In an insightful episode of the 20 minutes VC, host Harry Stebbings interviews Alex Bangash, the managing director at Runsome Group and founder of Trusted Insight. They delve into the nuances of venture capital from an LP's perspective, exploring the importance of technical expertise in LPs, the forward-looking nature of investments, and the evolving landscape of early-stage venture capital, which now often involves platforms like AngelList. Alex emphasizes the potential high returns from smaller funds that avoid competing with large VCs and the shift in venture capital towards growing rather than starting companies. He also discusses the challenges of identifying successful emerging fund managers and the importance of access over picking winners in venture capital.
You are listening to the 20 minutes VC with your host Harry Stebbings, and you can find me on Snapchat at htebbings.
This quote introduces the host of the podcast and provides contact information.
Therefore, I'm delighted to welcome Al Bangash, managing director at the runsome group, where he helps his clients invest in some of the best performing funds.
Harry Stebbings introduces the guest, Alex Bangash, highlighting his role and expertise in investing in top-performing funds.
I also want to say a special thank you to my good friend Jason Lemkin at Sasta for making the intro to Alex today.
Harry Stebbings expresses gratitude for the introduction to Alex Bangash, which facilitated the interview.
So I think for me it was just circumstances where I had first thought of joining venture capital. But at that time, this was around 2001 2002, there was no venture capital happening.
Alex Bangash describes the circumstances that led him to become an LP during a period when venture capital activity was low.
I found that if I brought to bear my technical and operational expertise in that field, I would have a differentiated approach.
Alex Bangash explains how his technical and operational expertise provided a unique approach to being an LP.
I would say there are definitely some exceptions, but by and large that is still true.
Alex Bangash acknowledges that while there are exceptions, most LPs still come from financial backgrounds.
No, I don't think it's a problem for the industry.
Alex Bangash does not believe the background of LPs is an issue for the venture capital industry.
There is probably a bigger problem, which is that I would say the entire finance industry is backward looking and not forward looking.
Alex Bangash criticizes the finance industry for focusing on past performance rather than anticipating future trends.
Venture is a highly persistent asset class that the top VCs or top brands will continue to do well. Now, if you look at, just pick the Forbes Midas list, for instance, and you will see that four out of the top ten VCs, Steve Anderson, Chris ACA, Josh Coppellan and Peter Thiel, in that they didn't have firms ten years ago and recent Horowitz wasn't around ten years ago.
Alex Bangash challenges the notion of persistence in venture capital, citing examples of top VCs who were not established a decade ago.
For LPs to identify these such funds very early is incredibly, incredibly hard because they don't have prior relationships with funds like these.
Alex Bangash explains the difficulty LPs face in identifying promising new VC funds due to a lack of prior relationships and track records.## Philosophical Issue in Venture Capital
"Many of the newer firms, not all, there are exceptions. So foundry first, Union Square park, they all came out of existing amazing firms, and there is nothing wrong with that."
This quote highlights that while many new venture capital firms have emerged from established entities, there are also novel entrepreneur-led models that are distinct and harder to identify for investors.
"Today, the entrepreneurs are picking the managers. This is in stark contrast to any other asset class."
This quote emphasizes the unique characteristic of venture capital where the quality of investments is determined by the entrepreneurs' choice of managers rather than the managers' ability to select securities.
"Venture has always been about access. So one of the famous folks in the industry has said, venture is not an asset class, it is an access class."
This quote underscores the idea that the core of venture capital is not about picking the best companies but about gaining access to potential investment opportunities.
"We think some of the best managers, which will actually be platforms like Angelist."
This quote suggests that platforms like AngelList are considered among the best managers due to their structural advantages and the potential for these types of platforms to lead in the future.
"What happens to managers who don't smash it? Can you raise again, is it that simple? Or is it a return to another bigger fund? What's the roadmap for them from there?"
This quote raises the issue of the professional consequences for venture capital fund managers who fail to generate positive returns and the uncertainty regarding their future opportunities in the industry.## Venture Capital Industry Dynamics
"So unfortunately, the dynamic of our industry is such that amongst established managers, if you are a traditional VCE, not an incubator, accelerator, post accelerator, what's actually happening is that there is always this theory of a bigger pool." The quote explains that traditional venture capital firms are part of a larger ecosystem where they have the advantage of being established, giving them a broader base to attract different types of investors.
"So venture, in some sense, the return expectation of venture used to be three to five x and above, and now there are folks in the industry that are perfectly fine with a two x net return..." This quote indicates a shift in the venture capital industry where the expected returns have decreased, with some investors now satisfied with a lower return on investment.
"What about second time funds, where it's very difficult to tell if someone smashed it or they haven't smashed it, because there's no real exits..." This quote highlights the challenge of assessing the success of emerging fund managers who are raising their second fund, due to the absence of exits that would clearly demonstrate their performance.
"So typically it's the same with venture funds. So when you choose a partner, an institutional partner, they know enough where they will say, okay, in two years, I will recommit to you with the understanding that you will not have had exits..." The quote explains that like startups, venture funds also rely on the confidence of institutional partners who commit to them with the understanding that it may take time to see tangible results.
"In every asset class, in every sector, the best returns are always in places where others can't invest." This quote conveys the idea that unique investment opportunities with less competition can yield higher returns.
"So even the smaller funds are now being a part of these later stage rounds." The quote reflects the trend of smaller funds participating in later stage funding rounds, which were traditionally the domain of larger funds.
"Absolutely not. Yeah. My thinking is that if a smaller fund is worthy to be invested in, they should have a shot at five to ten x." This quote clarifies that the speaker believes smaller funds should aim for much higher returns compared to larger funds due to their investment profile and potential for outsized returns from successful portfolio companies.## Venture Capital Fund Performance
"From a statistical standpoint, and from just a model standpoint, those kinds of things become very, very possible, even if you assume a very high loss. So that's where we think the true venture is, in fact."
This quote explains that high returns are statistically and theoretically possible in venture capital, even when accounting for high loss rates, suggesting that the model can work under certain conditions.
"But if you are dominant and you're not competing, the nice thing I like about some of these small funds is that they don't compete in their sector, in their geography, in their stage."
The speaker highlights the advantage of small funds that have dominance in their niche, which allows them to succeed without having to compete with the larger, more established venture capital firms.
"The biggest challenge for me in my role is always finding amazing people and avoiding the ones that are not good."
This quote emphasizes the importance of discerning talent and making wise choices about whom to work with or invest in, indicating that people are the most critical factor in venture capital success.
"A world which is more forward thinking, not anchored in past tenants and notions that are no longer relevant."
The speaker calls for a shift towards more progressive thinking, moving beyond outdated principles that no longer serve the industry well.
"I think Peter is probably, if not the most significant, one of the most original thinkers of technology in our time."
This quote acknowledges Peter Thiel as a significant and original thinker in technology, highlighting the importance of his contributions to the speaker's understanding of venture capital and technology.
"Two of the newer folks. And this also tells you, right, if I look at what's going right, so today I have to keep up. So that's why I follow Justin Kan on Snapchat, right?"
The speaker indicates the need to stay updated with the latest trends and thoughts in the industry, mentioning Justin Kan as a current influencer they follow to keep abreast of new developments.
"Thank you. Thank you for the privilege. Wow."
The speaker thanks the host for the opportunity to participate in the podcast, indicating a sense of honor in being able to share their insights.
"As a VC nerd, that really was so much fun for me."
The host expresses their enjoyment of the conversation, showing that they value the discussion and the guest's contributions to the topic of venture capital.
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