Optimizing fund structure, GP market fit, & more with Screendoor’s Jamie Rhode | Episode 1917

Optimizing fund structure, GP market fit, & more with Screendoor’s Jamie Rhode | Episode 1917

Screendoor’s Jamie Rhode joins Jason (00:00:00)

  • Jamie Rhode recently joined Screendoor, a fund of funds that supports underrepresented voices in the Venture Capital space.
  • Screendoor backs investors on their first rounds of investment.
  • The firm was founded in 2021 by Sat Patel and Hunter Walk.
  • Before joining Screendoor, Jamie spent eight years as an Institutional allocator with a data-driven approach, honing his skills at Bloomberg and then Verdis Investment Management.
  • Screendoor focuses on finding overlooked Venture managers with untapped potential in the ecosystem.
  • By supporting underrepresented Venture managers, Screendoor aims to break the virtuous cycle and get more capital to the edges or the Tails or truly the untapped potential in the ecosystem.

Early-stage fund managers today, spray and pray vs. concentrated bets, and importance of GP market fit (00:03:00)

  • Early-stage venture investing involves parallel-driven processes, with significant returns coming from the "edges" or "tails" of the investment spectrum.
  • To maximize alpha in early-stage venture portfolio construction, it's important to invest in GPs that cover the first institutional check and the tails, while also diversifying across a broad range of managers.
  • Successful angel investors typically make 20-50 investments to increase their chances of hitting an outlier, while a data-driven approach suggests that 50 deals may be the sweet spot for achieving this goal.
  • Emerging managers often play a significant role in investing in pre-seed and first institutional checks, bringing new perspectives and strategies that can help capture the edges or tails of the distribution where big wins are found.
  • Companies that have driven significant returns are often those that have created brand new sectors, and finding GPs who can play in the tail, the edges, and the new is crucial for harnessing the power law in early-stage venture investing.
  • Legal issues faced by companies like Airbnb, Uber, and Tesla can be an indicator of their disruptive potential.

Miro - Sign up for a free account (00:10:11)

  • Miro is a whiteboarding software that can be used for brainstorming and collaborating on projects.
  • Miro is useful for hybrid or fully remote teams as it allows for distributed and asynchronous collaboration.
  • Miro offers a variety of templates, including a pitch deck template for Founders.
  • Signing up for a free Miro account gives access to the pitch deck template and thousands of others.

Effective portfolio construction, investing in startups that are creating new sectors, and finding the right fund managers (00:11:18)

  • GP-market fit is crucial for successful venture capital investing, requiring expertise alignment with strategy, a long-term vision, a competitive advantage, and an understanding of the transition from investor to fund manager.
  • Optimal portfolio construction strategies for emerging managers include deploying capital into 50 deals to increase the probability of capturing a winner, prioritizing the first institutional check-in for the cheapest entry point, and aligning fund size with the manager's network, experience, and track record.
  • Seed stage investments attract higher first entry point prices for serial entrepreneurs, repeat founders, and AI-related ventures.
  • Early-stage venture returns differ from late-stage returns, with the latter resembling buyout and growth equity returns (around 14%).
  • Over the past 25 years, the average annual return on venture capital has been around 28%, with the potential for significant compounding returns over time.

Why seed stage investing attracts fewer GPs than series A or B (00:17:28)

  • The average seed-stage fund size is approximately $40 million, and it takes around 8 to 9 years to reach a DPI of 1, requiring a long-term mindset and willingness to defer rewards.
  • Many fund managers transition to larger deals and establish bigger firms after their initial funds, driven by the desire for increased management fees and a more comfortable lifestyle.
  • Seed-stage investing presents challenges, such as the preference of larger LPs for GPs to invest more money and the demanding nature of the work, which can deter some GPs.
  • Venture capitalist Jamie Rhode optimizes fund structure and assesses GP market fit by leveraging his network of GP advisors, including Homebrew, Precursor, and Cowboy Ventures, to gain insights into potential GPs' vision, capabilities, and expertise.
  • Rhode emphasizes the significance of evaluating a GP's ability to build a lasting firm, adhere to their investment strategy, and possess the requisite expertise to excel in their chosen investment area.
  • Screendoor is a platform that helps startups raise capital.
  • Jamie Rhode, the CEO of Screendoor, discusses how to optimize fund structure and GP market fit.
  • GP market fit is the ability of a general partner (GP) to raise capital from limited partners (LPs).
  • Factors that affect GP market fit include:
    • The GP's track record
    • The GP's investment strategy
    • The GP's team
    • The GP's network
  • The structure of a fund can impact its ability to raise capital and its performance.
  • Common fund structures include:
  • The right fund structure for a particular fund will depend on a number of factors, including:
    • The fund's investment strategy
    • The fund's target market
    • The fund's size
    • The fund's tax implications
  • Optimizing fund structure and GP market fit are essential for startups looking to raise capital.
  • By carefully considering these factors, startups can increase their chances of success.

Quantity of GPs to invest in and Screendoor’s approach to the DEI landscape (00:24:28)

  • Screendoor's investment strategy focuses on identifying and investing in emerging venture managers who bring new perspectives, strategies, and networks to the ecosystem.
  • The fund of funds model allows for broad diversification of unique edges or tails in the market.
  • Screendoor's mandate has expanded beyond diversity, equity, and inclusion (DEI) to include all overlooked managers who can demonstrate their unique value proposition.
  • Overly restrictive mandates can lead to missing out on exceptional opportunities, so the fund emphasizes considering all potential investments based on merit, regardless of specific demographic characteristics.
  • The untapped potential of overlooked managers and their networks can lead to the discovery of new sectors and areas of the market, creating significant opportunities for growth and returns.
  • Underrepresented founders are shifting towards software, marketplace, fintech, and high-tech businesses with higher gross margins.
  • GPs should consider their networks and customer base when deploying capital to build a diverse and successful portfolio.
  • Sector-focused funds may miss out on emerging opportunities like blockchain, Tesla, and SpaceX.
  • Collaboration and technology sharing between traditional industries and tech companies can lead to innovative products and services.
  • Jamie Rhode, co-founder and CEO of Screendoor, discusses optimizing fund structure and GP market fit.
  • Rhode emphasizes the importance of understanding the different types of fund structures and choosing the one that best aligns with the fund's investment strategy and goals.
  • He also highlights the significance of considering the GP's market fit, including their experience, network, and ability to add value to the fund's portfolio companies.
  • Rhode explains that GP market fit refers to the ability of the general partners (GPs) to effectively execute the fund's investment strategy and generate returns for investors.
  • He emphasizes the importance of GPs having a strong track record, relevant industry experience, and a well-defined investment thesis.
  • Rhode also highlights the significance of the GPs' ability to build relationships with entrepreneurs and identify promising investment opportunities.
  • Rhode stresses the importance of having a strong investment thesis when raising a fund.
  • He explains that an investment thesis should clearly articulate the fund's target market, investment strategy, and expected returns.
  • Rhode also emphasizes the need for the investment thesis to be well-researched and supported by data.
  • Rhode discusses key considerations for fund structure, including the type of legal entity, tax implications, and regulatory requirements.
  • He highlights the importance of seeking legal and tax advice when choosing a fund structure to ensure compliance with all applicable laws and regulations.
  • Rhode emphasizes the importance of alignment between the GPs and limited partners (LPs) in a fund.
  • He explains that alignment can be achieved through various mechanisms, such as carried interest, hurdle rates, and co-investment opportunities.
  • Rhode also highlights the significance of open communication and transparency between the GPs and LPs to foster trust and ensure a successful partnership.
  • Rhode concludes the discussion by summarizing the key points and emphasizing the importance of optimizing fund structure and GP market fit for successful fundraising and investment performance.

Carry, Fees, and the percentage of a fund that Screendoor targets (00:33:35)

  • Screendoor underwrites a 3X net net return when evaluating GPs.
  • Asking for premium carry is aggressive unless you have a proven track record.
  • Premium carry can be more easily justified if it shows up around a 5x and there's a hurdle involved.
  • Management fees should be looked at over the life of the fund, with an average of 1.75% being reasonable.
  • Premium carry based on a short track record is not advisable as it takes 7 to 10 years for a fund to settle into its ultimate quartile ranking.
  • Screendoor targets a minimum of 10% of a fund's size.
  • This allows them to be a catalyst in the underwriting and investment process.
  • They partner with endowments, foundations, and family offices who view them as an extension of their team.
  • Screendoor also has the network and access to LPs who may double down on their fund managers or back them when they move out of the core manager space.
  • Screendoor is expanding its mandate to invest beyond just first institutional checks.
  • They are looking to build out a portfolio that can cover a significant portion of emerging managers.

Qualities of high-performing GPs (00:38:37)

  • A successful GP should prioritize relationship-building and have a deep understanding of portfolio construction.
  • GPs should analyze both successful and failed firms to learn from their strategies and make informed investment decisions.
  • Aim for 10-15% ownership in winning investments and have a strategy for doubling down on winners.
  • Consider an innovative fund structure with 50% allocated to the top 5% of the fund and 50% to accelerator companies, programs, and direct investments.
  • Jamie Rhode from Screendoor emphasizes the importance of optimizing fund structure and GP market fit.
  • Base follow-on investment decisions on opportunity cost analysis rather than solely on insider information or gut feeling.
  • Avoid "feel-good" support investments that are not in the top 5% of the portfolio.
  • Clearly communicate fund strategy and investment criteria to founders and potential investors from the beginning.
  • The Screendoor team is open to collaborating with GPs and LPs and aims to educate the community on both sides of the investment equation.

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