Investing in Emerging VC Funds

Winter Mead: 

Thanks for having me, Elana.

Dave Perretz:

Great to be here. 

Elana Margulies-Snyderman: 

Absolutely. So, to kick off the conversation, tell us a little about your firm and how you got to where you are today. 

Winter Mead: 

Sure. So, starting with the big picture, we view emerging managers, mainly emerging managers and venture capital, as representing a key role in strengthening global innovation, so that is our why. Why are we supporting emerging managers? We think they play a really instrumental role in global innovation. Coolwater started from the institutional LP perspective, so we came at it from investing into emerging managers for about a decade, and we noticed there was a large gap in the ecosystem really supporting emerging managers from the firm building, fundraising, operational and financial perspectives. And so, we aim to build the value-added services platform for emerging managers 

Elana Margulies-Snyderman: 

And Winter, as a follow-up, given your focus on VC investing in emerging managers, I would highly welcome the opportunity to hear your high-level outlook for the space. 

Winter Mead: 

Sure. Overall, it's positive, or I wouldn't be doing what I'm doing. I think both Dave and I understand the opportunity. There's many emerging managers. There's literally thousands of funds. A lot of those have come into market in the last five-to-ten years, and we view that as an opportunity for being able to sort and co-build with the best of those managers over the coming decade. I think there is a bit of indigestion going on at the LP portfolio level. I do see GPs constantly positioning and repositioning themselves as they go from Fund I to Fund II, Fund II to Fund III and beyond, and I think there's a big focus around portfolio management and especially GPs managing performance numbers such as MOIC, multiple of invested capital, as well as DPI, distributed to paid in capital, two metrics that are very important in the venture capital world and ones that both GPs and LPs are tracking pretty closely in this market environment. 

Elana Margulies-Snyderman: 

And Winter, as a follow-up, I would love for you to touch upon some of the greatest opportunities you see and why. 

Winter Mead: 

Yeah, I think this is definitely where Dave and I have put our heads together over the last few years. So, as I just mentioned, the current market context, there's literally thousands of investment firms now. If you go back to when I started my career investing into the venture world, I would argue there was a few dozen smaller fund managers, but now there's literally thousands. And so, I really see the greatest opportunity near term in helping level up the high-quality emerging managers, because as I mentioned, I do believe they play a really critical role in financing innovation, and I think that's where Dave and I intersect. 

Dave Perretz: 

I would add to that, with all those thousands of managers comes a market that is now interesting for other software providers and service providers in the marketplace to continue to grow and improve their service offering, so you're seeing new software tools for GPs for portfolio management, for communicating with their LPs. For fund administration, you're seeing competition amongst the largest providers to increase the value that they provide to GPs, so it's a completely different operating world for a lot of these funds than it was ten or 15 years ago, and that's opened the door to a lot of different types of investors to come in. So, you're seeing people with different backgrounds, different access to deal flow, investing in new and different places. You're seeing the sector industry is consistently changing of what's the new area of focus, and all of those are positive opportunities for new people to come in and displace some of the incumbents or just provide capital to those founders out there that are building our future, which is ultimately our why again. So, a lot of opportunity to reinvent venture in some ways around the edges and define better deals, to report better, to make better decisions, and to ultimately drive DPI in a meaningful way for LPs and keep the cycle going so we can continue to innovate. So, it's a very opportunistic time for folks. 

Elana Margulies-Snyderman: 

On the other hand, I would love for each of you to touch upon some of the greatest challenges you face in your space and why. 

Winter Mead: 

Yeah, so from my perspective, I can answer that from the LP world and then from the GP world. So, for LPs currently, and this is from talking to a number of LPs, I believe their greatest challenge is actually working through some of their existing portfolios. So, I think a lot of LPs got very active in the last few years and invested into a number of both established and emerging managers, and I think the greatest challenge for them now is which managers do we want to keep? Which managers do we need to focus a little bit more on and proactively manage the portfolios, and which managers may we have to drop in the next cycle? So, I think that for LPs, that's probably the biggest challenge. Coolwater can actually play a role in partnering with those institutions and helping their existing portfolio funds. We don't just focus on new emerging managers. And then for GPs, I really think the challenge is scaling up, especially for emerging GPs, and really understanding what that journey looks like from de novo, when you're launching your fund, to putting the right pieces in place when you're building Fund I, to putting the right pieces in place and make sure you are conveying the right pieces to LPs as you scale up from Fund I to Fund II, Fund II to Fund III. I think the greatest challenge for any GP are those first few years of being an emerging manager. Obviously, it's always tough, it's always going to be a management exercise, but I think those first few funds are especially valuable for a GP as they think about becoming an established manager. 

Dave Perretz: 

And I would say you take it from the strategic point of view that Winter just laid out, but at a tactical level where folks like I operate with a lot of these emerging managers, there's never been more opportunity but that means there's a tremendous amount of competition, and the marketplace is getting hyper-competitive for LP allocation. So GPs need to understand that from an LP's perspective, whether you're a billion dollar fund or you're a brand new $50 million fund, your K-1s need to be delivered on time and your tax work needs to be done well, and your fund administrator needs to be communicating capital calls in accordance with your LPA, and all of those things have to work right away to be able to compete and to provide an equal value to your LPs because they're on the other side trying to work with their investment committees to justify the next investment into you, and you have to help them. And so, what I often think about and coach managers through is LPs are consistently trying to evaluate how you communicate and report to them. They're trying to assess your decision making. Are you out there just hoping to find the next great company or do you have a process? Do you have a deal flow engine? Do you have a way of diligencing those? Do you have a way of adding them to the portfolio, following along and figuring out what the right time is to get liquidity? Is it to always wait to the IPO or are there other opportunities throughout the lifecycle of the fund? And then lastly, all of this comes together in how you manage the fund because your LPs definitely care about your firm operations, and I think one of the big mismatches that I often see is between the expectations that LPs have, and the GPs have of themselves. And so, we tell people all the time, we used to say back in the army is we're in the ranger up phase eventually. You have to get very competitive; you have to want to win, and you have to build a firm that's designed from the get-go to get institutional LPs on board. And throughout that first couple of years, you can crawl, walk, run your way, but there's certain areas you just can't mess up, and you need to make sure you understand what that landscape is and you're ready to participate in the marketplace. What Winter and I often talk about it table stakes. Table stakes are going up for new managers and you just have to be aware of that, and you have to get the kind of services and support to help you so you don't spend all of your time in the back office, but you actually can spend your time searching for new deals and building those relationships with founders and your LPs. Otherwise, you'll get stuck fighting through the backlog of tasks and back office minutiae, but instead, you'd rather be out there finding the next deal. That's what your LPs would want, and so they care about these things more than they did five years ago. So, we're in a different world and I think the managers that recognize that and are out there competing, they'll do much better than those that think things are still the way they used to be. 

Elana Margulies-Snyderman: 

So, to shift gears a bit, ESG and DEI have been top of mind for the industry, and I would highly welcome your thoughts on how Coolwater is addressing these topics. 

Winter Mead: 

Absolutely. So, this is a very important piece of Coolwater that I think usually gets lost because we're mainly focused on financially oriented returns. So, taking a step back, Coolwater has helped graduate 250 plus funds through its accelerator. They've raised since graduation close to $4 billion and have invested into over 8,000 companies, so this is a significant part of the emerging manager landscape. Of those graduates, 25% have a woman as part of their founding team, and over 40% self-identify as underrepresented. So again, the interesting piece about those numbers are these are founders of investment firms, meaning Coolwater is playing a role putting diverse decision makers into the startup venture capital ecosystem, which we find very exciting. 

Elana Margulies-Snyderman: 

We've covered a lot of ground today and I wanted to see if you have any final thoughts or future plans you'd like to share with us. 

Winter Mead: 

Sure. So, it's business as usual, but we want to continue going into 2025. We're still excited about the venture capital opportunity. We're still excited about the emerging manager opportunity. We, as Coolwater want to partner with the best managers. That's no different in 2025 than it has been since inception. We will continue to support emerging managers through our accelerator. If you look online, we're actually expanding internationally as well. We just launched our international accelerator in Tokyo where we're co-building Japanese VCs, so we'll continue to support emerging managers on launching, fundraising and supporting their institutionalization as best managers driving out performance at the fund level to break through the noise. 

Dave Perretz: 

And I would say as Winter mentioned, people look to Coolwater to turbocharge the launch of their fund or the fundraising of the vehicle that they're currently fundraising for, but we're also thinking over the horizon. It's not just how you start your fund or how you raise the initial capital. It's how you manage that over the lifecycle, and so we're building services and tools at Coolwater to work with emerging managers to help them run their back office, build a best-in-class institutional firm that does all those things that LPs want. And in the process, you'll also see just better operations, better investing, better returns, because you're disciplined in doing the right thing. So, we're thinking all the way through the life cycle of the fund and we're out there, and so if you're interested in connecting to learn more about what we do to help firms manage, we'd love to talk. 

Elana Margulies-Snyderman:

Winter and Dave, I wanted to thank you both so much for sharing your perspective with our listeners. 

Winter Mead: 

Thanks, Elana. 

Dave Perretz: 

Thanks, Elana. 

Elana Margulies-Snyderman: 

And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics and join us for our next EisnerAmper podcast when we get down to business.

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