20VC The 3 Things LPs Want To See From VCs & Why The Table Stakes For VCs Is Higher Than Ever with Judith Elsea, CoFounder @ Weathergage Capital

Summary Notes


In this episode of the 20 minutes VC, host Harry Stebbings interviews Judith Elcia, co-founder of Weathergage Capital, a prominent fund of funds with $950 million under management. Elcia, who previously served as CIO for the Ewing Marion Kauffman Foundation, discusses the venture ecosystem, the importance of LPs (Limited Partners) in venture funds, and the evolution of the VC industry. She emphasizes the significance of entrepreneurs' perspectives on VCs, the use of data for deal evaluation and company growth, and the necessity for VC firms to reinvest in themselves to stay relevant. Elcia also touches on the challenges new fund managers face when raising capital and the need for long-term relationships with LPs. The conversation also explores the role of social proof in investment decisions, with a focus on founders' opinions as leading indicators for a VC's brand strength.

Summary Notes

Introduction to Judith Elsea and Weathergage Capital

  • Harry Stebings introduces Judith Elsea, co-founder of Weathergage Capital.
  • Weathergage Capital is a leading fund of funds with $950 million under management.
  • Elsea was previously the CIO of the Ewing Marion Kauffman Foundation.
  • She played a key role in creating the Kauffman Fellows Program.

"So joining us on the show today is Judith Elcia. Now, Judith is the co-founder of Weathergage Capital, one of the leading fund of funds with $950,000,000 under management."

This quote introduces Judith Elsea and her current role at Weathergage Capital, highlighting the firm's significance in the venture capital ecosystem.

Harry Stebings' Personal Journey and Acknowledgments

  • Harry expresses gratitude to Judith for her advice and support in his personal journey.
  • He thanks Beza Clockson at Sapphire Ventures for introducing him to Judith.
  • Harry recommends openlp.com for insights into the LP world.

"And since our meeting she's been so kind as to help and advise me in my personal journey. So for that I'm incredibly grateful."

Harry Stebings appreciates Judith Elsea for her mentorship and guidance, emphasizing the value of such relationships in professional development.

Venture Capital Industry Insights

  • Judith Elsea's interest in venture capital stems from her curiosity about economics and motivations of economic actors.
  • Her career spans various investment roles, including public equities and private equity.
  • Venture capital appealed to Judith due to the dynamic nature of startups and the potential for significant societal impact.

"But what really interested me in venture was when I used to run public equity portfolios. After a while, it was really hard to get excited about your job if you had to spend time wondering if Walmart was going to miss or beat earnings by a penny."

Judith contrasts the routine analysis involved in public equities with the more dynamic and impactful nature of venture capital, explaining her shift in career focus.

The Appeal of Venture Capital

  • Judith is fascinated by the risks entrepreneurs take and the potential rewards of their endeavors.
  • She cites Uber as an example of a startup with far-reaching consequences for various industries.
  • Entrepreneurs often drive societal progress through innovation, which Judith respects and finds intellectually stimulating.

"It's really entrepreneurs who are working hard on the stuff that really push society forward. Most of the time they fail, but sometimes they succeed, and I just really honor that struggle."

Judith highlights the significance of entrepreneurial efforts in advancing society, acknowledging both the challenges and the triumphs of the startup world.

Economic Motivations in Venture Capital

  • Judith points to the current renaissance in innovation, particularly in IT and life sciences.
  • She believes that exposure to these innovations is mostly possible through investment in young, private, venture-backed companies.
  • The venture asset class is attractive not only intellectually but also economically due to the potential for high returns.

"There is this enormous renaissance in innovation in both IT and life sciences now. And it's extraordinary, and we think it's quite durable and will be quite long-lasting and meaningful."

Judith discusses the current innovation boom and its durability, emphasizing the unique investment opportunities it presents in the venture capital space.

Fund of Funds and LP Perspectives

  • Judith addresses the perception of fund of funds as a middleman by focusing on the unique opportunities they provide access to.
  • She acknowledges the abundance of venture funds but stresses that only a subset are likely to generate strong returns.
  • Weathergage Capital aims to provide exposure to high-quality venture opportunities.

"There are a lot of venture funds out there, but of course, and we think a broader number of them are positioned to produce really good returns."

Judith responds to the skepticism around fund of funds by underscoring their role in identifying and investing in venture funds with the potential for high returns.## Role of Venture Capital Firms in Portfolio Construction

  • Venture capital firms offer a unique entry point into investment opportunities that may be inaccessible to limited partners (LPs) individually.
  • These firms provide exposure to investments in specific quantities that align with LPs' portfolio strategies.
  • LPs value venture capital firms for their ability to execute strategies that LPs may find challenging to implement on their own.

"Vector into that world and we like." "By doing something for our lps that they can't do for themselves or they can't do for themselves. In the quantum in which they would."

This quote emphasizes the role of venture capital firms as intermediaries that provide LPs with access to investment opportunities and strategies that may be difficult for them to execute alone.

Manager Evaluation and Cash on Cash Returns

  • Cash on cash is a critical metric for LPs when evaluating fund managers, but it's not the sole consideration.
  • Because venture capital returns can take a long time to realize, interim measures are necessary for assessing fund opportunities.
  • LPs use standard financial metrics such as net IRRs, TVPIs, DPis, and benchmark comparisons, but also consider qualitative factors to construct a comprehensive view of an investment opportunity.
  • The quality of the portfolio, adherence to strategy, and the track record of the partners are scrutinized to gauge the likelihood of repeat success.
  • Entrepreneurs' and founders' opinions are highly valued as they are the primary drivers of returns in the venture capital industry.

"It is all about cash on know. Fortunately or unfortunately, in venture at the." "So one needs interim measures to evaluate fund opportunities."

These quotes highlight the importance of cash returns in manager evaluation but also acknowledge the need for interim metrics due to the long-term nature of venture investments.

Importance of Founders' Opinions and Social Proof

  • The opinions of founders and entrepreneurs are considered leading indicators of a VC firm's effectiveness and brand strength.
  • LPs' opinions of a VC firm's brand are seen as lagging indicators when compared to the perspectives of founders.
  • The most valuable social proof for LPs is the endorsement of entrepreneurs, rather than the views of other LPs or the broader market.

"It depends on who's social proof." "The most powerful form of social proof for us is the opinion of entrepreneurs and much less so the opinion of."

This quote explains the prioritization of entrepreneurs' opinions over others as a form of social proof in the decision-making process for LPs.

Characteristics of VC Teams and Data Utilization

  • LPs are attracted to VC teams that are well-regarded by founders, proactive, and scrappy.
  • Successful VC teams focus on winning high-quality deals, putting founders first, and working hard to support company success.
  • The systematic use of data to find, evaluate, and accelerate the growth of companies is a newer, important characteristic sought after by LPs.
  • VC teams are expected to assist companies in practical ways, such as making connections, hiring, and customer acquisition.
  • LPs favor VC teams that have their own conviction and are less influenced by the investment decisions of other VCs.

"Is the teams that are well regarded by founders, and we like VC teams who are just scrappy as hell." "The use of data now, I think in the VC process is a really powerful change."

These quotes underscore the importance of VC teams being respected by founders and using data effectively as part of their investment strategy.

Building VC Firms and Engaging with LPs

  • LPs look for VC firms that are intentional about building their firm and platform, and how they engage with LPs.
  • Useful engagement between LPs and GPs goes beyond traditional communication methods and involves a willingness to consider new opportunities and maintain an open dialogue.
  • LPs prefer to have a wide aperture for viewing new groups and maintain a concentrated portfolio, making it challenging but not impossible for new managers to earn a place.
  • Warm introductions are beneficial but not mandatory for managers approaching LPs, and sharing data such as portfolio company information is a key part of the engagement process.
  • LPs use proprietary tools to collect data and often share insights with managers, providing feedback based on comparative data from other funds in the same investment timeframe.

"Is how are they building their firm, what kind of firm do they want to build, what sort of platform do they want to build and how do they engage with lps in useful ways?" "So of course, a warm introduction is."

These quotes discuss the qualities LPs seek in VC firms regarding their growth strategies and the importance of meaningful engagement with potential and existing LPs.## Venture Capital Investment Decision-Making

  • Venture capitalists must present their ideas for investment, understanding they may face rejection.
  • Honest feedback is crucial, detailing both positive and negative aspects of the proposal.
  • Common reasons for not investing include undifferentiation and lack of exemplary records for experienced managers, or short track records for new managers.
  • The opportunity set provided by the managers may not be distinct or superior to existing investments.
  • Poor returns, weak articulation of opportunity, or underdeveloped concepts can lead to investment rejections.
  • The intellectual caliber of individuals in venture capital is generally high, making outright poor propositions rare.

"Most of the time it's undifferentiation."

This quote explains that a common reason for investment rejection is the lack of a unique or distinguished approach from the venture capitalists seeking investment.

"These managers may be good and may be interesting, but it's not demonstrably different or better than the managers with whom we're already investing."

This quote emphasizes the importance of differentiation and superior performance in investment decisions, stating that without these, even competent managers may not receive funding.

Commitment to Venture Funds

  • Institutional investors often view the first commitment as extending to at least two or three funds.
  • Insufficient information from the first fund may not justify changing investment decisions by the second fund.
  • Due diligence and avoiding initial mistakes are crucial for maintaining investment commitments.
  • Loss of relevancy with founders, poor deal acquisition, and lack of reinvestment in the VC firm are reasons to cease backing.
  • Critical team member loss or poor execution are additional reasons for withdrawing from subsequent funds.

"Consider the first commitment at least a two fund commitment, if not a three fund commitment."

This quote indicates that investors typically engage with venture funds with the intention of a multi-fund investment horizon, barring significant issues.

"For us, when we decide to stop backing a VC firm, it's usually based on the loss of relevancy with founders."

This quote underscores the importance of a venture capital firm's ability to remain relevant and competitive in deal acquisition as a key factor for continued investment.

  • New fund managers often lack exposure to the LP investment process, which can be mystifying.
  • The process of raising a fund differs significantly from making company investments.
  • Time to close, interactions, and documentation are key differences between company investment and securing LP commitment.
  • For new managers, fund-raising takes longer due to the need for LPs to familiarize themselves with the managers and opportunities.

"Once you've done it a time or two, it becomes less experienced."

This quote suggests that familiarity with the LP investment process reduces its perceived difficulty over time.

"There are some really important differences."

This quote highlights that raising capital for a fund has distinct challenges compared to investing in a company, which new fund managers must understand and navigate.

Building Relationships with LPs

  • Fund managers are advised to initiate relationships with LPs early, even if immediate investment is unlikely.
  • Establishing long-term relationships is a strategic move for securing future fund investments.
  • Venture capital funds have long lifespans, making the relationship with LPs significantly longer-term compared to typical company investments.
  • LPs may respond to different stimuli at different times, and many are hesitant to provide feedback to general partners (GPs), contributing to the complexity of the relationship.

"That's how the good ones do it. That's how you do it, right? You do establish long term relationships."

This quote reinforces the importance of building sustained relationships with LPs for future investment opportunities.

"So I think all of these things sort of contribute to the opacity of the process and sort of leave vcs in the dark, the newer ones particularly."

This quote acknowledges the challenges new VCs face due to the opaque nature of the LP investment process and the lack of feedback they receive.## Social Capital's Prospects

  • Social Capital is admired for its smart partners and forward-thinking approach.
  • The fund's size could be a potential issue, but it's expected they will continue to attract iconoclastic entrepreneurs.
  • They are likely to capitalize on these relationships effectively.

"So I have to say I really like what social capital is doing. It's a very big fund already, so I'm not sure how it's going to play out. But their partners are super smart and they're very forward thinking." "I think they'll at minimum see and continue to see more than their fair share of iconoclastic entrepreneurs, and I think they'll capitalize on that very well."

The quote indicates the speaker's admiration for Social Capital, highlighting the intelligence of its partners and their ability to attract and capitalize on unique entrepreneurial talent, despite concerns about the fund's size.

Favorite Book and Its Parallels to VC

  • The Aubrey Matern series by Patrick O'Brien is favored for its rich characters and historical narrative.
  • The series draws parallels between the British Navy and startups in the VC ecosystem.
  • Similarities include raising capital, recruiting and leading teams, culture building, and the need to pivot strategies.

"Okay, so my favorite book is actually any one of the 20 books written by Patrick O'Brien in his Aubrey Matern series. [...] these are historical novels about the British Navy." "And there are a couple of reasons. Like the senior team had to raise capital to provision the ship. They had to recruit and lead teams. They had a cohesive culture. They had to build that aboard the ship."

The quote explains why the Aubrey Matern series is the speaker's favorite, drawing parallels between the challenges faced by the British Navy and those faced by startups and VCs, such as capital raising and team leadership.

Importance of Entrepreneurs' Perception of VCs

  • Initially, the speaker placed too much emphasis on Limited Partners' (LPs) perception of VC brand.
  • The focus has now shifted to prioritize the entrepreneurs' opinion of VCs.
  • This change reflects an evolved understanding of what is more valuable in the venture ecosystem.

"I wish I had known about the importance of the entrepreneur and the founder's opinion of vcs and overweighted that versus the importance of LP's perception of a VC brand."

The quote reflects a lesson learned by the speaker, emphasizing the importance of the founders' views on VCs over the perception of the VC brand by LPs, indicating a strategic shift in focus.

Reading Material and Venture Community Insights

  • The speaker enjoys content from a16z, Founder Collective, and First Round.
  • Professional media recommendations include Recode, It's Panda, Dan Primac, and Connie.
  • These sources provide a rounded perspective of the venture community.

"I would say I love the content produced by a 16 z. If you haven't read the content produced by founder Collective, I highly recommend it. And of course first round does a great job." "And I'd say on the professional media know it's the usual, but Rico, it's Panda, it's Dan Primac, it's Connie, it's know."

The quote lists the speaker's preferred content sources for VC insights, highlighting a16z, Founder Collective, and First Round for their content, as well as professional media sources for their insights into the venture community.

Felicis Ventures' Accomplishments

  • Felicis Ventures is praised for its growth, development, and healthy firm culture.
  • The firm's immigrant roots are seen as a key factor in resonating with a variety of founders.
  • Felicis Ventures' partners have each achieved at least one $1 billion exit, a notable accomplishment.

"Felisa's ventures and you mentioned them earlier. So we've been with Felisa's since their beginning. [...] with that recent sale now each one of the Felisa's partners has at least $1 billion exit under his or her belt."

The quote expresses pride in Felicis Ventures' achievements, especially the partners' success in securing significant exits, and credits the firm's immigrant roots and hardworking culture for its resonance with founders.

Venture Capital and Operational Support

  • Cooley is recognized as a leading global law firm for startups and venture capital funds.
  • The firm has extensive experience with venture capital funds, from formation to lifecycle management.
  • Cooley's expertise is seen as integral to the success of funds and their operations.

"Funds would be nothing without the operational support behind them. And in this case, there's no one better than Cooley, the global law firm built around startups and venture capital funds."

The quote acknowledges Cooley's role in providing essential operational support to venture capital funds, emphasizing their importance in the ecosystem and their history of working with top VCs.

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