20VC Why Many VCs Fail To Raise, Why LP Compensation Is A Massive Problem & Why Fund of Funds Will Become More Prominent with Lindel Eakman, Managing Director @ Foundry Group



In this episode of "20 minutes vc," host Harry Stebbings interviews Lindel Eickman, a prominent LP and Managing Director at Foundry Group, delving into his transition from overseeing private equity at UTIMCO to working with friends at Foundry Group. Eickman shares insights on the LP community, portfolio construction, and the evolving landscape of venture capital investing. He emphasizes the importance of partnership dynamics, the challenges in constructing a diversified portfolio, and the role of LPs in mentoring emerging managers. The conversation also touches on the trend of LPs transitioning to private capital, the significance of branding for LPs, and the complexities of generational transitions in VC firms. Eickman's experience at KPMG and his approach to saying "no" to hedge fund managers are also discussed, highlighting his strategic and selective investment philosophy.

Summary Notes

Introduction to Lindel Eikman and the LP Community

  • Lindel Eikman is a managing director at Foundry Group and a nationally recognized leader in the LP (Limited Partner) community.
  • Oversaw private equity fund managers at the University of Texas Investment Management Company (Utimco), representing about 25% of endowment assets.
  • Worked for KPMG in mergers and acquisitions tax practice prior to Utimco.
  • Brad Feld, Lindel's partner, was mentioned for the introduction on the podcast.

"And joining me today, I'm delighted to welcome Lindel Eckman, managing director at Foundry Group, and Lindell is a nationally recognized leader in the LP community, having successfully managed the private investment program for the combined 35 billion pool of capital managed by the University of Texas Investment Management company, otherwise known as Utimco."

The quote introduces Lindel Eikman as an influential figure in the LP community, highlighting his experience in managing significant capital at Utimco and his prior work at KPMG.

Lindel Eikman's Entrance into the LP Industry

  • Eikman did not initially dream of being an LP; his entry into the industry was serendipitous.
  • Discovered an internship at Utimco during business school that provided income and exposure to institutional money.
  • The internship involved rejecting hedge fund managers, which taught him the importance of saying no and only saying yes when everything aligns.
  • Recommends Howard Marks' book "The Most Important Thing" for understanding investment principles.

"I totally backed into this. Friend of mine found an internship. It was a paying internship, so those are good."

This quote explains that Eikman's entry into the LP world was unplanned and came about through the opportunity of a paid internship.

Eikman's Transition from Utimco to Foundry Group

  • Eikman's move from Utimco to Foundry Group was influenced by the opportunity to work with friends and a personal interest in technology.
  • He experienced successful returns in venture capital, which contributed to his decision to join Foundry Group.

"But really, when you think about foundry, I mean, Brad, Jason, Seth and Ryan are my friends. Who doesn't want to work with their friends?"

The quote highlights the personal connection and friendships as key motivators for Eikman's move to Foundry Group.

Investment Thesis and Portfolio Construction

  • Eikman discusses the approach to portfolio construction at Foundry Group.
  • He considers the balance between diversification and retaining upside potential through individual deal performance.

"When you think about our portfolio here at foundry, it's very different than what I had previous"

Although the quote is incomplete, it suggests a shift in Eikman's approach to portfolio management compared to his time at Utimco.## Foundry's Investment Strategy

  • Foundry focuses on a mix of direct deals and investing in portfolio fund managers.
  • They allocate 25% of their fund into the manager side and the remaining 75% into direct investments.
  • Direct investments can originate from their own fund managers, external themes, or their early stage funds.

"We're focused on taking our fund, and we are investing that in a mix of direct deals and portfolio fund managers. In our case, we're putting 25% of the fund into the manager side of that."

The quote explains Foundry's investment approach, highlighting their strategic fund allocation between direct deals and manager investments.

Addressing Negative Signaling in Opportunity Funds

  • Negative signaling in follow-on funds is a known issue, but Foundry hasn't seen this affect their market perception.
  • They participate in multiple funding rounds, just like in early-stage funds, and market dynamics dictate outcomes.
  • Separate funds for follow-on investments do not change market perceptions around financing according to Foundry.

"We really haven't seen this differently from our early stage funds or really any other market signal from existing investors."

This quote emphasizes that Foundry's experience with negative signaling is consistent with their early-stage funds, suggesting that their follow-on investment strategy does not alter market signals.

Venture Capitalists and Alpha Generation

  • Alpha is associated with volatility, especially in small, early-stage funds.
  • Foundry acknowledges the opportunity for outsized alpha but also recognizes the inherent volatility in achieving it.

"To get Alpha, you usually have volatility. And when we think of the small early stage funds. Yeah. I think you are given that opportunity to have outsized alpha when basting us the return profiles."

The quote discusses the relationship between alpha and volatility in venture capital, particularly in the context of early-stage funds.

Foundry's Connection with USV

  • The relationship with USV and Foundry began with a meeting in 2006.
  • Lindel Eichman's personal connection to Boulder, Colorado, played a role in considering an investment with Foundry.
  • The initial pitch from Foundry took place at a dinner after a series of meetings.

"I was at Fred's annual meeting back in probably the fall of 2006... And we were in New York. I had flown up, spent a long, long day meetings after meetings, and ended up at a dinner where this guy, Brad Feld was softly pitching me."

The quote describes the initial encounter between Lindel Eichman and Foundry, providing context for the start of their investment relationship.

Early Investment in USV

  • Lindel Eichman's first venture investment was in USV, influenced by timing, technology familiarity, and the opportunity for significant ownership.
  • Understanding of the network thesis and partnership dynamics were key factors in the decision to invest in USV.
  • The balanced partnership at USV and Foundry is considered crucial for making good investment decisions.

"I think timing was important there, and USV was actually my first venture investment... I understood the network thesis that made sense to me."

The quote reflects on the factors that influenced Lindel Eichman's decision to invest in USV, emphasizing the role of timing, understanding of technology, and network thesis.

Generational Transition in Venture Capital

  • Foundry is on record stating they will not undergo a generational transition.
  • The current principal decision-makers' commitment to the fund and each other is a key consideration for Lindel Eichman.
  • Generational transition in the industry is seen as challenging and often not done correctly.

"Well, I think foundries on the record is saying that we're not going to transfer this through a generational transition."

The quote indicates Foundry's stance on generational transition and highlights the difficulty of executing such transitions successfully in the venture capital industry.

LPs, VCs, and the Importance of Access

  • Access is deemed as important for VCs as it is for LPs.
  • Lindel Eichman refers to "sourcing advantage" as a form of access, questioning the distinction between picking and access.
  • The role of an LP is likened to a more diversified form of VC, focusing on selecting a team and strategy for a new fund.

"Access is just as important for vcs. So I would argue with Mike about that some I always look at sourcing advantage is what I call it, but that's access by another name."

This quote challenges the idea that the primary importance for LPs is access rather than picking, suggesting that both VCs and LPs rely on access to opportunities.## Hybridization of GPs and LPs

  • Traditional institutional LPs struggle to be great direct investors.
  • Attracting and retaining top talent is challenging for institutional LPs.
  • Foundry Group Next represents a hybrid model, blending GP and LP roles.

"I don't think most platforms lend themselves to it and certainly traditional institutional lps. I don't think they make great direct investors and in general they aren't able to attract the most talented direct investors to their platform."

The quote highlights the difficulty traditional institutional LPs have in becoming successful direct investors and their challenges in attracting top investing talent.

Impact of New Platforms on Investment Strategies

  • Changing platforms can lead to different mandates and portfolio construction.
  • Understanding risk in portfolio strategy is crucial, especially for new or emerging GPs.
  • Partners with long-term venture market experience are valuable for underwriting portfolios.

"I think many gps miss on portfolio strategy. That's probably the place that when we ask questions, GPS just flail about, especially newer or emerging gps, and they're unaware of the risk characteristics that are different in a total portfolio versus an individual position."

This quote emphasizes the common oversight of portfolio strategy by GPs and the lack of understanding of risk at the portfolio level compared to individual investments.

Importance of Risk Strategy Awareness

  • A thoughtful portfolio strategy is key for GPs.
  • Awareness of how to build a portfolio reflects a GP's competence.
  • Deals should be selected based on how they fit into the overall portfolio strategy.

"It's an awareness and a thoughtfulness of how they're going to build a portfolio."

The quote suggests that an impressive GP demonstrates a deep understanding of portfolio construction and risk strategy.

LP Branding and Its Role in the Ecosystem

  • LP branding is becoming increasingly important.
  • Institutional LPs face challenges with staff turnover and commitment to venture capital.
  • Venture fund of funds are taking a more prominent role.
  • LPs can mentor and advise GPs, helping with company financing, portfolio construction, and fundraising.

"I think the gps are recognizing, appreciating the commitment. But when it comes to branding, in our case we differentiate because of our access to an experienced LP in my background, but really it's about access to my partners and their GP perspective."

This quote highlights the value of LP branding and the unique benefits an experienced LP can bring to GPs, including mentorship and access to a network with a GP perspective.

  • Large institutions face challenges in focusing on venture investments.
  • Foundry Group Next aims to address the difficulties large institutions have in deploying large checks into venture.
  • Institutions are likely to continue supporting venture capital.

"And even in that scenario, it was difficult to focus on venture because you're not able to put large checks to work."

The quote reflects on the challenges large institutions face when trying to invest significant sums in venture capital, which Foundry Group Next is addressing.

LP Compensation Structures

  • LP compensation is typically a combination of salary and bonus.
  • The bonus is often tied to return performance over several years.
  • Performance is usually measured using IRR over three to five-year periods.

"Compensation plus a bonus. And that bonus is often derived from some combination of return performance over a period of years."

This quote explains the general compensation structure for LPs, emphasizing the performance-based bonus system.

Desired Changes in the LP Ecosystem

  • The speaker suggests there are changes needed in the LP ecosystem, potentially in how LPs are incentivized.
  • The speaker hints at broader issues with retirement accounts and their investments in the US.

"I don't think that I'll say large north american institutions do a great job of incentivizing their staffs."

The quote implies that there are systemic issues in the way large North American institutions incentivize their staff, which could be a topic for further discussion.## Importance of Large Capital Pools

  • Large pools of capital play a crucial role in the economy and support numerous people.
  • The talent managing these pools needs to be carefully considered due to their significance.

"In general, I think that we need to appreciate the importance of the pools of capital, the large pools of capital, and the importance of what they do for the economy and what they will do for those people they actually support."

This quote emphasizes the vital role that large capital pools have in the economy and the importance of the individuals who manage and invest these funds.

Compensation Structures and Public Disclosure

  • Compensation structures in the investment world are problematic.
  • Public disclosure presents ongoing challenges in the industry.

"Compensation structures are certainly an issue. Public disclosure is always a challenge that we faced."

The quote addresses the speaker's concerns about how compensation is structured in their field and the difficulties associated with public disclosure.

Quick Fire Round: Pushing for Exits

  • Speaker C advocates for taking the opportunity to exit when possible.

"Absolutely. Get out if you're even close to the door."

The quote is a direct and straightforward recommendation to seize exit opportunities when they arise.

Pranks at Foundry Group

  • Pranks are a tradition at the Foundry Group's annual meetings.
  • Sneaking silly phrases into presentations is part of the group's playful culture.

"Every year we have a continuing theme of trying to sneak silly phrases into the presentation, and there's been some chicanery around that, and that will certainly continue, and I'm certain that I will be the target of it."

This quote describes the lighthearted and humorous pranks that take place at Foundry Group, fostering a playful work environment.

Intellectual Stimulation at AGMs

  • Speaker C finds intellectual stimulation in focusing on small funds and assisting in their growth.

"I think it's actually focus small funds and helping GPS raise small funds. That's different and it's hard."

The quote highlights the intellectual challenge and stimulation found in concentrating efforts on smaller funds and helping them to raise capital.

  • Fred Wilson and Brad Feld are highly regarded for their content.
  • Ben Dixon and Chris Dixon from Andreessen Horowitz produce quality content.
  • Riley Brennan's newsletter on the future of transportation is a hidden gem.

"Fred hasn't led me astray yet, so it's hard not to mention Fred and certainly Brad, my partner. I think that Dixon and Evans from Andreessen put out good content."

The quote recommends several individuals and their content as valuable resources for industry insights and information.

Common Mistakes by GPs When Pitching LPs

  • General Partners (GPs) often display overconfidence in meetings with Limited Partners (LPs).
  • GPs frequently include too much information in their pitch decks, contrary to the advice they give to companies.

"There's a lot of hubris in the room when GPs come in. I think the mistake they make generally is putting too much in a pitch deck and not limiting and not taking their own advice."

The quote criticizes GPs for not practicing what they preach in terms of pitch deck brevity and clarity when seeking investments from LPs.

Favorite Books and Their Impact

  • "The Creature from Jekyll Island" is informative about the federal monetary system.
  • "Daemon" by Daniel Suarez is a memorable near-term science fiction novel, particularly concerning AI.

"The creature from Jekyll island is important to understand the fed monetary system in our world today. [...] One that just has stuck with me I cannot shake from my head is demon by Daniel Suarez."

The quote shares the speaker's top book recommendations, highlighting their educational and entertainment value.

Recent Public Investment Decision

  • Speaker C recently decided to invest with Resolute Ventures.
  • The decision was influenced by the firm's experience, portfolio strategy, and partnership dynamics.

"We are investing with Resolute Ventures. It is a combination of real experience and portfolio strategy."

This quote explains the rationale behind the speaker's recent investment choice, emphasizing the importance of strategy and experience.

Acknowledgments and Show Promotion

  • Thanks are extended to Brad Feld for the introduction to the show.
  • Promotion of Wealthfront for financial services and Angel Loop for investor-founder relations.
  • Listeners are encouraged to follow on Snapchat and subscribe to the newsletter for updates.

"And again, a huge thanks to his partner Bradfeld for making the introduction today. [...] So go to wealthfront.com twentyvc."

The quotes show appreciation for the connections that made the interview possible and promote the services of sponsors while inviting listeners to engage with the show through various platforms.

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