Successful Operations for Emerging Funds: Q&A with Samir Kaji, founder and CEO of Allocate
We had the pleasure to reflect on the current state of affairs for emerging managers with experienced institutional investor, Samir Kaji, who hosts the Venture Unlocked podcast and is also the founder and CEO of a soon-to-launch VC startup, Allocate. In the Q&A below, Samir discusses why setting a strong operational foundation is important as firms seek institutional capital, why secondaries are worth another look right now, and the importance of having a data strategy.
Q: What do you advise emerging managers when they are aspiring to to raise institutional capital?
The amount of operational work that firms have to do is often underestimated. Running a firm and building a fund are often different undertakings. Growing a firm entails a distinctive thought process and mental model that requires preparation. An institutional investor is going to look at how the firm evolved from proof of concept, to raising funds from small high net worth individuals and/or family offices, to getting institutional-ready. Differentiating through operational efficiency of the firm is a critical part of the evaluation. Are they building a long term firm? How will they be competitive? Do they have a strong operational plan, and, if so, have they made their readiness and scalability clear to LPs? The bar has been raised as far as expectations for operational expertise of smaller funds.
Q: What red flags have you seen that can get in the way of emerging managers raising capital?
There are many factors that can impede fundraising efforts. The two core ones are when the firm isn’t institutional-ready or is not differentiated enough. Differentiation on its own means nothing. Differentiation that is specific to what that manager can offer in a unique arena is what investors care about, regardless of industry. I frequently ask managers: why does your differentiation matter and how will it matter over time? We just went through a long bull run from 2008 to 2015 where it was hard to fail with high valuations and strong markets. How does that continue across cycles?
I like to use a Blackjack analogy. If you don’t know what you are doing, the house will win. If you know how to play the game, and you know how to apply the mathematics to play your hand, you give yourself a slightly better chance. If you count cards, you get even better odds. Managers should ask themselves: “What is my version of counting cards? What allows me to win on a more consistent basis than others?” Firms should also factor in strengths, such as operational excellence -- you need to know what your portfolio is doing and communicate that data to your LPs.
Bottomline: Don’t play the game until you can identify how to stand out consistently in a way that's very specific to you.
Q: What are some of the real limitations around what institutions can do, such as check size or allocation limitations?
Institutional capital tends to be durable across cycles. Since institutions typically have long-term horizons, they understand the trends in markets and maintain their support through highs and lows. Historically, in down markets, individual capital evaporates when times are tough, often due to fear and uncertainty. For big investors, the difficulty lies in check size limitations. For example, when managing a $15 billion organization with 30% in alternatives and maybe 5-10% is in venture, there is an expectation to write big enough checks to move the needle. That said, large investors don't want to be the entirety of a fund. If it’s not significant enough, the amount of risk and administration doesn't make it worthwhile. This is where fund size comes into play. For funds that are less than $25 million - $50 million, it’s a challenge to get institutional traction. There are some specialized fund-of-funds that will write checks into smaller managers because they've seen the returns and want to gamble on talent. If that firm can show its longevity, investors can place money there again.
Q: Secondary markets are exploding and are more present in day-to-day deal activity. What are your thoughts on the secondary markets and why should emerging managers be thinking about them?
It’s true that secondary markets are much more robust today. Late stage privates now resemble what IPOs used to be. For example, companies such as Stripe are getting higher valuations in present-day private markets than IPOs of the early 2000s -- think back to Google’s $23 billion IPO in 2004. Since the market is fairly efficient on those types of stakes, secondaries are a great way to generate liquidity for LPs. The driver of these deals is data. If you don't have the data, you have complete information asymmetry, and it's hard to create an efficient market.
Q: You alluded to data being a game changer, especially as the private markets continue to grow. Why is having a data strategy important?
There's so much data that firms can collect and leverage; however, a data strategy is vital. As much as data can empower our decision-making, it can also lead to a negative effect when it isn’t utilized properly or collected with a purpose. Firms need to understand what type of data they are collecting and why it matters. They can then develop their own decision methodologies around it and act on that knowledge to raise capital. I've seen data collected incorrectly and used in the wrong ways. Firms should formulate a well thought out plan for what data to collect and why. Data is the future in this space.