LP investment strategies, IRR focus, and more with Berkocorp's Joshua Berkowitz | E1882

Episode Summary

Executive Summary: In this podcast, Jason Calacanis and Josh Berkowitz discuss venture capital from an LP perspective, covering cap table issues, fund evaluation, and the importance of decision-making. They explore how family offices diversify into venture, the challenges of broken cap tables, and the traits of successful GPs. The conversation also touches on fundraising difficulties, the role of reserves, and the need for honest feedback in the industry.

Main Topics: Cap Table Problems and Founder Equity (Priority: 5/5): Discussion on how low founder equity at seed stage, often due to predatory angel groups, leads to broken cap tables, forcing recaps or founder departures. LP Perspective on Venture Capital (Priority: 5/5): Josh Berkowitz explains why family offices diversify into venture, citing high returns, entrepreneurial spirit, and the opportunity to back innovative companies. Evaluating Venture Funds and GPs (Priority: 4/5): Criteria for selecting GPs, including unique strategies, execution ability, sourcing, picking, and the importance of getting reps in deal evaluation. Decision-Making and Doubling Down (Priority: 4/5): The process of making investment decisions, the role of consensus vs. individual decision-making, and strategies for doubling down on winners. Fundraising Challenges and Market Conditions (Priority: 3/5): Current difficulties in fundraising, the impact of market saturation, and the need for honest feedback from LPs to improve fund structures. Reserves and Fund Structure (Priority: 3/5): Debate on whether early-stage funds should have reserves for follow-on investments, and the potential agency problem between GPs and LPs.

Key Arguments: Broken cap tables at early rounds, often due to predatory angel groups, lead to founder equity dilution and potential company failure. Family offices diversify into venture for high returns, entrepreneurial engagement, and the chance to shape the future. Successful GPs need unique strategies, execution ability, and extensive deal experience to identify top 0.01% startups. Decision-making in venture funds should be internally consistent, whether consensus-driven or individual-based. Doubling down on winners requires information advantage and should be structured carefully to avoid LP-GP agency problems. Fundraising is currently very challenging, with LPs often not providing candid feedback on why they pass. Late-stage venture capital (above $500M valuations) should be classified separately from early-stage VC to avoid distorting industry data.

Data Points: Founder equity given away at seed stage: 60% - Example of broken cap table where founders gave away 60% of the company early. Series A dilution: 20% - Expected dilution in Series A round. Series B dilution: 20% - Expected dilution in Series B round. Fund size for seed stage: $50 million - Jason Calacanis's first target for his fund. Carry percentage: 25% to 30% - Jason's fund charges 25% carry, with 30% if 2x return, which some LPs find too high. Number of startups in database: 21,000 - Jason's firm has 21,000 startups in their database. Number of meetings per day for analysts: 6 - Analysts at Jason's firm do six meetings per day. Number of meetings for reps: 500 - After 500 meetings, investors develop better pattern recognition.

Pivotal Quotes: "If you have cap table problems like low founder equity at the seed stage and they've given away 60% of the company, you're like, well, when they do their series A, that's going to be another 20% gone, and Series B, another 20% gone. These founders are going to have very little equity." — Jason Calacanis: Discussing the consequences of broken cap tables on founder equity. "The most important thing to me is that, like, the strategy is internally consistent. That every way they've structured their firm works together in concert to deliver returns." — Josh Berkowitz: Explaining how he evaluates venture funds for LP investment. "I don't think everybody should be doubling down or even have any reserves. I think if you are an early-stage firm that's running small checks into most of these companies, and then the only information you have afterwards is that you're reading the same quarterly update as every other investor. I don't actually know if you have any extra information to make you think you should double down at the A or B." — Josh Berkowitz: Arguing against automatic doubling down without information advantage.

Implications: This episode highlights the need for founders to be wary of predatory early-stage investors and for LPs to demand transparency and alignment in fund structures. The discussion on doubling down and reserves suggests that early-stage funds should focus on their core competency rather than chasing follow-on investments without clear advantages. The current fundraising environment requires GPs to be adaptable and seek honest feedback to improve their offerings.