20VC Why The Whole Industry Is Backward Looking, The Best Funds Are Entrepreneur Led and Venture Is All About Access with Alex Bangash, Founder @ Trusted Insight

In an insightful episode of the 20 minutes VC, host Harry Stebbings interviews Alex Bangash, the managing director at Runsome Group and founder of Trusted Insight. They delve into the nuances of venture capital from an LP's perspective, exploring the importance of technical expertise in LPs, the forward-looking nature of investments, and the evolving landscape of early-stage venture capital, which now often involves platforms like AngelList. Alex emphasizes the potential high returns from smaller funds that avoid competing with large VCs and the shift in venture capital towards growing rather than starting companies. He also discusses the challenges of identifying successful emerging fund managers and the importance of access over picking winners in venture capital.

• Harry Stebbings is the host of the 20 minutes VC podcast.
• The podcast discusses venture capital (VC) related topics.
• Previous episode featured Jeff Busgang from Flybridge discussing VC returns.
• Current episode features Alex Bangash, an LP and managing director at runsome group.
• Alex Bangash has made over 50 investments into funds globally.
• He is also the founder of Trusted Insight, the largest platform for institutional investors.
• Trusted Insight has notable backers including early investors or founders of Facebook, LinkedIn, Mint.com, and Match.
• Special thanks given to Jason Lemkin at Sasta for the introduction to Alex Bangash.
• Promotion for DesignCrowd, an online marketplace for design services.

You are listening to the 20 minutes VC with your host Harry Stebbings, and you can find me on Snapchat at htebbings.

This quote introduces the host of the podcast and provides contact information.

Therefore, I'm delighted to welcome Al Bangash, managing director at the runsome group, where he helps his clients invest in some of the best performing funds.

Harry Stebbings introduces the guest, Alex Bangash, highlighting his role and expertise in investing in top-performing funds.

I also want to say a special thank you to my good friend Jason Lemkin at Sasta for making the intro to Alex today.

Harry Stebbings expresses gratitude for the introduction to Alex Bangash, which facilitated the interview.

• Alex Bangash initially considered joining venture capital.
• Around 2001-2002, there was a downturn in venture capital activity.
• Mentors suggested Alex explore the perspective of limited partners (LPs) in the market.
• Alex leveraged his technical and operational background to differentiate himself as an LP.
• He spent nearly a decade at Bell Labs, which provided a unique context for technology investing.

So I think for me it was just circumstances where I had first thought of joining venture capital. But at that time, this was around 2001 2002, there was no venture capital happening.

Alex Bangash describes the circumstances that led him to become an LP during a period when venture capital activity was low.

I found that if I brought to bear my technical and operational expertise in that field, I would have a differentiated approach.

Alex Bangash explains how his technical and operational expertise provided a unique approach to being an LP.

• The majority of LPs come from financial rather than operational backgrounds.
• There are exceptions, but the trend persists.
• Alex Bangash does not see this as a problem for the industry.
• He identifies a larger issue with the finance industry being backward-looking.

I would say there are definitely some exceptions, but by and large that is still true.

Alex Bangash acknowledges that while there are exceptions, most LPs still come from financial backgrounds.

No, I don't think it's a problem for the industry.

Alex Bangash does not believe the background of LPs is an issue for the venture capital industry.

• The finance industry tends to focus on past performance.
• Alex Bangash sees this backward-looking approach as a philosophical issue.
• He believes that the future of investing will differ from the past.

There is probably a bigger problem, which is that I would say the entire finance industry is backward looking and not forward looking.

Alex Bangash criticizes the finance industry for focusing on past performance rather than anticipating future trends.

• Venture capital is seen as a persistent asset class where top firms continue to perform well.
• However, there is significant churn in the VC industry.
• New successful funds often lack prior relationships and attributable track records, making them hard for LPs to identify early.
• Examples of successful new funds include Founders Fund, First Round Capital, Lowercase, and Y Combinator.
• These funds are entrepreneur-focused and led, which is a shift from traditional VC funds.

Venture is a highly persistent asset class that the top VCs or top brands will continue to do well. Now, if you look at, just pick the Forbes Midas list, for instance, and you will see that four out of the top ten VCs, Steve Anderson, Chris ACA, Josh Coppellan and Peter Thiel, in that they didn't have firms ten years ago and recent Horowitz wasn't around ten years ago.

Alex Bangash challenges the notion of persistence in venture capital, citing examples of top VCs who were not established a decade ago.

For LPs to identify these such funds very early is incredibly, incredibly hard because they don't have prior relationships with funds like these.

Alex Bangash explains the difficulty LPs face in identifying promising new VC funds due to a lack of prior relationships and track records.## Philosophical Issue in Venture Capital

• The evolution of venture capital firms, with a distinction between traditional firms and entrepreneur-led models.
• Entrepreneur-led models are recognized for their disruptive approaches but are challenging for institutional investors to identify.

"Many of the newer firms, not all, there are exceptions. So foundry first, Union Square park, they all came out of existing amazing firms, and there is nothing wrong with that."

This quote highlights that while many new venture capital firms have emerged from established entities, there are also novel entrepreneur-led models that are distinct and harder to identify for investors.

• The shift in venture capital where entrepreneurs choose their investors, inverting the traditional asset class model.
• The importance of access in venture capital, where information asymmetry is legal and proprietary access is crucial.
• Examples illustrating the importance of being chosen by entrepreneurs, such as WhatsApp choosing Sequoia and Mark Zuckerberg's choice in investors.

"Today, the entrepreneurs are picking the managers. This is in stark contrast to any other asset class."

This quote emphasizes the unique characteristic of venture capital where the quality of investments is determined by the entrepreneurs' choice of managers rather than the managers' ability to select securities.

• The concept that venture capital success is more about having access to deals than selecting the best ones.
• The increasing transparency in the venture capital industry, where entrepreneurs publicly share their experiences with investors.
• The changing relationship between venture capitalists and entrepreneurs, moving from adversarial to more collaborative.

"Venture has always been about access. So one of the famous folks in the industry has said, venture is not an asset class, it is an access class."

This quote underscores the idea that the core of venture capital is not about picking the best companies but about gaining access to potential investment opportunities.

• The structural advantages of platforms like AngelList in transforming the venture capital and early-stage funding landscape.
• The potential for a variety of new investing platforms to emerge, similar to the evolution seen in social networking.
• The anticipation of significant company creation in the era of AI and APIs, including in the investing space.

"We think some of the best managers, which will actually be platforms like Angelist."

This quote suggests that platforms like AngelList are considered among the best managers due to their structural advantages and the potential for these types of platforms to lead in the future.

• Discussion on the reality that not all fund managers succeed, with many losing money, especially when market conditions change.
• The question of what happens to fund managers who do not achieve success in their investments and their potential career paths.

"What happens to managers who don't smash it? Can you raise again, is it that simple? Or is it a return to another bigger fund? What's the roadmap for them from there?"

This quote raises the issue of the professional consequences for venture capital fund managers who fail to generate positive returns and the uncertainty regarding their future opportunities in the industry.## Venture Capital Industry Dynamics

• Established venture capital firms have a stable presence in the industry, allowing them to shift investor bases as needed.
• Traditional VCs, as opposed to incubators or accelerators, benefit from being part of a select group from which investors choose.
• There is a trend of accepting lower return expectations in the venture capital industry, with some investors being content with a 2x net return.

"So unfortunately, the dynamic of our industry is such that amongst established managers, if you are a traditional VCE, not an incubator, accelerator, post accelerator, what's actually happening is that there is always this theory of a bigger pool." The quote explains that traditional venture capital firms are part of a larger ecosystem where they have the advantage of being established, giving them a broader base to attract different types of investors.

"So venture, in some sense, the return expectation of venture used to be three to five x and above, and now there are folks in the industry that are perfectly fine with a two x net return..." This quote indicates a shift in the venture capital industry where the expected returns have decreased, with some investors now satisfied with a lower return on investment.

• Judging the performance of second-time fund managers is complicated due to the lack of real exits.
• Investors look for fund managers who can provide signals of potential success and have the financial capacity for follow-on investments.
• Institutional partners may commit to fund managers early, with the understanding that there may not be exits or significant progress in the short term.

"What about second time funds, where it's very difficult to tell if someone smashed it or they haven't smashed it, because there's no real exits..." This quote highlights the challenge of assessing the success of emerging fund managers who are raising their second fund, due to the absence of exits that would clearly demonstrate their performance.

"So typically it's the same with venture funds. So when you choose a partner, an institutional partner, they know enough where they will say, okay, in two years, I will recommit to you with the understanding that you will not have had exits..." The quote explains that like startups, venture funds also rely on the confidence of institutional partners who commit to them with the understanding that it may take time to see tangible results.

• Smaller venture funds have grown larger, leading to competition for the same deals at later stages.
• Early-stage venture capital is now often associated with incubators, accelerators, and post-accelerators.
• There is a structural shift in venture capital from investing in starting companies to investing in growing companies.
• The best investment opportunities are perceived to be in areas where there is less competition.

"In every asset class, in every sector, the best returns are always in places where others can't invest." This quote conveys the idea that unique investment opportunities with less competition can yield higher returns.

"So even the smaller funds are now being a part of these later stage rounds." The quote reflects the trend of smaller funds participating in later stage funding rounds, which were traditionally the domain of larger funds.

• Return expectations vary significantly between larger and smaller funds.
• Smaller funds are expected to have the potential for higher returns, sometimes aiming for 5 to 10 times the investment.
• The potential for high returns is justified by the possibility of a few successful exits from a concentrated portfolio.

"Absolutely not. Yeah. My thinking is that if a smaller fund is worthy to be invested in, they should have a shot at five to ten x." This quote clarifies that the speaker believes smaller funds should aim for much higher returns compared to larger funds due to their investment profile and potential for outsized returns from successful portfolio companies.## Venture Capital Fund Performance

• Venture capital funds can achieve high returns even with a high loss rate, if they invest in exceptional companies.
• Small funds that are best-in-class and don't compete with major firms like Sequoia, Excel, Benchmark, and Andreessen Horowitz have an advantage.
• Dominance in a specific sector, geography, or stage allows these small funds to thrive without direct competition from larger firms.
• Not all small funds will perform well; success is contingent on their structure and investment strategy.

"From a statistical standpoint, and from just a model standpoint, those kinds of things become very, very possible, even if you assume a very high loss. So that's where we think the true venture is, in fact."

This quote explains that high returns are statistically and theoretically possible in venture capital, even when accounting for high loss rates, suggesting that the model can work under certain conditions.

"But if you are dominant and you're not competing, the nice thing I like about some of these small funds is that they don't compete in their sector, in their geography, in their stage."

The speaker highlights the advantage of small funds that have dominance in their niche, which allows them to succeed without having to compete with the larger, more established venture capital firms.

• The primary challenge in the venture capital role is finding and collaborating with exceptional people, both as employees and investment opportunities.
• Identifying and investing in the best individuals and companies is crucial to success in the venture capital industry.

"The biggest challenge for me in my role is always finding amazing people and avoiding the ones that are not good."

This quote emphasizes the importance of discerning talent and making wise choices about whom to work with or invest in, indicating that people are the most critical factor in venture capital success.

• The speaker desires a more open and forward-thinking approach to venture capital, embracing new ideas and models.
• Trusted Insight is mentioned as a platform built to increase transparency and automate workflow for institutional investors.
• Moving away from outdated notions and being open to change is considered essential for progress in the industry.

"A world which is more forward thinking, not anchored in past tenants and notions that are no longer relevant."

The speaker calls for a shift towards more progressive thinking, moving beyond outdated principles that no longer serve the industry well.

• Authenticity and evolution over time are valued in the resources and thinkers the speaker follows.
• Fred Wilson, Paul Graham, Peter Thiel, and Ben Horowitz are mentioned as influential figures in the speaker's perspective on startups and venture capital.
• The speaker also keeps up with current trends by following individuals like Justin Kan on modern platforms like Snapchat and Quora.

"I think Peter is probably, if not the most significant, one of the most original thinkers of technology in our time."

This quote acknowledges Peter Thiel as a significant and original thinker in technology, highlighting the importance of his contributions to the speaker's understanding of venture capital and technology.

"Two of the newer folks. And this also tells you, right, if I look at what's going right, so today I have to keep up. So that's why I follow Justin Kan on Snapchat, right?"

The speaker indicates the need to stay updated with the latest trends and thoughts in the industry, mentioning Justin Kan as a current influencer they follow to keep abreast of new developments.

• The speaker expresses gratitude for the opportunity to share insights on the podcast.
• The host appreciates the insights provided by the guest and promotes their own platform for further engagement with the audience.

"Thank you. Thank you for the privilege. Wow."

The speaker thanks the host for the opportunity to participate in the podcast, indicating a sense of honor in being able to share their insights.

"As a VC nerd, that really was so much fun for me."

The host expresses their enjoyment of the conversation, showing that they value the discussion and the guest's contributions to the topic of venture capital.

• DesignCrowd is introduced as a resource for entrepreneurs and small businesses in need of design work.
• The platform boasts a large number of registered designers who can assist with various design needs, including logos, websites, business cards, and even t-shirts.
• A promo code is offered for a discount, and a quick turnaround time is highlighted as a benefit for users of the service.

"And talking of sites there, how's your site design looking? How's your overall approach to design looking? Well, that's where design crowd come in."

This quote introduces DesignCrowd as a solution for design needs, suggesting it as a valuable resource for listeners who require design services.