20VC Why Entrepreneurs Care Less About Firm Brand at Seed, How LPs Should Think About GP Commit & How The World of LPs and Fundraising Will Change Post COVID with Apurva Mehta, Managing Partner @ Summit Peak Investments

In this episode of The Twenty Minute VC, Harry Stebbings interviews Apurva Mehta, Managing Partner at Summit Peak Investments, a firm that invests in early-stage VC funds and direct co-investments. Apurva, who has a unique dual role as both LP and GP, discusses Summit Peak's investment philosophy, which includes backing exceptional managers like Raymond Thompson, Lockhee Groom, and Josh Buckley, and investing in companies such as Airtable, Verta Health, and Sourcegraph. Prior to Summit Peak, Apurva served at Cook's Children's Hospital and the Juilliard School, building expertise in venture capital allocation. The conversation also touches on the evolution of early-stage investing, the rise of solo capitalists, and the challenges and strategies of fundraising for a fund of funds. Apurva emphasizes the importance of transparency, relationship-building, and understanding the venture ecosystem's inefficiencies to capitalize on tech innovation.

• Apurva Mehta is the managing partner at Summit Peak Investments.
• Summit Peak Investments focuses on early-stage venture capital funds and direct co-investments.
• They have backed notable managers such as Raymond Thompson, Lockhee Groom, and Josh Buckley.
• Summit Peak Investments also has direct investments in companies like Airtable, Verta Health, and Sourcegraph.
• Apurva's background includes seven years as Deputy CIO at Cook's Children's Hospital and three years as Director of Portfolio Investments at the Juilliard School.

"And so with that, I'm thrilled to welcome Apurva Mehta, managing partner at Summit Peak Investments, investing in early-stage venture capital funds and making direct co-investments."

This quote introduces Apurva Mehta and gives a brief overview of his professional role and the focus of Summit Peak Investments.

• Apurva Mehta occupies a unique position in the venture world, being both an LP (Limited Partner) and a GP (General Partner).
• As LPs, Apurva and his partner Patrick have been allocators for 15 years, most notably at a children's hospital endowment.
• They built a venture program that helped establish their name and network within the venture community.
• The decision to back Raymond Thompson (Ray at Caffeinated) in 2012 was their entry into venture space allocations.

"And today is even more exciting as our guest is really a hybrid of an LP and a GP."

This quote highlights the dual role of Apurva Mehta as both an LP and a GP, which is a relatively unique position in the venture capital industry.

• Apurva and his partner took a chance on Raymond Thompson early in his career.
• They were impressed by his hustle and network, which were validated through reference checks.
• The decision to invest in Thompson was seen as a small risk within a larger portfolio but had the potential to enable the building of a venture portfolio.

"Ray came to Fort Worth, and maybe as a sort of the quintessential venture GP. He was in jeans and a t-shirt and sneakers."

This quote describes Raymond Thompson's personable and non-traditional approach during his initial meeting with Apurva and his partner, which set him apart from other asset class managers.

• References are considered with a grain of salt, especially those provided by GPs themselves.
• Apurva's team goes beyond provided references, using their network and tools like LinkedIn to reach out to founders for additional insights.
• Founder references are given significant weight, with 30 to 50 calls made to portfolio company founders for new fund evaluations.
• The team values founder feedback on a GP's value-add and willingness to repeatedly take their capital.

"It really means a lot when a founder gives a reference of why a GP, why a VC is value add, and why they would take their capital over and over again."

This quote emphasizes the importance Apurva places on founders' opinions about GPs, as it provides insight into the value and impact the GPs have on the companies they invest in.

• In 2012, venture capital was viewed skeptically by institutional allocators due to illiquidity post-financial crisis and difficulty accessing top Silicon Valley firms.
• Apurva and his partner took a contrarian approach, focusing on early-stage investing, which they saw as the most inefficient market segment.
• The early-stage space has grown exponentially, with the number of micro VCs increasing from around 100 in 2012 to over 1,000.
• Despite the influx of capital, Apurva believes early-stage venture capital remains inefficient and offers the best opportunity to tap into tech innovation and venture returns.

"We felt that it was the most inefficient segment of the market and we decided, look, let's back micro VCs and early-stage funds centered around startup ecosystems."

This quote explains the strategy behind Apurva's decision to focus on early-stage venture capital, highlighting the perceived inefficiency and opportunity within this market segment.## Rise of Solo Capitalists

• Solo capitalists are a growing and sustainable trend in the venture capital ecosystem.
• Entrepreneurs at the seed stage are less concerned with brand and more focused on having a decision-maker who can provide hands-on support.
• Solo capitalists are often entrepreneurs turned investors, offering relatable experience and quick decision-making.
• Legacy firms may offer valuable capital, but they often come with more bureaucracy and slower decision-making processes.

"At the seed stage, you want to know that you're sitting across the table from the decision maker, the person that is going to roll up their sleeves and help this business out in a pandemic or whatever, the next crisis that we hit."

This quote emphasizes the importance for seed-stage entrepreneurs to have direct access to a decision-maker who can provide immediate and practical assistance in times of crisis, which solo capitalists are well-positioned to offer.

• Fundraising for a fund of funds can be a challenging and emotional process.
• Summit Peak raised $84 million for their first fund, which was a significant achievement for a first-time fund.
• The process involved leveraging a network of LPs built over a decade, which was a key factor in their success.
• The fundraising experience highlighted the importance of securing anchor investors before making large capital commitments.

"In three words, an emotional roller coaster."

This quote succinctly describes the emotional ups and downs experienced during the fundraising process, indicating the inherent challenges in raising capital for a new fund.

• Committing the entire fund before securing an anchor investor was a risky move that led to a period of stress and uncertainty.
• The support from general partners (GPs) who trusted the fund managers was crucial to overcoming the initial lack of capital.
• Building and tapping into an existing network of LPs was a successful strategy that should be utilized more effectively in the future.

"We committed the entire fund before we had even lined up an anchor investor."

This quote reflects on the risky strategy of making significant capital commitments prior to securing foundational investment, which is not recommended for future fundraising efforts.

• Summit Peak adopts a concentrated approach to portfolio construction, with an optimal number of 12 to 15 GPs and 20 to 30 direct or co-investments.
• The fund allocates 60% of capital to early-stage GPs, 10% to new GPs, and 30% to co-investments.
• The strategy focuses on backing GPs with a proven track record and investing in companies at an inflection point of growth.

"Our portfolio today mirrors how we've been investing for the last decade or eight years in venture, which is even with a blank canvas, we have had this approach of having a more concentrated approach."

This quote outlines Summit Peak's consistent strategy of maintaining a concentrated portfolio, which has been a cornerstone of their investment approach for many years.

• In the current environment, endowment and foundation groups are retrenching due to uncertainties, which can affect LP concentration in a fund.
• Having a significant concentration from a single LP can be risky, especially if they pull back during the next fundraising cycle.
• Summit Peak is comfortable with a high level of concentration from LPs, provided the funds continue to perform.
• There is a shift towards fund of funds as LPs for solo GPs and micro VCs due to their stable capital base.

"If you miss that capital call, it's okay, you can catch up, or we won't call capital from you for six months and you'll be okay. But that being said, I would never do that again."

This quote advises against overcommitting without having secured capital, as it can lead to a precarious financial situation, despite the understanding and support of GPs.## Speed of Decision Making

• Speed is crucial in the decision-making process for both solo capitalists and venture capital general partners (VC GPs).
• The absence of red tape and investment committees allows for quicker decisions.
• Fund of funds are favored for their ability to make swift decisions on diligence and reference calls.

"There's, again, no different than why an entrepreneur wants capital from a quote unquote solo capitalist, and the speed of decision making to invest and be able to be a helpful GP, a VC GP, I think, likes the capital from a fund of funds because of that same exact concept, which is the speed of our decision making."

The quote emphasizes the value of speed in the investment process, highlighting the similarity between the needs of solo capitalists and VC GPs when it comes to quick decision-making, which is facilitated by fund of funds.

• Advises against selling part of the management company to anchor investors.
• Selling a piece of the management company is seen as expensive capital and may lead to resentment from the GP.
• Giving a fee break to an anchor investor is acceptable, but parting with ownership is a difficult decision to reverse.

"It's expensive capital. Ultimately, as a GP, now we're in that seat, it's okay to give an anchor investor a break on fees, that's one thing, but giving up a piece of your management company, it makes that LP very expensive."

This quote advises GPs against selling part of their management company to LPs, as it can lead to expensive and regrettable outcomes.

• Fund of funds must be sensitive to fees, but understand the necessity of management fees for running a business.
• Management fees are less contentious as they are essential for business operations, especially for new funds.
• Carry is the main source of GP wealth, and while LPs are sensitive to carry terms, they are agreeable if the returns justify it.

"The management fee is not something that a GP is getting rich off of. It's the carry that they're working hard towards. And if they're going to hit those return hurdles, well, then they should get compensated for it."

The quote clarifies that management fees are for operational costs and not for GPs to get rich, whereas carry is the significant financial incentive for GPs and should be earned if performance metrics are met.

• GP commits are challenging for new and young fund managers due to their personal financial situations.
• There is empathy for GPs who can barely meet the GP commit requirements.
• The importance of "eating your own cooking" is recognized, but flexibility and respect are given to those who can only manage the minimum.

"Every ounce of our net worth is invested into our fund one, and then whatever's remaining into our fund two. So I have empathy for gps on that GP commit."

This quote reflects the personal investment and commitment GPs make into their funds, highlighting the empathy for those who struggle with GP commit requirements due to their financial circumstances.

• The pace of capital deployment is at the discretion of the GP and should not be advised by the fund of funds.
• Understanding the expected deployment schedule of a GP is crucial for planning and sizing investments.
• Tracking metrics beyond traditional performance indicators is important when deployment timelines are reduced.

"We're cycle agnostic, so we want to be investing in venture irrespective of what's going on in the market."

This quote emphasizes the fund of funds' approach to investment, which is not influenced by market cycles, and their trust in the GPs' capital deployment strategies.

• The importance of having top-tier funds participate in later funding rounds is recognized but is not the sole measure of success.
• The focus should be on the company's performance and the value-add of the investor, regardless of their brand name.
• Brand recognition of investors can be a metric considered, especially at mid to later stages.

"Those brand names do matter, whether that's Benchmark Capital, Andreessen Horowitz, Sequoia Capital, they are great funds and they're great investors at various stages, and you want to see companies being well funded by some of them."

This quote acknowledges the significance of having well-known investors in later funding rounds, indicating that while it's not the only metric of success, it is still a factor that is considered.## LP Interest in Company Performance

• LPs (Limited Partners) value understanding a company's performance and potential undervaluation.
• Financial stability and having the right backers are considered crucial for a company.
• Having a slide showing investment alongside prominent investors is a common practice in presentations.

"It is something that we certainly are keen to understand. And if they're not in the company, that's okay too. That means it's maybe misunderstood... So I know that was almost a non response. I mean, we care about it."

The quote emphasizes the importance for LPs to understand the company's performance and the potential upside of investing in companies that might be undervalued or misunderstood by larger brands.

• Prioritizing relationship-building in Silicon Valley was key, regardless of being based in Texas.
• Building a network through frequent visits and community events was essential.
• The COVID-19 pandemic shifted the necessity for physical presence, making location less relevant.
• Maintaining relationships and conducting business through virtual means like Zoom has become the new norm.

"Pre Covid location didn't matter... We became members of the battery, we did all of our meetings there and we built our network in Silicon Valley to the point where now location doesn't matter."

The quote describes the initial efforts to build a strong network in Silicon Valley and how, due to the pandemic, the importance of physical location has diminished, allowing for remote relationship-building.

• The pandemic has forced LPs to innovate their due diligence processes.
• Strong relationships and networks are increasingly important for LPs to secure investments.
• Virtual meetings and reference calls have become acceptable and necessary practices for LPs.

"I think it's going to be tough for lps. It's going to be strength of relationship and network that ends up bringing lps to the table... you're going to have to innovate how you due diligence."

This quote reflects on the challenges LPs face due to COVID-19, emphasizing the need for strong relationships and innovative approaches to due diligence in the absence of in-person meetings.

• Ray Dalio's "Principles" is a favorite book for its insights into decision-making.
• Juggling multiple roles, such as being an investor, running a business, and fundraising, is challenging.
• Articulating differentiation and edge is a common mistake by first-time fund managers.
• Transparency in the venture industry, especially from an LP perspective, is desired.
• The recent investment in Sourcegraph was driven by confidence in the team and product.

"Ray Dalio's principles. It's a great book to dig into and develop decision making skills... Juggling, wearing multiple hats... Clearly articulating their edge and differentiation... The biggest thing I would say is transparency."

Each of these quotes provides a snapshot of personal preferences, challenges faced in the role, common mistakes observed in the industry, and values such as transparency and informed decision-making.

• The venture community is seen as a platform for collaboration and sharing ideas.
• The shift to virtual platforms for community events and meetings has been well-received.
• Transparency and education for LPs are key goals for the venture industry.
• The COVID-19 pandemic has necessitated innovation in how LPs and venture capitalists operate.

"We were building our name and our brand as, look, let's bring the venture community together... We have great relationships with our gps, so I don't feel like I'm ever in the dark."

This quote highlights the efforts made to foster a collaborative venture community and the importance of transparency and strong relationships within the industry.

• Digital tools are crucial for companies to thrive in the changing environment.
• Amplitude is highlighted as a product intelligence platform that helps understand user behavior and build better product experiences.
• Harness Wealth is recommended for tech employees and investors seeking financial advisory services.
• HelloSign is commended for its focus on user experience in the digital signature space.

"Digital hit in new gear in 2020, and companies need the tools that will allow them to flourish in our everchanging world... Amplitude helps the top product and growth teams... Harness helps tech employees and investors... Hello Sign is the effortless esignature solution."

These quotes showcase the importance of digital tools and platforms in adapting to the evolving business landscape and the value they provide in terms of product development, financial advisory, and legal processes.