The Sure Shot Entrepreneur

Build Strategies Around Who You Are

Episode Summary

Alex Edelson, founder and general partner at Slipstream Investors, shares his journey as a limited partner and recounts the genesis of Slipstream. He talks about the importance of evaluating VCs based on their portfolio construction, unique strengths, and feedback from founders, and highlights lessons from common mistakes emerging managers do.

Episode Notes

Alex Edelson, founder and general partner at Slipstream Investors, shares his journey as a limited partner and recounts the genesis of Slipstream. He talks about the importance of evaluating VCs based on their portfolio construction, unique strengths, and feedback from founders, and highlights lessons from common mistakes emerging managers do.

In this episode, you’ll learn:

[6:32] 3 key characteristics of emerging managers that LPs compete for

[10:56] What the best LPs do to remain top of mind of fund managers

[16:18] Lessons from common VC mistakes

The non-profit organization that Alex is passionate about: Bridge Funding Global

About Guest Speaker

Alex Edelson is the Founder and General Partner at Slipstream Investors. Before starting Slipstream, Alex was the Chief Operating Officer and General Counsel at QED Investors and Nigel Morris's Chief of Staff.

About Slipstream Investors

Slipstream Investors is a DC-based VC fund of funds that invests in pre-seed and seed funds, many of which are emerging managers, and in their breakout portfolio companies.

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Episode Transcription

[I'm looking for] People who build strategies around what is so special about them. This is a very personal business, and it is about the people and their unique skill sets and the relationships they build with founders and other investors.

Gopi: You are listening to The Sure Shot Entrepreneur - a podcast for founders with ambitious ideas. Venture capital investors and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision. Welcome to The Sure Shot Entrepreneur. My guest today is Alex Edelson. He's a general partner at Slipstream Investors. 

Alex is a limited partner. He invests in venture capital firms. I met Alex at a webinar organized by a venture capital firm where he talked about [00:01:00] how the market is evolving, what kind of new VC firms are getting formed, and how limited partners can be a part of this revolution that's happening today in the venture capital world.

He was very authentic, very candid in his opinions, so that's why I invited him to The Sure Shot Entrepreneur to ask him more detailed questions. We're going to talk to him about his journey. How did he choose to become a limited partner? Why did he start Slipstream? What does he look for in venture capital funds when he looks to invest in them? Alex, welcome to The Sure Shot Entrepreneur. 

Alex: Thanks, Gopi. Thanks for having me. Excited to be here. 

Gopi: Let's start with you. You're based in Washington, DC. You spent a few years on the VC side of the world, and you were a lawyer to begin with, and now you decided to jump into the limited partner world. How did that happen? 

Alex: Yeah, so I spent seven years practicing law, joined a friend's two-year-old FinTech startup. It didn't go as we hoped, and then was fortunate to find my way to QED, an early stage FinTech investor. I joined during Fund 5 and started as Nigel Morris's chief of staff. He's the managing partner there. I later became the COO and general counsel, and I was there at a really unique time. We were coming out of that emerging manager stage.

The first three or four funds had done really well, and QED was starting to grow a bit in Fund 5, and being able to watch QED and be a part of QED's transition from an emerging to an established manager was a really great education for me into this world, and that's led to where I am today.

Gopi: Okay. So you are an emerging limited partner, if I may say that. I'm an emerging manager because I'm starting a new venture capital firm, and it's in the early days of its life. And similarly, you started Slipstream. Alex, what is Slipstream and what is the strategy for Slipstream? What do you see in the market that's exciting for you? 

Alex: Yeah, thanks Gopi. So there were four realizations I had while I was at QED. First, many of the best performing venture funds are small early-stage funds and a lot of them are emerging managers.

So first three or four funds, limited track record, that's what QED was. And [00:03:00] you see these funds getting enough ownership and a few winners and they have a small fund size, they can generate amazing returns. So on the other end of the spectrum, it seemed difficult to scale a venture firm. The exits are only so big. Venture funds can only get so much ownership. Their hit rate is only gonna be so high. And so it seemed to me like if you can find and evaluate the best small early stage funds, there's amazing potential in those and you could get excellent returns. 

The second thing that stood out to me was that a lot of people struggle to evaluate those funds. And often those funds struggle to fundraise, and that's not necessarily because they're not gonna do well. I thought that maybe I was in a position to be able to evaluate those, and I saw the inner workings of a top emerging manager in QED and spent a lot of time talking to people about sourcing and picking and winning and adding value, getting liquidity, portfolio construction, and just generally the characteristics that top early-stage VCs have.

That was my education into what a top early stage investor looks like and what was interesting to me was like those are not track record, they're qualitative characteristics. And if you are [00:04:00] in the ecosystem and you know the founders and you know the venture firms, then you can test for those qualitative characteristics without having a track record. And so it seemed like maybe I'm in a community of people that can help me evaluate these and maybe I can invest in great funds that are somewhat overlooked. 

The third thing that I saw while at Q E D was like, you know, initially I felt like I didn't know much. I had a lot to learn about venture. But over time, we were working with emerging managers in a variety of ways, and what surprised me was some of them wanted to talk to me and I just didn't feel like I knew anything. I felt like they should wanna talk to the investment team. But they wanted to talk about other things. Maybe they were good at sourcing, picking, winning, adding value, all of those things. But they wanted to talk about fundraising or investor relations or portfolio construction, team composition and running their firms. And those were areas where I was developing an expertise. I thought maybe I can help and provide some perspective to funds that are in their first few vantages. 

And the last was like, there were great co-investment opportunities. There are so many LPs in these small funds who want to co-invest, but far fewer actually do. The returns of any one fund are gonna be [00:05:00] driven by just a few winners and there are often opportunities for the LPs in these funds to put more capital into these winners, and I thought there was a great opportunity there to bring those co-investment opportunities to investors who I thought I could bring into Slipstream who may not have exposure to those opportunities.

So Slipstream does three things. It's a fund of funds, so I provide diversified exposure to early-stage small venture funds, many of which are emerging managers (they don't have to be) and many of which are difficult to access although plenty are fundraising for a while and are sort of hiding in plain sight, in my view.

The next is I'm a scout fund for my LPs. Some of my LPs wanna put more money into these funds, but they don't know how to find or evaluate them. And then I also can co-invest out of the fund. I'm using a small portion of it, and then I bring those co-investment opportunities to my LPs. 

Gopi: You brought up quite a few topics here. Just like how venture capital investors evaluate startups, limited partners evaluate venture capital investors. It's difficult to evaluate venture capital investors for a few reasons. First is if you wait for a full track record to be established, it's gonna take many years and perhaps even decades, and it might be too late to invest in those firms. So limited partners have to jump in quite early and then without a lot of proof points.

How do you look at qualitative aspects in addition to the limited or no quantitative data available? What are some characteristics that you look for? 

Alex: Yeah, it's a great question and and the premise of it is right on, because often funds that have a track record grow and it's hard to maintain those early returns and then some don't grow.

But it's very hard to get into those because they have happy LPs and they're not growing. What I should preface this with is that there isn't one way to win for these small funds. but there are a lot of ways that can work, especially for the very small funds.

But what I'm looking for is a few things: 

1) Portfolio construction that I think can generate fund level returns

At a very high level what I'm referring to is enough ownership in the companies they're investing in so that if they have a winner that can have a meaningful impact on fund level returns. So like can return the fund or better.

2) Something unique or special about the fund manager that I believe will be a reason they can win across multiple vantages

That often relates to sourcing, picking, winning, or adding value, and ideally, all of those. And so I'm most drawn to fund managers who have some combination of operating experience at a successful venture-backed company, deep domain expertise, a track record of investing at a similar stage at another firm. Ideally, they'd have some combination of all of those. QED is a really good example of that. It includes a founder of Capital One, a number of others who were part of Capital One from the very early days; people with a range of other FinTech operating experience. They have deep domain expertise in FinTech. They have FinTech operating experience that's uniquely valuable to founders, and it's a reason why QED has been so successful for so long. 

3) Consistent feedback that this VC is one of the most or the most helpful investor to a given founder that they've worked with, and also that the best later stage investors in the sectors where this venture fund is investing think highly of that investor and they wanna see all their deals. And then, a thoughtfulness about getting liquidity from their investments. It's a long way off, but it's really important and there are a lot of funds that get marked up, but it's really all about DPI. 

Gopi: Cash on cash returns.

Alex: Yeah. 

Gopi: Can we take a few examples from the investments that you've made at Slipstream. You mentioned that you look for something unique about these investors. Portfolio construction is important. Some are more diverse - they have a diversified portfolio. Some are more concentrated, some focus on geographies, some focus on certain sectors.

But in addition to all of these things, you're looking for something different about the VC. Can we take a couple of examples and talk about what you found unique about those firms? 

Alex: Yeah, so a few examples. One that I really like is Iterative in Southeast Asia, which is getting really compelling ownership on a lot of companies in a region with massive tailwinds where the GPs are serial founders, very successful and there just aren't that many [00:09:00] people playing at the pre-seed stage in Southeast Asia that can help these founders like they can. So, they're really uniquely positioned both from a portfolio construction standpoint, but also to add a lot of value to founders in that region. 

I've invested in Better Tomorrow Ventures and Deciens, and those are two FinTech funds I love because in part they've got FinTech operating experience. They have investing experience. They're deep domain experts in the areas where they're investing. And those are things that draw me to them. 

Gopi: This is very interesting. You're giving specific examples of firms that you have invested. How do you meet these VCs? What's the best way for a VC to connect with you? 

Alex: Yeah. I don't think there's a wrong way. Coming through someone you know is always helpful but it shouldn't be preclusive if we don't have mutual contacts. I meet people who reach out cold over LinkedIn or email me. I meet people through funds that I've invested in. I meet them through QED and founders who I've worked with over the years. I meet them from other LPs in the space. [00:10:00] There are other family offices and institutional investors who invest these types of funds, and I meet other funds through them too. So there's no wrong way, reach out cold if you don't have a connection. 

Gopi: So you have a very open strategy to meet various types of VCs. How long does it take for you to go from the first meeting to the point where you decide that you want to invest in the firm?

Alex: Yeah. I'm comfortable making investment decisions in three to five weeks. I can move fast when I need to move fast. I can move faster than that if I need to. If I have more time, I sometimes will take that. I'm a solo GP myself. Sometimes, if I'm in the middle of something, I do need a little more time to make an investment decision. 

In a perfect world, we're building a relationship before they're even fundraising. And so we have time to get to know each other and think about whether this is the right fit for them and for me. And so when the time comes that they're fundraising, it can go pretty quickly because I've basically already decided before then. 

Gopi: Okay, so let's take a situation. Tell me if this happened in real life. Similar to how entrepreneurs are always chasing VCs and investors to [00:11:00] get funding, from the outside it looks like VCs are always chasing limited partners to get funding. But I'm sure there will be situations where you have to compete to get into a VC fund. And it's super competitive. They're over-subscribed and they have a short fuse timeline and you have to fight to get on. In the case of a VC, it would be the cap table of a startup. In the case of an LP, they're fighting to get on the fund before the fund closes. Has that happened and how do you differentiate yourself and how do you tell the VC that Slipstream is a superior investor? How do you compete? 

Alex: Yeah, so I think it comes down to whether fund managers wanna partner with you. Building a relationship early with them that's personal is important. I think finding ways to be helpful is important. I think introducing them to other LPs is one common way to be helpful. But when they're oversubscribed, you know, by definition they don't need that. I think also sort of respectfully and constructively challenging them on their strategy and how they're thinking about the fund is something that my sense is not a ton of LPs do.

I think the best ones do that though and fund managers respect that and they want to get [00:12:00] better and they want LPs who can help them be better. It's about like being transparent and responsive and doing what you say you're gonna do. Those have impacted my ability to get into funds that don't have much room.

Gopi: Venture capital is a sector where the asset chooses the investor. And I think that applies here as well, especially for established VC firms where they don't need new LPs. The VCs have the freedom to choose the LPs, and it's important for LPs to begin to establish those relationships before the VCs become successful.

You've seen quite a few VCs over the years. And by the way, we're using various terms here - manager, VC, GP, emerging manager - they all mean the same thing. We're talking about venture capitalists. What makes a VC successful? What are some things that good VCs do? 

Alex: Uh, it's such a good question. The categories that I break this down into are sourcing, picking, winning, adding value, getting exits and getting portfolio construction right. 

Gopi: What's more important? Sourcing, picking, winning value add. [00:13:00]

Alex: They're all important. I don't think I would invest in a fund that didn't check all those boxes. From a sourcing perspective, though, it's not the same for every fund. Some funds are very concentrated and they don't need to be in all the hot deals, and they don't want to compete for all the hot deals, and they don't value seeing every deal in the same way that other funds value that. 

I think it's really built around the strategy and the unique strengths of the fund manager. I think from a picking perspective, you would have to be good at picking whether you're concentrated or not. I think adding value is really important. Yeah. Because it creates a flywheel. Not only are you hopefully impacting the likelihood of success of the underlying portfolio companies and the magnitude of success, but you're also creating a flywheel. Your founders love you. The community starts to hear that you're a really helpful investor to have on their cap table, and then it creates positively selected deal flow. And so it's really important.

Obviously, getting exits and being thoughtful about exits is critical. And I tend to be drawn to people who think about every fundraising round as a [00:14:00] decision about whether they would wanna buy or sell into that round, and if they would sell, they don't always have the ability to sell in that round. My hope is they're thinking about it, and then if they do have the ability, they're selling. Those are the things. 

But if I'd step back one level. You know, people who build strategies around what is so special about them. And this is a very personal business, and it is about the people and their unique skillsets and the relationships they build with founders and other investors. I dunno if that answers your question, but that's how I think of it. 

Gopi: That's a very unique way to phrase it. Can you tell a little more about it? What does it mean? Strategies around who they. 

Alex: Yeah, so for example, I'm an LP and Dan Kimmerling started Deciens. He is a deep domain expert.

He works very closely with companies. He is highly concentrated. He gets good ownership. He has very high conviction on his investments as they start to evolve because he's working very closely with these companies, so he can often see when a company's starting to inflect or when it's likely to inflect earlier than other [00:15:00] investors who are also around the table with him. And that allows him to be aggressive when he sees opportunities.

Gopi: It's a good way to describe how a VC firm is formed. It's always formed around the strengths of the investor, the qualities of the investor, the personalities of the investor. And that shows in the decisions they make, including decisions about what companies to invest in, which founders to support, and how to support these founders.

I like the way you phrased the strategy around who they are. It's a good way to understand what a VC firm does. What do VC firms do that tick you off or say, "well, you know, that's a problem"? You meet a lot of VCs, many are successful, and I'm sure you meet VCs who make mistakes along the way, and they seek your feedback. What's your most common feedback to VCs? 

Alex: Yeah. First is if you're on a fund 1, take your time getting started. See a lot of deals before you make a lot of investments. Second is build the case while you're deploying your current fund for your next fund. If you wanna be bigger and for example, have more reserves and to follow on into more companies in your fund 3, and you're raising your fund 2 and deploying your fund 2, track contemporaneously during fund 2 as opportunities come up to follow on into fund 2 companies or fund 1 companies. Track, like if I had limited reserves, is this one of the companies I would've followed on in fund 2. And then in fund 3, when you're fundraising, you have a bit of a story to tell about. "Look, I'm actually quite good. If I had reserves to follow selectively, I would've done that well." Or maybe I'll realize, "geez, I'm not really good at falling on selectively. Maybe I should continue to have no reserves. Or maybe I should have a strategy where I'm falling on automatically and just taking my pro rata and everything through a certain stage."

The last thing is to just be careful about growing too big, too fast. There's more margin for error on these smaller funds. You need more ownership. It's more competitive to get bigger checks into companies. And you just spend more time fundraising if you wanna make big changes in your fund size, you have to bring in a lot of new LP dollars. 

Gopi: So don't succumb to fomo. Begin with the end in mind and grow thoughtfully. Very wise advice. We're coming towards the end of our conversation, and I want to ask you about your community involvement. Is there a nonprofit organization you are passionate about? Which one? 

Alex: Yeah, thanks for asking, and I'm really excited to be involved with Bridge Funding Global. In fairness, I sort of view them more as a social impact platform because investing in women and other underrepresented managers and founders should be about returns and not charity. But historically, you know, the VC community has been disproportionately populated by white males. Bridge Funding Global is a fundraising platform and an investor community for top performing women GPs to help their fundraising match them with actively deploying LPs and with a vision towards building a large ecosystem for women in diverse emerging managers. They've had success in doing that. I'm on the permanent selection committee there. I'm really proud to be involved and optimistic that we can make an impact. 

Gopi: Alex, this is a very insightful conversation. It's very rare to find a limited partner who's open and candid with his thoughts. It's actually hard to find even a limited partner who's willing to talk. It's a pleasure to have this opportunity to share your stories with the world. I look forward to sharing your nuggets of wisdom. 

Alex: Thanks again. I had a lot of fun. 

Gopi: Thank you for listening to The Sure Shot Entrepreneur. I hope you enjoyed listening to real-life stories about early believers supporting ambitious entrepreneurs. Please subscribe to the podcast and post a review. Your comments will help other entrepreneurs find this podcast. I look forward to catching you at the next episode.