20VC Inside The Mind of A Leading LP How LPs Evaluate New Fund Managers on Everything from First Meeting to Portfolio Construction To Fees and Carry with Lisa Edgar, Managing Director @ Top Tier Capital Partners

In a comprehensive discussion on "The 20 Minute VC," host Harry Stebbings interviews Lisa Edgar, the Managing Director at Top Tier Capital Partners, exploring her journey into venture capital and the evolution of LP (Limited Partner) investing. Edgar recounts her serendipitous entry into the LP world and emphasizes the importance of time and sector diversification, stemming from her experiences with different economic cycles. She advises emerging fund managers on the significance of GP (General Partner) commitment, the intricacies of fund economics like management fees and carry, and the necessity of building a resilient firm culture for long-term success. Edgar also sheds light on the changing venture landscape, noting the globalization of the industry and the rise of opportunity funds. Additionally, she touches on the role of secondaries in providing liquidity and the art of maintaining relationships with potential investors, highlighting the lengthy and nuanced process of securing LP investment.

• Harry Stebbings is in San Francisco and open to meeting people in person.
• Harry expresses gratitude to Zeus Living for making his stay comfortable.
• The episode was recorded live at Allocate GP in London, an event for General Partners (GPs) in venture capital.
• Listeners are encouraged to register interest for the next Allocate GP event.

"I'm in San Francisco this week, so if you're in town and want to meet, it would be great to meet in person." "This show was recorded live from an awesome event called Allocate GP in London."

• Harry Stebbings is in San Francisco and is inviting listeners to meet.
• The episode was recorded at a live event focused on venture capital General Partners.

• Lisa Edgar is the Managing Director at Top Tier Capital Partners, a venture fund of funds.
• Top Tier Capital Partners has invested in notable funds including Index, Initialize, True Ventures, Andreessen, and Boldstart.
• Lisa Edgar's previous experience includes working at WR Hambrecht + Co and Horsley Bridge.

"I'm very excited to welcome Lisa Edgar, managing director at top tier Capital Partners, one of the leading venture fund of funds over the last decade."

• The introduction highlights Lisa Edgar's current role and the reputation of Top Tier Capital Partners in the venture capital industry.

• Harry Stebbings endorses several companies and products:
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• Carter provides tools for managing startup equity and cap tables.
• Brex provides a corporate card designed for startups with specific rewards.
• RankScience offers SEO solutions to improve organic traffic and content ranking.

• Lisa Edgar did not have a meticulously planned career path.
• She began her career at the Federal Reserve Bank in San Francisco and moved into venture capital serendipitously through a recruiter.
• When she started, venture capital and fund of funds were not widely understood concepts.

"I was working at the Federal Reserve bank in San Francisco and I was trying to move to Portland, Oregon... That was at a time where I think there was four funda funds in the entire industry."

• Lisa Edgar's entry into venture capital was unplanned and occurred when the industry was in its early stages.

• Lisa Edgar has experienced multiple economic booms and busts, which have influenced her investing mentality.
• The .com bust taught the importance of time diversification and sector diversification in investments.
• The global financial crisis led to a focus on J-curve mitigation and cash flow management, with the introduction of secondaries and co-investments.

"I've been through two busts and I say I have one more in me, so that's it." "After the global financial crisis, we also changed a little bit the way we invested, and that was really about j curve mitigation and cash flows."

• Lisa Edgar has adapted her investment strategy based on past economic downturns, focusing on diversification and cash flow management.

• Institutional investors are accustomed to capital calls, and back offices typically handle them separately from the investing team.
• Subscription finance is used to smooth capital calls.
• Family offices and high net worth individuals experience capital calls differently, as the capital is drawn directly from their accounts.

"We're an institutional investor, and a lot of the people that invest in us, we're a fund of fund." "There is this notion of just in time capital calls, and what people are using now is really subscription finance."

• Institutional investors like Top Tier Capital Partners are familiar with capital call processes, and subscription finance is a tool used to manage them.

• The venture capital industry has expanded from a US-focused cottage industry to a global landscape.
• Technological innovation is now happening worldwide, and venture capital has become the financial engine for this global innovation.

"It's changed obviously dramatically from a very small cottage industry that was really Silicon Valley in Boston, so it was really us based."

• The venture capital industry has undergone significant changes, becoming a global market that supports technological innovation worldwide.

• Warm introductions are the preferred method for GPs to get in touch with LPs.
• Lisa Edgar acknowledges the challenges for those without contacts but emphasizes the importance of warm introductions.

"So a warm introduction is really the way to go."

• Warm introductions are essential for GPs seeking to connect with LPs like Lisa Edgar and her team at Top Tier Capital Partners.

• Warm introductions are highly valued in the investment community.
• Inbound pitches are common, but those referred by a known contact are given priority.
• A warm introduction ensures that the pitch will be heard, either directly or through a team member.

"But a warm introduction is the way to go because I get so much inbound as probably everybody does in this room. And if it comes from somebody I know, I-E-A warm introduction, I always answer."

This quote emphasizes the significance of a warm introduction in getting the attention of investors amidst a high volume of inbound pitches.

• Preferences for pitch presentations vary among investors.
• Some investors prefer a free-flowing conversation over a structured slide-by-slide presentation.
• The approach should be adjusted based on the investor's style and the stage of the presentation.

"I cannot go through a pitch deck. I don't have the capacity. ... So I like to have a conversation now."

Lisa Edgar expresses her personal preference for a conversational pitch rather than a structured pitch deck presentation.

• Investors look for what makes the team uniquely qualified.
• Understanding the context and people strategy is crucial in initial meetings.
• Performance metrics such as track record are important but often delved into in subsequent meetings.

"I always try to figure out who they are and why they're different or uniquely qualified to do this."

Lisa Edgar highlights the importance of understanding the team's unique qualifications and context during a pitch.

• A track record is essential, especially for institutional investors.
• First-time funds may be considered, but first-time investors are generally not.
• Both quantitative and qualitative factors influence investment decisions.

"One is that while we might invest in first time funds, we won't invest in first time investors."

This quote clarifies that Lisa Edgar requires a track record of successful investments, even if considering investments in first-time funds.

• The reinvestment process is distinct from initial investments.
• Reinvestment decisions are influenced by numerous subtle factors, both quantitative and qualitative.
• LPs are seen as a valuable platform and are likely to continue supporting a fund, barring major changes or issues.

"All things being equal, the reup will win. Never are all things equal, though, right?"

Lisa Edgar explains that while existing relationships are favored for reinvestment, various factors can affect the decision.

• Starting relationships with institutions is crucial, even if immediate funding is unlikely.
• Persistence and long-term relationship building can eventually lead to investment.
• Different LPs have different receptiveness to early relationships.

"I think certain lps will be receptive to it and certain ones won't. And I think the ones that will, you definitely should, because it is a long term business and you do want to track them."

Lisa Edgar supports the idea of initiating and nurturing relationships with LPs for future investment opportunities.

• Demonstrating the ability to return capital to investors is critical.
• Liquidity can be shown through secondary transactions or partial sales.
• The ability to generate returns, or 'moolah in the cooler', is a key consideration for investors.

"It is. We call it the DPI. It's very important to show the ability to return capital back to the investors."

Lisa Edgar agrees with the importance of demonstrating liquidity in investments, emphasizing the need to return capital to investors.

• Venture capital traditionally involves a J-curve, but the speaker mentions a scenario with only Funda funds and no J-curve.
• The absence of a J-curve implies a different investment trajectory compared to traditional venture capital expectations.

didn't even have a J curve. I mean, think about it. Venture capital, only Funda funds, no J curve.

• The quote highlights the unusual situation of Funda funds operating without the typical J-curve associated with venture capital investments, suggesting a deviation from the expected investment growth pattern.

• The importance of navigating the secondaries market for micromanagers in the next decade is emphasized.
• Early stage managers should learn to navigate secondary transactions due to the increasing normalization of these transactions for liquidity purposes.
• There is a global presence of secondary buyers, and seed managers may sell a strip of their portfolio to them.
• Lisa Edgar agrees with Semil Shah's view on the significance of the secondaries market.

I do want to touch on the secondaries element, because I was chatting with Semil Shah the other day, and he said, the best micromanagers in the next decade will be able to really navigate the secondaries market, especially with the extension in privatization period. How do you think about incoming years for secondaries, the secondary market, and how early stage managers should be navigating it?

• This quote introduces the topic of the secondaries market and its growing importance for venture capital managers, particularly in relation to the extended privatization period.

• The protocol for follow-up communication after initial LP-GP meetings is discussed.
• An LP's lack of response to follow-up emails should not be immediately interpreted as disinterest.
• The art of maintaining relationships without pestering is crucial for GPs to master.
• Persistent and informative communication can lead to successful commitments from LPs.

We spoke about the meeting process as well. Say post meeting, if there's no email back from the LP, if there's no correspondence, post the first meeting, what are the signals that someone is versus isn't interested? And if an LP doesn't email back within a couple of days, does that signal not interested?

• This quote raises the question of how to interpret an LP's silence following a meeting and the appropriate level of follow-up.

• The venture capital industry does not uniformly adhere to a "two and twenty" fee structure unlike private equity.
• Management fees can vary based on the size and number of the fund, with higher fees justifiable for smaller, newer funds.
• Carry should start at 20%, with the possibility of premium carry after achieving a significant return hurdle, preferably three times the investment.
• The European waterfall model is preferred for carry distribution, ensuring LPs receive their initial investment and fees before GPs take their carry.
• The concept of a clawback is discussed, where GPs may have to return carried interest if investments underperform.

So VC is not a two in 20 world. PE is, but a lot of VC isn't. And certainly when I say that, I really mean the top players. I mean, they have premium carry and we are fortunate enough to have a portfolio of a lot of that.

• Lisa Edgar points out the difference in fee structures between venture capital and private equity, emphasizing that top VC players often command premium carry.

• The industry standard for GP commit is typically 1%, but expectations can vary based on the GP's financial success.
• Financial institutions may assist with subscription lines or individual lines of credit to facilitate GP commits.
• Higher GP commits may be expected from more successful managers, reflecting their confidence and investment in their own funds.

How do you think about GP commit and does it need to be the three 4%? And that's market standard?

• The question addresses the norm and expectations around the percentage of GP commit in the venture capital industry.

• Institutions prefer to invest in firms that can evolve into franchises with longevity.
• Building a lasting firm requires consideration of culture, partnership dynamics, and generational transitions.
• Effective partnership dynamics involve planning for partner progression and succession from the outset.
• Lisa Edgar has written a paper on generational transitions, highlighting its importance.

You've seen some of the best emerging fund managers really graduate in the US and be the great funds that they are today. What advice and learnings do you have from watching them kind of graduate and mature for the maybe more micro generation, first generation of earlier stage managers in Europe in terms of that maturation from first fund to franchise?

• This quote prompts Lisa Edgar to share her insights on the progression of emerging fund managers into successful, mature funds.

• Early venture capital (VC) firms often lacked diversity and a focus on firm culture.
• Top Tier Capital Partners spun out of Paul Capital and prioritized building a resilient team and firm culture.
• The firm established four core values: Leadership, Trust, Transparency, and Respect (LTTR).
• LTTR is integrated into the company's operations, including performance reviews and a culture committee.

And then culture. I mean, in the early days, it was really a bunch of guys doing deals, and they often had their own books, and I'm sorry to say, it was all guys, and they all kind of looked the same and went to the same school, which, thank goodness, that's changing.

This quote emphasizes the lack of diversity and cultural focus in the early days of VC firms, highlighting the shift towards a more inclusive and culture-oriented approach in the industry.

And today, if you actually asked any of the now 35 employees at top tier what letter means, they'd be able to tell you what it means, what it means to them about how we act, how we discuss it.

This quote illustrates the successful integration of Top Tier's core values (LTTR) into the company culture, with employees understanding and embodying these values.

• Lisa Edgar's favorite book is "From the Mixed-Up Files of Mrs. Basil E. Frankweiler," a children's book that won the Newbery Award.
• The book's story of children living in an art museum resonates with her love for art and museums.

It tells you a lot about me. I'll tell you two things. It was this great story. I was a kid, I was reading it. A sister and brother lived in Connecticut. They ran away from home and went to the Metropolitan Museum of Art.

This quote reveals Lisa Edgar's personal connection to the book and how it reflects her interests in art and storytelling.

• Lisa Edgar would like to change the need for opportunity funds in the venture ecosystem.

The need for opportunity funds.

This succinct quote identifies the desire to address the reliance on opportunity funds within the venture ecosystem, suggesting a need for structural or strategic changes.

• The availability of information and resources has dramatically increased, aiding learning and decision-making in venture capital.
• Even complex tasks like filling out subscription documents can be learned through online resources.

You could find so many things on the Internet.

This quote highlights the ease of accessing information online, which has transformed learning and operational processes in the venture capital industry.

• Managing an international expansion presents both challenges and opportunities for VC firms.
• Lisa Edgar's role involves understanding the VC landscape in different regions and adapting investment strategies accordingly.

It's a challenge and a real opportunity, and it was really great for me to come here to really learn what's going on in VC.

This quote underscores the dual nature of international expansion as both a challenge and an opportunity for personal growth and strategic development in venture capital.

• The decision to re-invest in a small seed emerging manager was based on a developed relationship and demonstrated progress.
• Relationship-building and trust are key factors in investment decisions.
• The investment involved overcoming initial challenges but led to a strong partnership and co-investment opportunities.

It was a long process and I will say we've had lots of long conversations with the two gps and it's really a partnership now.

This quote conveys the importance of relationship-building and communication in forming successful partnerships and investment decisions in venture capital.

• Harry Stebbings expresses gratitude towards Lisa Edgar for her insights.
• The transcript mentions resources such as Carter and Brex, which provide services to startups and investors.
• RankScience is mentioned as a tool for improving organic traffic and SEO without requiring engineering resources.

Well, Lisa, thank you so much for agreeing to do this with me.

Harry Stebbings thanks Lisa Edgar, emphasizing the value of her participation and the insights shared during the conversation.