In this episode we’re joined by one of the most honest and dynamic LPs we’ve yet met: Evan Finkel, Head of Venture Capital Investments at Integra Global Advisors. Evan’s based in the US with an Early-stage investment focus - first check to Series A in the US, Europe, Israel, and LatAm. This is a long one and covers a lot of ground from an LP’s perspective, so strap in. Big shoutout to Ophelia Cai from Tiny for the introduction 💖
In this episode, Evan emphasizes the importance of accessing top-tier investment opportunities and the need for a data-informed approach as well as his perspective on the current market conditions, including the deployment slowdown and the potential for a macro TVPI adjustment. The conversation also highlights the importance of having well-defined goals and strategies as a venture capital LP, exploring the principles and considerations important when allocating to venture.
We also discuss how investing in smaller funds yield a higher probability of outsize returns for LPs as well as the stages of investment that Evan believes offer the best value for money while overcoming the challenges of performance dispersion in VC.
Finally, we discuss the classification of ecosystems, why Evan considers Europe an established ecosystem and how he thinks about the challenges and opportunities in different VC markets, concluding on the importance of data-informed decision-making and the importance of separating personal relationships from investment decisions.
Watch it here or add it to your episodes on Apple or Spotify 🎧
Chapters:
02:02 Meet Evan Finkel: Background and Journey
05:37 Building a Global Venture Fund Strategy
09:25 Market Insights and Current Trends
13:08 Challenges and Opportunities in Emerging Markets
17:04 Government Support and Market Distortion in Europe
21:07 Deployment Slowdowns and Capital Management
22:34 First Principles of VC Investment Strategy
30:47 Performance Dispersion in Venture Capital
38:00 European Venture Challenges
40:44 The Emotional Side of VC
41:47 Balancing Emotions and Investments
44:18 Friends in VC: A Double-Edged Sword
45:50 The Reality of Fund Management
55:32 Operational Due Diligence
01:05:33 Fundraising Strategies for Emerging VCs
01:08:35 The Commitment of Raising a Fund
01:12:07 Counterintuitive Learnings for LPs
✍️ Show notes
Evan’s journey in VC.
Pre-VC: Studied neuroscience and finance in college; spent a few years in consulting at a very quantitative boutique focused on statistical and econometric modeling for multinational corporations; recruited by Anheuser-Busch, oversaw the ROI and attribution modeling for the US marketing budget; went back to school and completed a 2nd bachelors degree in computational and applied math and a masters in machine learning; and, held a software dev role at Amazon
Integra is an IRA functioning as a multi-family office. We serve ultra-high net worth families, foundations, endowments, and pensions. We cover the entire investment universe including liquid equities, fixed income, VC, PE, real estate, private credit, hedge funds, and frontier and esoteric asset classes like litigation finance. On the VC side, we invest in both VC funds and startups.
It’s a complete accident that I wound up in venture but that has allowed us to build our venture program from first principles
Deep Dive and Q&A on Integra GA’s allocation strategy.
We invest in early-stage funds across the US, Europe, LatAm, and Israel
We generally prefer the first few vintages from a given manager and/or small funds - we feel this provides the highest probability of the returns we’re looking to receive
We look for emerging managers but experienced investors (i.e. a referenceable track record as an angel or from a previous firm)
We’re data informed - break down track record, try to identify trends and patterns, areas to poke and prod
This set is from Kauffman which is dated but reflective of the experience of an actual institutional LP rather than a retrospective analysis from Pitchbook data.
“In our own portfolio, we found that we earned an investment multiple of two times our invested capital only from venture funds whose commitment size was less than $500 million; not a single fund that exceeded that capital raise earned more than twice the invested capital after fees.”
“Our data on the relationship between fund size and returns is supported by other empirical work within the industry. Silicon Valley Bank conducted a study on VC fund size and performance, examining Total Value to Paid In (TVPI) capital returns from 850 VC funds from vintage years 1981–2003. 20 There are three main conclusions to be drawn from SVB’s analysis:
The majority (51 percent) of funds larger than $250 million fail to return investor capital, after fees.
Almost all (93 percent) of large funds fail to return a “venture capital rate of return” of more than twice the invested capital, after fees.
Small funds under $250m return more than two times invested capital 34 percent of the time; a rate almost six times greater than the rate for large funds.”
Here’s some data on persistence of fund performance (i.e. ‘settling into a given quartile’ - from here). Things are a bit muddled if the previous fund is in the second or third quartile but the data appears quite strong when the previous fund was in the top or bottom quartile.
“Only 17% of venture funds larger than $750M have ever returned to limited partner investors more than 2.5x TVPI net of fees and expenses compared to 25% of funds smaller than $350M. Said differently, a smaller fund is roughly 50% more likely to return more than 2.5x than a large fund.
An even larger performance gap exists when measured by cumulative IRR, which is 17.4% in funds smaller than $350M versus just 9.7% in funds larger than $750M.”
3 biggest learnings in LP investing
GPs are not your friends: Many LPs, even big institutional LPs, confuse being friends with the person running the VC firm and being friends with the legal General Partner entity. It’s great to have friends in venture but those friends have a GP entity that may be charging you real fees, holding onto your money for 10+ years, taking waived management fees instead of a cash contribution from the partners, and strategically using lines of credit and fuzzy valuation policies to manipulate IRR. Make sure you invest in the fund because you believe it’s the best place to actually allocate your incremental dollar not only because you like the person running it.
There are too many ‘sophisticated’ LPs with large asset bases who are too worried about whether the guest WiFi has a password and not nearly enough about whether the investment thesis of the fund makes any sense…don’t invest in a fund just because one of these institutions invested.
Most LPs don’t understand the purpose of venture in a diversified portfolio or are willing to write checks that aren’t going to generate venture-scale outcomes. Unless you’re in the types of funds (small and early-stage) that have the highest probability of generating outsized, asymmetric returns, you’re better off investing in real estate or private credit and getting the same or better returns with regular cash distributions.
Advice to your 10 year younger self.
Strap in, it’s going to be a wild ride…but also, chill out, it’ll all (probably) be fine
The PhD which you’re going to want to get in a few years…don’t wait
That weird crypto thing…maybe start mining it right now?
Top tips for emerging VCs fundraising.
Spend a lot of time thinking about whether you want to be an investor or a fund manager - everyone wants to have their own fund but that is a full time job on top of your job being an investor. You might be a lot happier just deploying capital and not having to worry about fundraising, operations, compliance, etc.
Honestly answer the following questions: Do you actually have a unique and differentiated advantage? No, really, do you? Are you sure? Can you articulate it?
Most counterintuitive learning.
The incentive misalignment between GPs & LPs and LPs & underlying beneficiaries is even worse than it appears
LPs have access to more data than ever before but many seem to key in on who else is investing in a fund, which firms have co-invested with the fund, and which unicorns are in the portfolio
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A global LP's perspectives, allocation strategy and learnings with Evan Finkel, from Integra Global Advisors