Tipping Point

Perspectives from a Fund of Funds Manager

June 7, 2021

In this episode, Ben Black, Managing Director and Co-Founder of Akkadian Ventures and Co-Founder of RAISE, speaks with Ryan McDermott from Resolute Partner Group (RPG) about his advice for new managers wanting to work with institutional partners. They explore McDermott’s background in private wealth management, his transition to VC, and tackle the question of what makes a manager valuable.

This interview has been lightly edited for length and clarity.

Ben: Ryan, please introduce yourself and the firm.
Ryan: We started as an RIA in 2019, we were really big backers with a lot of the Unity founders and so we intrinsically worked with a lot of those people. But, at heart, we’re video gamers, so when we thought about the firm we wanted to make sure that we were being clear and resolute on our ethics, while at the same time incorporating our love of video games. As a firm, we’ve stuck with people who are developers, creators in the video game industry, and at the same time, people who create engines and software packages for the industry. Additionally, we thought it would be a fun wordplay to call ourselves RPG because role-playing games are our general favorite genre of video games. 

Ben: What differentiates your group from everyone else now and how you approach the business?
Ryan: We have an incredibly intensive relationship with our clients. Since day one, we have looked at it as a long-term partnership. Our clients weren’t necessarily within the financial paradigm that most financial advisory services work, which is pretty much paternalistic to their client base, and we thought that that was just unsuited. Our clients are incredibly smart people, smarter than we are, and so we put up some finance guardrails around their intelligence, but then let them do what they do. It’s a true collaboration on ideas and we’ve removed the paternalistic idea that the advisor knows better than the client. 

Ben: I know you have 45 relationship investments in different venture capital funds, which is as big as any firm I know. How did you think about building this program? What was the inception of your investment in venture capital? 
Ryan: I have to give credit to a colleague that I work with intimately, named Benjamin Ratz, who runs an organization out of Sweden, called Nordic Makers. Benjamin and I collaborate on almost every single VC deal that we do so there’s a lot of cross pollination. From my standpoint, I had been working in the private wealth management business for a long period of time and all the firms where I was seated, there really was not an emphasis on venture capital. There was a strong mandate that if you are not in Sequoia, then the asset classes in general was just a meaningless asset class. But, I think the data show that is not applicable, certainly in the last 10 years. In fact if we just look at post-2009, being exposed to growth was way better off than being exposed to value. 

The issue that I kept noticing is that, if you live in San Francisco, the ecosystem that you see is one of startups, innovation, and capturing the new idea. This full emphasis on disruption is really attractive and the best way to actually learn more about it is to meet the VC fund people, the various managers, the entrepreneurs, and really immerse yourself in the ecosystem. That was probably the mandate that, when I started RPG, I said, “we have significant client money that wants to invest in disruption, it wants to do new things, it wants to be out there.” 

Again, the clients, they are disruptors in their own right, they see the value of it. So when you start with that premise, you can dive into the ecosystem — if you have capital, then you can start making the allocations that you want. Benjamin and I were able to effectively do that because we were really able to hone in immediately on the $10 million that we could allocate. So, if we start taking baby steps within that allocation, we can expand it out, which we’ve done. In late 2019 through the end of 2020 we signed out a bunch of managers, which is simply one vintage. Once you establish a vintage amount, you need to maintain that vintage amount, so that almost every year that you keep allocating it. Otherwise, in the darkest of times, if you’re not there, then you’re not going to get the best investments. 

I had done a lot of manager’s selection prior to, but most of it was candidly in the hedge fund space. So, I melded my hedge fund allocator mind with Benjamin’s VC predilection, for the process, and we noticed that the questions you ask the managers are similar. When you’re a hedge fund meeting people, you ask all these questions around risk control, sizing, how many days to get out of a position, how are the operational controls, how are the decisions made, who’s clearing the trades, who does the audit, and who can actually sign the checks when the money goes out? I would say generally speaking, in the VC world, there are controls, but they’re just nowhere to the same extent thought out. It’s partly because, if you’re going to go to a pension fund that is going to put in a hundred million dollars in your hedge fund, they’re going to ask you different questions than the guy who’s putting in a $500,000 commitment into your VC fund. 

A lot of the emerging managers aren’t quite ready for those questions and that makes sense, but it was a learning process for me to understand these people that haven’t had to endure those types of questions. The typical hedge fund meeting, that cycle takes around three months, and you’re asking about all their short and long positions, so you’re really trying to get a flavor. And I would say that the flavoring of the opportunity set has really drawn us to the venture capital world. 

I remember early on in contemplating venture capital, there’s this question: do you choose the generalist or the very niche provider? And in the end, we generally defaulted to the niche providers because we could see certain themes that we explicitly wanted to express in our portfolio. 

Ben: What are some examples of those themes?
Ryan: There’s a manager that speaks about the nexus between biology and software. Whether you’re learning more about ourselves, or doing a behavioral cognitive therapy program through an iPhone app, we believe in the enhanced human performance through technology. Not only how a hip replacement improves performance for those people, but we’re talking literally software enhancement, which is huge. 

Whether it be healthcare or synthetic biology, one of the themes that we see is that, if you’re going to run trials, or you’re going to understand interactions of chemicals, the computing power that you can now put behind those ideas is just infinitely greater than where it was. I mean, just look at the speed with which vaccines came together — it was unheralded. 

In other strategies, there’s this concept of non-correlated cash flow which works really well. We’re lucky enough to invest with a team who focuses on investing in little subscription businesses. The concept of subscription today versus 10 years ago, it was just night and day. There are so many little niche markets that I don’t even think about, but there’s this subscription that has catered to that market. And it’s chugging along at 15 bucks a month, and it’s an amazing little business. 

Ben: Do you typically have an idea to go and find managers, or are you just looking at what’s coming to you and saying, that fits our model? How are you sourcing your relationships? 
Ryan: I would say about 80 [percent] of it is top-down macro expression. Macro, not by global macroeconomics, but, who is going to solve this weird idea. And so, that’s kind of where we get all the synthetic biology, AI, and a lot of ESG and carbon sequestration ideas. And then, the stuff that bubbles up is a bit more like that subscription fund where you’re like, wow, that actually is a brilliant idea because you might get earlier cash flows on something. 

Ben: One of the things that I think I’m always very fascinated by, is that people who live and breathe venture capital from the beginnings of their careers don’t have a lot of appreciation for the fact that allocators, like yourself, are looking across asset classes. I’m interested in your perspective on the differences between allocating to hedge funds versus allocating to venture capitalists. What surprised you the most? What did you find most odd about the way venture capitalists pitch you versus the way that hedge funds pitched you? 
Ryan: When we meet a fund, it’s almost always going to be me and Benjamin on the call. Benjamin is wildly optimistic and I’m wildly negative. So, when you have that standpoint, 2020 public markets worked really well. We have a hunch that private markets did well too, but we don’t have the money in the bank like we do on the public side. It’s been a lot easier again, since 2009, just to go out and buy S&P 500 or QQQ. I think in long term work, you’re going to see outsize gains in the venture side and the illiquidity premium is going to start kicking in. I assume that all of those relatively easy returns that you got just along an only QQQ type portfolio will mean revert. But I think that it’s been harder to allocate towards venture capital in a world where you see your public’s just flying through the roof. But say, US long-term public is probably like a 6 to 7 percent [per year return] deal, so if they did 21 percent, let’s just say last year, you just captured almost three years of the growth. So, that’s kind of my mantra, and we’ve seen a hugely interesting private market, the amount of secondaries just through the roof, everybody’s got an SPV and a SPAC. But, venture is not that, again, you’re planting seeds, and you’re working hard, and those are the companies that will be SPACs in seven years or so.

Ben: What does a venture capitalist really need to focus on to make you a happy long-term investor with them? What can they do better? How can they manage you? 
Ryan: One of my favorite people to work with is Nathan Benaiche He stands out because he’s so responsive, he’s on top of everything, he’s extremely honest with his companies, and he just makes me smarter. So that would be the “super good bucket.” Then there’s the bucket where I think they’re allocating but they haven’t really communicated. That’s my lesser preferred bucket. The worst is when you don’t do a deal and don’t communicate. Then there’s the middle chasm of little communication, and I don’t know much about your deals. 

My advice is to talk up your companies and use your LPs. The way we thought about RPG was that our clients could help us at every point, so think about your LPs as really helpful thought leader teams. Everybody’s now talking about their LPs and our investments as a niche community that they curate. You keep hearing that and then there’s some truth to it and it makes the LPs feel fun and engaged. And the more they're engaged, the more they’re going to think about referring their friends to portfolio companies, or they’re going to try to think through deals for you, which is what you want. You should always be on the top of your companies’ and LPs’ minds.

Ben: Moving forward, what are you looking for now? 
Ryan: We’ve had a couple of calls with some managers this week. I think that we remain very interested in carbon sequestration ideas and ESGs. ESGs just because it’s a lot of direct-to-consumer type plays, which interests us. But, the bigger problem in ESG is going to come in the really big stuff, such as massive infrastructures. Look at Texas, who right now needs to make their grid more efficient as we saw how close they were to full meltdown. Another example is green cement. A lot of people don’t realize that CO2 emissions on just concrete and cement are through the roof. I think there should be an interest in that, so that’s kind of where I am.

Watch the whole interview with Ryan. And request an invitation to RAISE Global Summit 2021.

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Disclaimer

The Tipping Point Series (“Tipping Point”) is a collection of interviews with fund managers who (a) have previously raised a venture capital fund and (b) are providing advice and insights into the formation and management of venture capital funds (the “Presentations”).  Tipping Point is not an offer to sell or a solicitation of an offer to buy any security issued by any venture capital fund, including without limitation, any venture capital fund managed by Tipping Point’s speakers, presenters, or producers. 

The Presentations do not (a) provide investment advice with respect to any security or (b) make any claim as to the past, current, or future performance of any security or venture capital fund, and Tipping Point expressly disclaims the use of the Presentations for such purposes.  The Presentations are not intended to constitute legal, tax, accounting, or other advice or an investment recommendation. Prospective fund managers should consult their own advisors about such matters with regard to their venture capital funds.  Raising a venture capital fund involves significant risk of loss of income and capital, including loss of the full amount raised and invested, which may occur as a result of identified or unidentified risks.

Tipping Point is produced by Raise Conferences, LLC (“Raise”).  Raise is a private invite-only venture capital conference, which provides a forum for venture capital funds to network with and present to potential venture capital investors.  Although Raise produces Tipping Point, the Presentations are independent of Raise’s conference and do not provide any forum for the Tipping Point speakers, presenters, or producers to solicit the sale of any securities. 

Ben Black
Ben Black is a Co-Founder and Managing Director of Akkadian Ventures and a 20-year private equity veteran. He is also the Founder of RAISE Global.

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