E24: Joshua Berkowitz of Berkocorp on Why LP's Should Care about IRR% not TVPI

Episode Summary

Executive Summary: Joshua, a family office LP with a background in real estate and venture capital, shares his investment philosophy focused on IRR over multiples, the importance of time diversification, and the need to stay continuously in market. He discusses evaluating GPs based on strategy fit, the value of a diversified 'messy' portfolio, and common mistakes like being overly impressed by founders' past success. He emphasizes that venture is a positive-sum relationship business where LPs and GPs align to back transformative founders.

Main Topics: IRR vs. MOIC as the Core Metric (Priority: 5/5): Joshua argues that IRR is the universal metric for comparing across asset classes, while MOIC and time are just proxies for IRR. He underwrites all investments to a 20% IRR, translating to higher multiples for longer-duration funds. Time Diversification and Pacing Models (Priority: 5/5): He stresses the criticality of staying in market year after year to avoid lumpy cash flows, benefit from vintage diversification, and develop the skill to identify top GPs. A pacing model ensures distributions eventually fund new commitments. Evaluating Emerging Managers (Priority: 4/5): Joshua looks for a strong 'GP-strategy fit'—a unique strategy that aligns with the GP's background, network, and personality. He values rough edges and contrarian thinking as signals of potential alpha. Portfolio Construction and Follow-On Strategy (Priority: 4/5): He favors a diversified 'messy' portfolio across stages, geographies, and strategies. For follow-ons, he recommends that lead investors with board seats have larger reserves, while collaborative seed investors should keep reserves small. Common LP Mistakes (Priority: 4/5): Joshua reflects on his early mistakes: being too impressed by founders' pedigrees without assessing their VC-specific skills, undersizing checks without a framework, and making random co-investments without treating them as a separate fund. Communication and LP-GP Alignment (Priority: 3/5): He advises GPs to over-communicate strategy changes (e.g., thesis creep) through quarterly updates and LP calls. He values family offices as LPs because they invest their own capital, make quick decisions, and are aligned for the long term.

Key Arguments: IRR is the universal metric; MOIC and duration are just easier ways to reason about it. Every LP effectively cares about IRR. Investing all venture capital in a short window eliminates time diversification; a consistent annual commitment avoids this trap. GP-strategy fit—a strategy that perfectly matches the GP's unique background, network, and personality—is the key differentiator for top-quartile funds. Follow-on reserves should align with the GP's role: lead investors with board seats should have larger reserves; collaborative seed investors should have minimal reserves. Seed managers are generally poorly suited to lead Series A/B rounds because their thesis and skill set differ. LP value add is rarer than VC value add but can be unlocked by GPs explicitly asking for help in quarterly updates.

Data Points: Target IRR: 20% - Joshua underwrites all investments (seed, Series A, B) to a 20% IRR. Seed fund multiple target: 5x - Assumes a 5x multiple over ~8 years to achieve ~20% IRR. Series A fund multiple target: 3x - Assumes a 3x multiple over ~6 years to achieve ~20% IRR. Graduation rate (seed to Series A): ~33% - Joshua's intuition is that roughly one-third of companies make it from one round to the next. Portfolio composition: ~50% real estate, rest in diversified asset classes including venture - Joshua's family office real estate generates monthly income for capital calls. Pacing model allocation: Divide target venture allocation by 6-7 years - A simple rule to stay in market; Joshua notes it's a rough heuristic.

Pivotal Quotes: "I would characterize my strategy as it's a fing mess. And it's a mess intentionally. I think there are many, many ways to be successful in venture. I think the data shows that. I think the most important part is that you're backing exceptional GPs that have a strategy that aligns with that." — Joshua: Describing his intentionally diversified venture portfolio across stages, geographies, and strategies. "The biggest and most obvious is that when I started doing this, I didn't think, I don't think my barometer for what good looked like was that good. And so I said yes to a bunch of funds that I don't think would make the cut in 2023." — Joshua: Reflecting on his early mistakes as an LP, being overly impressed by founders' past success without sufficient VC-specific diligence. "I think LP value add is probably a more mythical creature." — Joshua: When asked whether LP value add or VC value add is rarer, he argues that LP value add is harder to find but can be unlocked by GPs making specific asks.

Implications:* For LPs, the podcast underscores the need for continuous market participation, robust pacing models, and a disciplined focus on GP-strategy fit over pedigree. For GPs, it highlights the importance of clear communication, aligned follow-on strategies, and treating LP relationships as long-term partnerships built on integrity and mutual value creation.