VC10X - VENTURE CAPITAL PODCAST
Venture Capitalists (VCs) & Angel Investors share their investing thesis, screening process, value-add, exits, and more. Hosted by Prashant Choubey (@ChoubeySahab)
Muieen has been writing on the topic of LP/GP fundraising and is a top writer on Medium for his articles. He has worked with various emerging managers globally helping them in various respects.
We talk about:
Muieen's story & how he got into VC?
So it started off with an internship, Betatron, which was the number one accelerator in Hong Kong at the time during 2020 when I was finishing up my MBA at Nanyang Technological University. Then after that I graduated and I started to write articles about what you need to know as an emerging manager. Whether it's talking about how other funds have raised them through their pitch decks or going through and saying these are all the resources that invest in the in someone of such and such background as an emergency as an LP. So that's how I started.
How GPs can benefit from the Mega LP List?
So little over a year ago, I had published a list of all the different LPs who publicly promote that they invest in emerging managers. What ended up happening is that it inspired a lot of other people to write via command C, command V, copy paste.
Now everyone seems to have a new article pretty much referring to a lot of the same things I put. And then through that, a lot of people actually started to spam these LPs. So now you have LPs who previously used to openly promote that they invest into emerging managers. They will no longer do that sort of stuff. And the whole issue came from this kind of weird relationship where if you keep everything open and everyone is going to try to just spam it to that and then someone doesn't like to get spammed because no one likes getting spam. It's irrelevant, it wastes time, all that stuff.
So they decided, okay, I'm just going to cut it off, which then makes everything worse for the entire ecosystem. That is the start as to why we're doing the approach we're doing and why we're doing what we are doing.
We also prevent people from trying to scrape the list or anything like that. And just to make everything easier, we also give pertinent details about the LP so that people understand how to write the email and how to structure the email. That way it's more than just kind of like, hey, I am a person trying to raise the fund gives me money, let's get this done. That doesn't work. Yes, I get it. The LPs are pretty protected, so this time they are not going to get spammed. It's very protected and only the serious ones will reach them.
How do you know these LPs are active?
So I have personally mapped out the careers of a number of people in the allocater space. A lot of people who were in the allocated space ten years ago are very likely either a) still in the allocater state, b) retired, or c) unfortunately they passed away. For the issue of c, we generally remove that information because we don't want people kind of reaching out to that person or that family and reminding them about something bad has happened. For B. If they're retired, then we'd still kind of write about if this is the person who's retired.
They might be able to help you connect with other people who are relevant in the ecosystem and act as a super connector for you, maybe an adviser, but on how you want to position that relationship and under what context you want to reach out to them. For a if someone has been in the allocater space ten years ago, they're very unlikely to have pivoted into something different. The biggest difference in their career that will have happened is if their company has been acquired or if they've moved on to a different allocator. That's much easier to deal with and to help us make sure that everyone is relevant.
Can I guarantee that everyone is going to allocate? I can't do that because I don't manage these guys' money. So because of that, there's no way for me to control that unless I start to internally work for everyone there. And we have about 2000 LPs at this point, so it would be impossible to do anything like that. No one can guarantee that you are going to get the investment or allocation that you want. But yeah, it's a legit list, that's for sure.
How should GPs position themselves in front of LPs?
It's about making your fund thesis unique and being able to stand out when you contact the LPs, because a lot of what we've seen maybe two years ago, you could have the broadest fun thesis, which is kind of like, oh, I'm going to deal with a hot topic like Fintech or Crypto, etc. Which is no longer possible given everything that happened in crypto the past few weeks with FTX.
So now it's more about okay, fine, given my background this is what I should be focused on, right? So for example, there is a GP that we talked to a few weeks ago and with them they come from a very specific background of they were personally affected by Hurricane Katrina plus they come from a background where they're more likely to get hit by all of these climate issues. So for them it makes a lot of sense that they focus on sustainability with a focus on marginalized communities because there's a lot of money there and these guys are ex-government so they understand how things work and they understand how the government contracting business works as well. And these guys were trying to figure out how to do a fintech fund so I kind of had to talk to them and tell them like no, you have an amazing background right now, given that I personally look through all of these different family offices websites, I can tell you that sustainability is a big play. And so if you can just figure out this is the fund thesis and make it very interesting, then from there it's just a matter of meeting the right people who have the sustainability mandate and tell them, hey, listen. This is what I'm doing. And because of my background, I am uniquely qualified to go up against it and to help startups in this space make the world a better place.
Importance of pre-qualifying LPs
So it comes down to prequalifying and triaging and that prequalifying of the LPs we try to do to a certain extent but there's only so far we can go in terms of building that relationship with the LP. From there it's kind of like dating where you kind of have your first meeting which is hey, just a quick five minute meeting. This is what I'm working on. Is relevant to you or not? Yes, it's relevant. OK, cool. I seem to like you, you seem to like me. Let's do a second meeting, right?
And from there, the second meeting is more where they can show pitch, like and they can say, okay, this is why we're more interested. These are the deals we're walking through. And this is where I would really like you guys to work with us.
How LPs conduct due-diligence?
Again, this all depends on the LP and what type of LP you're dealing with, because there are two branches of the it's world.
You have the more unsophisticated LPs, so I'd say are closer to high net worth individuals. And you have very sophisticated institutional grade investors, right? Where when they do due diligence, the first thing they're going to do is they're going to look at your fund and they're going to look for every other fund that has any overlapping pieces from yours. So for example, if you are a fintech fund then they're going to find every fintech fund there is and then they're going to ask themselves the question OK, is this fund better than these guys are not? And should I just invest my cash into these guys?
And then you'll have the high up with individuals where it's much easier to deal with because for them it's like oh, okay, I know you personally, what you're doing seems to be cool, really nice startups. I don't find investing in you guys because you can do something I just don't have the time to do. So it's the world that they need to understand how to dance around and how to deal with that process depending on who they're talking to, right?
What kind of LPs are willing to bet on first time managers?
So a lot of it comes down to how you spin the story more than anything else. Plus if it's more institutional grade then making sure that they have an emerging managers mandate and that you fit into that emerging managers mandate for example, some fund of funds, they do have an emerging managers mandate but they will only invest in US based funds. So you just have to make sure that one of the mandate works and then from there it's about really getting your story right and getting your story to fit what your LP is thinking.
So for example, we'll use for corporations, with them it's a matter of reaching out and figuring out okay, what are the startups that might disrupt this company's industry in the future and will this company want exposure to these startups earlier than when they become a unicorn company in the end. So for the GP it becomes easier to kind of reach out to the corporate saying, okay, listen, I come from this background. We have so and so industry. This is what I think is going to be relevant and these are the type of products I've already invested in that can help you out today. And so from that perspective the corporations can see, okay, there's benefits here from us and we realize the value based off of these startups that you've already showed up.
And now talking about fund sizes, LPs have their own preferences that we are going to allocate at least $10 million in a fund and we are going to do it in ten funds or maybe five funds. And some LPs want to go smaller, they'll be like, okay, we'll invest one to 2 million. And then there's also a thing like they'll also think about that. We do not want to be like the majority of the fund, we do not want to lead the fund. So it has to be at least maybe $20 million fund. Then maybe we can put in 5 million in that fund. But if it's maybe a 10 million fund, then they would not probably put $5 million in that fund because they do not want 50% ownership of fund.
A lot of it comes down to prequalification. As you know, with the way public markets have been currently, the nominator effect has kind of taken place. So for example, if someone knows that, okay, my allocation to private equity has been traditionally about eight to now because public equities have significantly dropped down in price. I'm overallocated to private equity, I might have to reduce that. I won't be able to know these guys' portfolios to that extent to say, okay, this is relevant or irrelevant. At the end of the day, you can only focus on building the relationship with the LP and making sure that, okay, these guys can allocate money later on even if they're not ready yet or B, they might be able to introduce me to a better fit as well.
DEI on allocator side
I've looked at all of these different family offices. I've looked at all of their staff employees when I can. There are so few family offices who seem to hire people of color or anything like that. I think I've looked at maybe a hundred different family offices teams. I've only noticed one woman of color the entire time. So of course we have to work on the allocater side. And I know that a lot of people talk about how we need more color on the VC side we also need more color on the allocated side and we need to get more young students involved in the allocated space. There are a number of organizations like New American Alliance I hope I got the name right, who host events to try to get young students who are in their college years to get exposure to these allocators and get their careers into that. Because if we can get more people of color in the allocation space, then that makes everything significantly easier for everyone. And it's just a matter of making sure that these rules get exposure and these companies get more exposure to minority talent or underrepresented talent.
Mega LP List- https://www.mega-lp-list.com/
Muieen's blog - https://muieen.medium.com/
Resources for DEI for GPs, Founders and aspiring VCs - link
Follow Muieen on Linkedin - https://www.linkedin.com/in/muieen/
Follow Muieen on Twitter - https://twitter.com/MuieenCader
Hosted by Prashant Choubey