the variety of entrepreneurs that Sequoia's partners are able to attract and work with, contributing to the firm's broad reach in the startup ecosystem.

Learning from Mistakes

  • Importance of learning from mistakes in venture capital.
  • Difficulty in identifying common mistakes.
  • Underestimation of an entrepreneur's commitment and the time it takes to succeed.

It's funny. I mean, I can't point to that many things that are like, the common things that go wrong.

Ryan Aquina suggests that while mistakes are common, identifying a pattern among them is challenging, emphasizing the unique nature of each venture capital experience.

Venture Capital Feedback Loop

  • The need for early wins to establish credibility in venture capital.
  • Success can be influenced by luck and timing.
  • Longevity without success can lead to questions about a VC's capabilities.

I think the feedback loop you have to get going as a vc is you need to have some wins that make you super credible to other people, right.

Ryan Aquina explains the importance of early successes in building a venture capitalist's reputation, which in turn helps attract better deal flow and investment opportunities.

Evaluating Fund Investments

  • Difficulty in assessing a fund's performance in the initial years.
  • Indicators of success include backing companies that gain fundamental traction and have the potential to become iconic.
  • The true measure of success becomes evident between three to five years into a fund's life.

It would be sometime between three and five years where we start to see whether some of their companies really inflected.

The quote discusses the timeframe in which it becomes possible to evaluate the performance of a venture fund based on the growth and potential of the companies it has invested in.

Reasons for Funds Going Sideways

  • Rapid growth can push firms out of their sweet spot.
  • Success can lead to arrogance, loss of intellectual honesty, and a decline in decision-making.
  • Loss of motivation after achieving success can impact performance.

I think sometimes firms grow too big too quickly, right.

Ryan Aquina points out that excessive growth can be detrimental to a venture firm, as it may force them to move away from their areas of expertise or optimal operating conditions.

Loyalty to Managers and Fund Size Considerations

  • The challenge of balancing loyalty to successful managers with the opportunity cost of large fund sizes.
  • Strategies for evaluating when a fund becomes too large, such as assessing the number of capable general partners and historical investment amounts.
  • Deciding when to scale down investments in a fund.

Our default is always to be loyal to the people who we're already invested in.

The quote reflects the inclination to maintain investment relationships with fund managers who have a track record of success, despite the challenges that may arise as those funds grow in size.

Communicating Investment Withdrawals

  • The difficulty of informing managers about the decision not to reinvest.
  • Importance of early communication and honesty in these discussions.

I mean, usually we try to know it well ahead of time and tell them relatively early in whatever their fundraising process is, but there's no way to sugarcut it.

Ryan Aquina describes the approach to communicating with fund managers about the decision not to continue investing in their funds, emphasizing the need for transparency and timeliness.

Decision to Back Green Oaks

  • The initial hesitancy to invest in Green Oaks due to its lack of a well-known brand.
  • The decision to make a small initial investment, which proved to be highly successful.
  • Factors influencing the decision included exceptional founder feedback and an interesting e-commerce thesis.

It's funny, that decision almost didn't happen.

Ryan Aquina shares the story of how the decision to invest in Green Oaks was almost not made, highlighting the importance of revisiting initial decisions and the role of intuition in venture capital.

Strategy Shifts in Fund Management

  • The balance between sticking to a stated strategy and evolving when necessary.
  • Importance of clear communication and purposeful changes when shifting strategies.

Yeah, there's definitely tension there, right?

The quote acknowledges the challenge of managing expectations when a fund manager decides to change investment strategies, emphasizing the need for clear rationale and communication.

Position Sizing and Portfolio Construction

  • Strategies for building a venture portfolio with different tiers of investment sizes.
  • The number of core relationships and the distribution of investments across various fund sizes and stages.

So today, at least in the US venture portfolio, we probably have maybe six to eight core relationships.

Ryan Aquina explains the structure of their venture portfolio, detailing the different levels of investment commitment and the number of relationships at each level.

Venture Fund Deployment Pace

  • Concerns about the rapid deployment of funds by venture capitalists.
  • The difficulty for limited partners (LPs) to criticize top venture capitalists due to the scarcity of investment opportunities.

Yeah, I mean, I would say that's probably one of the things where we most wish people had been more disciplined, right?

The quote expresses a desire for more discipline in the pace at which venture funds deploy capital, especially during periods of market exuberance.

Public Market Influence on Private Deployment

  • The impact of public market performance on private investment liquidity.
  • The challenge of large pre-IPO companies like Stripe not having liquidity events.
  • The need for consistent outflows to support institutional requirements.

It's certainly improved things for us. We're less liquidity constrained now than we were, say, at the beginning of last year.

Ryan Aquina discusses how improvements in public market performance can alleviate liquidity constraints for private investments, but also notes the ongoing challenges due to the lack of liquidity events for large private companies.

Addressing the Liquidity Challenge

  • The limited options for LPs to influence liquidity events for large private companies.
  • Concerns about the impact of investor exits on company valuations post-IPO.

I mean, there's not much we can do, strictly speaking.

The quote reflects the passive position that LPs often find themselves in when waiting for liquidity events, highlighting the reliance on market conditions and company decisions.

Selling Positions in Funds

  • The rarity of selling positions in funds due to the potential for high returns.
  • The reluctance to sell at low prices to secondary funds seeking their own high returns.

We'll certainly think about it. We almost never do it because we're not willing to do it at a low price.

Ryan Aquina explains the consideration process for selling fund positions, emphasizing the preference for holding onto investments rather than selling them at discounted prices.

Decision-Making and Investment Strategy

  • The speakers discuss the importance of having multiple investment tools and being cautious with allocations.
  • They emphasize the difficulty in predicting the performance of investments, even with reputable managers.
  • The conversation turns to the value of direct investments and the preference for investing in known entities with reasonable valuations and structures.
  • The speakers touch upon the need for discipline and the ability to say no to marginal investments, even if it risks future opportunities.

"A good price, certainly we'll think about, but it's just, that's virtually never the case."

This quote by Ryan Aquina highlights the rarity of finding investments at a good price, indicating cautiousness in investment decisions.

"Because no matter your conviction in someone, when you're writing them a blank check, we don't know what's going to happen."

Ryan Aquina expresses the uncertainty involved in investing, even with trusted managers, emphasizing the risk of providing funds without knowing the exact use.

"But if we have an opportunity to invest in something that we know is a great company today at a reasonable valuation, and sometimes with a really great structure around it as well, I find it much easier to have high conviction."

Ryan Aquina explains the preference for direct investments in established companies with reasonable valuations and favorable structures, which offers higher conviction in the investment.

Investment Structures and Protection

  • The speakers discuss investment structures that protect the downside while maintaining upside potential.
  • They describe a specific investment in Coupang through a structured note that was senior in the capital structure, providing downside protection.
  • The importance of a prepared mind and trust in the management team is highlighted when making quick investment decisions.

"Most of the money we invested in that was in this special structured note where we felt it had very protected downside, but managed to keep a lot of the upside as well."

Ryan Aquina details the structured note investment in Coupang, which offered protection on the downside while allowing for upside potential.

"Well, basically it was a note where it was the most senior thing in the capital structure. And of course, we had a view about the minimum future ev of that enterprise."

Ryan Aquina clarifies that the note's senior position in the capital structure provided a level of security against losses, based on the expected enterprise value.

Due Diligence and Underwriting in Direct Investments

  • The conversation covers the importance of thorough due diligence and the potential pitfalls of insufficient investigation into direct investments.
  • The speakers recount the process of getting to know a business, such as visiting the company and understanding its operations and financials.
  • They stress the significance of having a "prepared mind" informed by industry knowledge and past successes.

"We do like to get to know these businesses, and so ideally we like to get to know them well ahead of time."

Ryan Aquina discusses the preference for understanding businesses well before investing, indicating a thorough due diligence process.

"We had enough time to go visit the company in South Korea and tour some of the warehouses and things like that, get to know bomb a little bit better."

Ryan Aquina describes the hands-on approach to due diligence, including visiting company sites and getting to know the management, which was the case with Coupang.

Portfolio Allocation and Sizing

  • Speakers talk about the variability in investment sizes based on liquidity and opportunity.
  • They discuss the constraints of investment allocations and the necessity of being adaptable.
  • The example of a large, successful investment in Coupang is contrasted with a limited opportunity in Snowflake due to allocation constraints.

"It depends on our liquidity at any given time, but there's a huge range, honestly."

Ryan Aquina explains that investment size varies depending on available liquidity, indicating that financial flexibility influences decision-making.

"If something's earlier stage and less certain, doesn't have as much structure, it may only be a $5 million."

This quote by Ryan Aquina demonstrates the cautious approach to sizing investments, with smaller allocations for earlier-stage and less certain opportunities.

Incentive Structures in Endowments and Foundations

  • The speakers discuss the lack of proper financial incentive structures in traditional endowments and foundations.
  • They highlight the role of culture and credibility in taking risks and achieving success without the typical financial incentives.
  • The conversation explores how to motivate risk-taking in investment management, suggesting personal investment and suitable incentive structures.

"I mean, honestly, I think the answer is no. I think we're able to do what we do because I have to give credit to our CIO, Seth. He's created a culture where people care about doing these things and want to do these things."

Ryan Aquina acknowledges the absence of strong financial incentives in endowments but credits the culture established by the CIO for their success.

"But if I had a blank sheet of paper, if I were running a family office, let's say I would probably do something where one people would be required to invest a lot of their own money in the investments the firm was making."

Ryan Aquina suggests that requiring personal investment from management could create stronger incentives for risk-taking in a family office setting.

Reflection on Price Sensitivity and Investment Outcomes

  • The speakers reflect on the influence of public market trends on exit valuations and the importance of being price-sensitive.
  • They acknowledge mistakes made during market bubbles and the importance of maintaining discipline and declining overvalued investments.
  • The conversation touches on the potential repercussions of passing on investments and the need to balance discipline with maintaining relationships.

"We made mistakes like everyone else. I would give ourselves some credit for. At the peak of the bubble, we said no to several co-investments where people that we really respect and still respect were pounding the table to do these things."

Ryan Aquina admits to past investment mistakes but also notes the prudence shown in declining certain investments during market bubbles, demonstrating discipline.

"It's always a concern. But look, I think you have to be disciplined at the end of the day and say no to things that are marginal uses of your capital."

Ryan Aquina discusses the need to maintain investment discipline, even if it means potentially missing out on future opportunities, emphasizing long-term strategic thinking.

Learning from Direct Investing Mistakes

  • The speakers discuss a failed oil and gas investment and the lessons learned from the experience.
  • They highlight the risks associated with commodity-based businesses and the dangers of high leverage and reinvestment requirements.
  • The importance of resilience and the ability to recover from investment setbacks is underscored.

"You have to be very careful with businesses where you have to reinvest the balance sheet every year."

Ryan Aquina draws from a past mistake to caution against businesses that require constant reinvestment, which can be financially unstable.

"In some ways, I think that's what happened there. And what is my takeaway? You have to be very careful with businesses where you have to reinvest the balance sheet every year."

Ryan Aquina reflects on the oil and gas investment failure, concluding that such businesses can be fragile due to the necessity of continual reinvestment.

Evolution of Investing Style

  • Ryan Aquina shares how his focus has shifted from public markets to private investments over the years.
  • He notes an increased trust in his judgment and an understanding of market cycles.
  • The conversation touches on the challenges of generating alpha in competitive markets and the value of experience in investment decision-making.

"I just find it much easier for me and my personality to, I think, generate alpha on the private side."

Ryan Aquina explains his shift towards private investments, where he feels more confident in his ability to generate returns compared to the highly competitive public markets.

"I think another thing is, I think after seeing things play out over a couple of cycles, I trust my judgment a little more."

Ryan Aquina reflects on how experience and witnessing market cycles have led to increased confidence in his investment decisions.

Mistakes and Missed Opportunities

  • Ryan Aquina reflects on errors of omission as some of his biggest mistakes.
  • Specifically mentions missing the opportunity to invest in OpenAI.
  • Cites the unusual structure and technical uncertainty of OpenAI at the time as reasons for not investing.
  • Suggests that they should have placed a small bet based on Sam Altman's reputation and the idea's potential.

"And probably the number one thing I think about right now is, you know, I mentioned we're investors in YC, and when Sam left YC around then, we also had an opportunity to invest in OpenAI and we didn't do it."

This quote highlights a missed investment opportunity in OpenAI, which Ryan considers significant, especially given their existing investment in Y Combinator (YC) and the transition of Sam Altman from YC to OpenAI.

Portfolio Management Strategy

  • The ideal balance between public and private investments is approximately 50/50.
  • Maintaining 5-10% in cash and short-duration government securities is typical.
  • They use a concept called "drawdown beta" to manage risk, aiming for a beta of 0.75 or less.

"So ideally, we want to be probably about half, half public's privates. We typically carry anywhere from five to 10% in cash and short duration government securities."

This quote outlines their preferred asset allocation strategy, balancing between public and private investments and holding a portion in liquid assets for risk management.

Fundraising and LP-GP Relationships

  • Despite a challenging environment, top firms with strong reputations are not struggling to raise money.
  • Ryan advises fund managers to treat fundraising like an enterprise sales cycle and avoid premature evaluation by large institutions.
  • He suggests that emerging managers will face more difficulties in raising capital in the current environment.

"But I think especially for the firms that have top reputations, I don't think they're having that much trouble raising money."

This quote emphasizes that well-regarded firms continue to attract investment despite broader market challenges, highlighting the importance of reputation in fundraising.

LP Base Construction Advice

  • Advises against exceeding a 10-20% concentration for any single LP in the fund.
  • Management of LP relationships can be time-consuming, especially with a large number of LPs.
  • Discusses the potential negative impact of IR teams creating a barrier between LPs and GPs.

"You probably don't want to exceed ten to 20%, except in very unusual circumstances."

This quote advises on the ideal cap table construction for funds, suggesting a limit on the percentage of the fund that any single LP should hold to avoid over-concentration.

Venture Capital and Firm Building

  • Ryan would like the venture capital industry to be less competitive, though he acknowledges this is unlikely.
  • Discusses the difficulty of ensuring successful generational transitions within firms.
  • Attributes successful transitions to thoughtful mentorship and timely sharing of economics.

"It's very hard, right. I mean, I think the reason it's hard is just because it's unusual to have exceptional people, and then it's very hard to find the next generation of exceptional people."

This quote addresses the challenges firms face in maintaining quality across generational transitions, emphasizing the rarity of finding exceptional talent.

  • Reflects on the pro-cyclical nature of LPs and their changing interests in market trends such as late-stage investments, solo capitalists, and crypto.
  • Open to reconsidering hard tech investments based on the success of companies like Tesla and SpaceX.
  • Discusses the scalability of large funds and the decreasing likelihood of achieving a 3x return as fund sizes grow.

"I mean, something I chuckle about a little is just how pro cyclical people are."

This quote comments on the tendency of LPs to follow market trends, often with a herd mentality, and how quickly their investment interests can shift.

Personal and Professional Reflections

  • Ryan shares his thoughts on various aspects of his role, including the difficulty of disappointing potential investees.
  • Envisions himself possibly working at MIT or a family office in ten years.
  • Expresses a desire to maintain independent thinking and avoid groupthink among LPs.

"Well, I mean, the thing I dislike most, of course, is having to disappoint people."

This quote reveals the emotional challenge Ryan faces in his role, as the nature of venture capital involves rejecting many potential investments.

Industry Observations and Advice

  • Advises against forcing early evaluations by potential LPs, which could lead to being prematurely written off.
  • Suggests that managers should build relationships over time and not expect immediate fundraising success.
  • Discusses the importance of not waiting too long to share economics with the next generation within a firm.

"If an LP is very picky and usually does very mature things, you don't want a situation where you get them to evaluate you prematurely and then you're permanently written off."

This quote offers strategic advice to emerging fund managers on how to approach potential LPs, emphasizing the importance of timing in the fundraising process.

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