20VC What LP's Want In VCs with Beezer Clarkson, Managing Director @ Sapphire Ventures

In this episode of the 20 minutes VC, host Terry Stebings chats with Beezer Clarkson of Sapphire Ventures about the often-overlooked process of venture capitalists (VCs) fundraising from limited partners (LPs). Clarkson, with a rich background at DFJ's global network and Omidyar Network, discusses her journey to becoming an LP, the importance of LPs in the venture ecosystem, and the intricacies of LP investment decisions. She highlights the need for VCs to articulate their unique value proposition to LPs and the competitive nature of securing investments from prominent LPs. The conversation also delves into portfolio construction, the dynamics of the fundraising process, and the emerging trend of LPs establishing a brand presence in the industry. Clarkson emphasizes consistent investment over time and openness to new funds as traits of successful LPs, while also mentioning Sapphire Ventures' targeted approach to investing in early-stage firms in specific geographies.

• The podcast episode focuses on the often-overlooked aspect of venture capital (VC) fundraising: the role of Limited Partners (LPs).
• LPs are the sources of capital for VCs, colloquially referred to as the "money behind the money."
• The episode features Beezer Clarkson, who leads Sapphire Ventures' investments in venture funds both domestically and internationally.
• Beezer Clarkson has a diverse background with experience at DFJ's global network, Omidyar Network, Hewlett Packard, and Morgan Stanley.
• She also runs an LP blog called Open LP to demystify the world of LPs.

"So where do they get their money from? And that's where the mysterious world of LPs come into it."

This quote introduces the central topic of the podcast, which is the source of funding for VCs and the role LPs play in the venture capital ecosystem.

• Beezer Clarkson's career trajectory was driven by a love for technology and began on the direct investing side.
• She started in investment banking and strategy consulting before falling in love with technology in the late '90s.
• Beezer's experience includes working with startups, joining a VC in New York, and dealing with software at Hewlett Packard.
• At Omidyar Network, Beezer engaged in direct venture investing, fund investments, and nonprofit grants, providing her with a comprehensive understanding of capital utilization in different contexts.

"I came at it in a probably slightly serpentine path, but driven by a love for technology and coming from the directing side, the direct investing side, actually."

This quote explains Beezer Clarkson's non-linear career path to becoming an LP, highlighting her diverse experiences and passion for technology.

• Beezer's experience with various forms of investment at Omidyar Network allowed her to discover her preference for being an LP.
• She enjoyed the ability to see how different types of capital moved through the ecosystem and the strategic use of capital within firms.
• This led to her first foray into being an LP and eventually to her role at DFJ and Sapphire Ventures.

"That's where I started my first entree into being an LP and fell in love with that side of the world, and then followed that passion to DFJ."

Beezer Clarkson's quote explains her transition to focusing exclusively on LP work, which was motivated by her passion and interest in how capital is leveraged within firms.

• Beezer Clarkson's experience at DFJ Network provided insights into the global nature of innovation and the complexities of building and running a venture firm.
• She learned about the challenges of venture firm growth and the dynamic nature of venture capital.

"Reconfirm for me that innovation does occur everywhere... married with how really very, quite hard it is to build and run a venture firm itself."

This quote reflects Beezer Clarkson's realization that innovation is not geographically constrained and that managing a venture firm is a complex endeavor.

• The episode aims to break down the process of LP involvement in funding, starting with how LPs select funds to invest in.
• Beezer Clarkson compares the approach to how VCs select startups, with a focus on early-stage firms and series A exposure.
• The process involves building a database of existing funds and continuously updating it with new entrants.

"Yes, I think there are probably more similarities than dissimilarities."

The quote by Beezer Clarkson draws a parallel between the processes LPs and VCs use to select their investments, emphasizing the strategic and methodical nature of both roles.## Fund Manager Sourcing

• Sapphire's fund manager sourcing involves understanding the ecosystems they invest in through travel and networking.
• They source from various areas, including referrals from entrepreneurs, GPs, LPs, and lawyers.
• The Bay Area provides a natural sourcing ground, but they extend their search across the United States and other geographies.

"We spend a fair bit of time traveling because we want to understand and see what the entrepreneurs and vcs are seeing."

This quote highlights the importance of firsthand experience and observation in identifying potential investment opportunities and building a network for sourcing.

• Sapphire is not entirely geography agnostic; they target the US, Europe, and Israel specifically.
• They acknowledge other regions with venture activity but choose to focus on selected geographies.
• There's an implication that funds must decide on their focus areas, although exceptions may occur.

"I wouldn't say we're agnostic. We are targeted the US, Europe and Israel."

Beezer Clarkson clarifies that while Sapphire does invest in multiple geographies, they have specific target areas and are not indiscriminate in their geographic focus.

• LPs face competition to invest in the best funds, similar to startups seeking funding from top VCs.
• Some funds are highly sought after, with long waitlists for LPs.
• LPs may face allocation constraints and varying check sizes across funds.
• Persistence and timing are key for LPs to gain access to desirable funds.

"There is inevitably changes in an LP base over time, because the world just changes and opportunities come up and it's about trying to be there when the opportunity presents itself."

Beezer Clarkson emphasizes the dynamic nature of LP bases and the importance of being ready to seize opportunities as they arise.

• LPs expect communication from GPs about the pace of fund investment.
• LPs monitor investments through quarterly reports and expect a dialogue about any deviations from the planned investment period.
• LPs have their own portfolio construction and need advance notice to adjust their investments accordingly.

"You really hope that you don't wake up one day and say, oh my gosh, it's been two years and all of a sudden the fund's gone."

Beezer Clarkson underlines the expectation that LPs should be kept informed about the rate at which a fund is being invested to avoid surprises and allow for proper portfolio management.

• The fundraising process for GPs is similar to that of startups, with a structured approach and a pitch deck.
• GPs should articulate their identity, goals, and market focus.
• The process includes leveraging networks, managing timelines, and dealing with legal documentation.

"There is usually a deck, there is usually a discussion of who you are, why you are, what the ultimate goals are, which are pretty similar amongst funds, but how they go about it is different."

Beezer Clarkson describes the typical elements of a GP's pitch, highlighting the importance of a clear presentation of the fund's identity and strategy.

• Sapphire looks for a clear understanding of why a GP is the right choice for an entrepreneur.
• LPs appreciate well-prepared pitches that clearly articulate the GP's unique value proposition.
• LPs differ in their preferences, but understanding the "why you" is crucial for Sapphire.

"I always want to know why you. Because for me that captures the have you thought about who you are as an investor, what you want to invest in, and why the entrepreneur is going to pick you versus all the other sources of capital that are available in the market."

Beezer Clarkson stresses the need for GPs to have a well-defined sense of their investment identity and to communicate this effectively to potential LPs.## Investment Decision-Making Process at Sapphire

• Limited Partners (LPs) typically have a standardized structure for investment decision-making.
• The process involves a team that conducts due diligence, referencing, and sourcing.
• An investment committee is in place, which may not include every member of the investing team.
• The committee votes and makes the final investment decision.
• LPs then communicate their commitment to the General Partner (GP), specifying the amount.

"Typically an LP will have a team that does the diligence, the referencing, the sourcing, and then there is an investment committee." This quote outlines the general structure of how LPs operate when making investment decisions, highlighting the roles of the team and the investment committee.

• Successful LPs demonstrate a long-term commitment to the asset class, investing consistently over time.
• They remain open to investing in both new/emerging managers and established funds.
• Great LPs and Venture Capitalists (VCs) share these common practices.
• Industry research, such as reports by Cambridge Associates, supports the importance of a balanced investment approach.

"One is a commitment to the asset class over time... It's also being open to the new and the different." This quote emphasizes the importance of consistent investment over time and being receptive to both new and established fund managers as a hallmark of successful LPs.

• Sapphire Ventures had the opportunity to redefine what it means to be an LP when it launched its LP business in 2012.
• They focused on identifying the qualities and attributes of a great LP and then built their product to reflect those.
• Being new allowed them to establish their brand and differentiate themselves in the LP market.

"We got to sit down and say, what does it mean to be an LP? What does it mean to be a great LP? What are the qualities? What are the attributes?" This quote describes how Sapphire Ventures took a foundational approach to establish their identity and philosophy as an LP.

• Branding for LPs is often established through decades of persistence, perseverance, and presence in the market.
• Newer LPs, like Sapphire Ventures, think about branding to ensure their name is recognized.
• The concept of branding is becoming more relevant for LPs, similar to how newer VCs approach the market.

"We think about branding because we're newer and we want to make sure that our name is known for this..." This quote highlights the importance of branding for newer LPs in order to establish their presence and reputation in the market.

• 2016 was characterized as a year of disparity between the "Haves" and the "Have-nots."
• An unprecedented amount of money was raised by funds in the first quarter, with larger funds and established names dominating.
• The trend of familiar names raising funds continued into April, with significant activity from established players.

"In the first quarter of a year, over 50 funds raised something to the tune of eleven, $12 billion..." This quote provides insight into the fundraising climate of 2016, highlighting the success of established funds in attracting capital.

• The volatility of the stock market at the beginning of the year influenced fundraising activities.
• Both LPs and GPs aimed to capitalize on lower valuations during uncertain times.
• There is an awareness among GPs of the potential for a more challenging market environment, prompting preemptive fundraising.

"The stock market was wobbly, to say the least, in the beginning of the year, which causes its own dynamic in the industry." This quote reflects on how market instability can affect investment strategies and the timing of fundraising efforts.

• Beezer Clarkson's favorite book is "The Tale of the One-Way Street" by Joan Aiken.
• The book resonated with Clarkson due to its unique story about a world with rigid one-way rules and a lack of vibrancy.

"One of my favorite books is actually by a British author named Joan Aiken and it's called the tale of the one way street." This quote shares a personal literary preference of Beezer Clarkson, providing insight into influences that may shape their perspective.## Entrepreneurial Mindset

• The story highlights the value of challenging conventional wisdom and exploring new possibilities.
• It emphasizes the importance of questioning the status quo to unlock new opportunities.
• The metaphor of walking the wrong way on a one-way street symbolizes innovative thinking.

then one day, being the entrepreneur that he is, he turns around and walks the wrong way on the one way street and the world explodes into this kaleidoscope of colors and possibility. And there's pink cats and red horses. And you can do everything he was told. You can only do one way. You could do a million ways.

This quote illustrates the transformative power of entrepreneurial thinking, which can lead to seeing the world in new and diverse ways.

• OpenLP was started to increase transparency and understanding of Limited Partners (LPs) in the venture capital ecosystem.
• The website aggregates posts and information about LPs to serve as a resource for those interested in the LP community.
• The hashtag #OpenLP on social media platforms is used to collect and share insights from LPs.
• The initiative aims to foster engagement and strengthen the venture capital ecosystem by encouraging LPs to participate in discussions.

Openlp kind of gets at what you were talking about with the marketing and branding around the lps, because what was happening for us over the last year, plus is that we were getting a huge number of questions about what is an LP, the reason why you're doing this podcast, who are they? Where are they? What do they do? What do they say?

Beezer Clarkson explains the motivation behind OpenLP, which is to provide clarity and information about LPs to the broader community.

• Beezer Clarkson reads a wide range of industry publications to stay informed about the venture capital market.
• Publications mentioned include Term Sheets, Strictly VC, PE Hub, Full Ratchet, The Skim, Trusted Insight, and Tech.eu.
• Tools like Nuzzle help aggregate must-read content, making it easier to stay updated on important news and trends.

I read a lot, so I don't know if I could say just one, but I would say my typical morning involves reading everything from term sheets, strictly VC, pE hub information, full ratchet, the skim, trusted insight techieu.

Beezer Clarkson describes her extensive morning reading routine, which helps her stay knowledgeable about the venture capital sector.

• Saying no is a challenging aspect of being an LP, as they often have to decline investment opportunities.
• Beezer Clarkson has developed a framework for saying no, often due to factors such as focus area, existing portfolio balance, or concerns over capitalization.
• When declining, she attempts to be helpful by making introductions to other LPs or offering support in other ways.

Oh, easily saying no. And I'm sure this is a pain point, that GPS experience too. The lps have to say no a lot, just like GPS, and it's never any fun.

This quote acknowledges the difficulty of rejecting investment opportunities, a common challenge for both LPs and General Partners (GPs).

• The most recent investment decision was made based on the fund fitting perfectly into their preferred criteria.
• The fund is Bay Area-based, focuses on Series A, is sized under $200 million, and has experienced investors.
• The decision was influenced by the fund's potential, the team's background, and the constructed LP base's credibility.

Sorry, the most recent investment decision we made is to a fund that sits smack in our sweet spot. So it's a Bay Area based series, a fund. It's sub 200 million.

Beezer Clarkson explains the reasoning behind their most recent investment, highlighting their strategic focus and due diligence process.

• Beezer Clarkson is recognized for her significant value addition to the venture capital ecosystem.
• OpenLP.com is recommended as a go-to resource for LP-related information.
• The podcast promotes an upcoming episode and offers resources like the newsletter for audience engagement.

And again, I'd like to give a huge hand to Beza for coming on the show today. And I want to say a huge thank you for all she's done for me in terms of guidance, support and introduction.

Terry Stebings expresses gratitude to Beezer Clarkson for her contributions and guidance, highlighting her positive impact on individuals in the venture capital community.