Morgan Creek Capital’s Endowment Style Investing – Frank Tanner | E54

Summary

In this insightful conversation, Frank from Morgan Creek shares valuable perspectives on early-stage investing, particularly in the micro VC space. He discusses portfolio construction strategies, emphasizing the importance of maximizing ownership in the seed and pre-seed stages. The conversation also highlights Morgan Creek’s dedication to supporting emerging managers through hands-on involvement, providing market insights, and offering secondary market solutions. Frank sheds light on the key challenges faced by first-time VCs, the potential growth in fund sizes, and the broader opportunities in early-stage venture capital. The discussion underscores the importance of collaboration and strong brand value in driving success.

Takeaways

• 😀 Focus on future potential rather than past performance when evaluating micro VC funds. CPIC (Cumulative Performance and Investment Criteria) helps in assessing long-term value.
• 😀 For first and second-time VCs, prioritizing maximum ownership in early-stage rounds is critical, especially in smaller funds with limited capital.
• 😀 In pre-seed and seed investing, taking more ownership in rounds and increasing the number of bets can provide higher returns, particularly when brand recognition is strong.
• 😀 Micro VC funds with $30-50 million in capital should aim for maximum ownership without overcomplicating their portfolio strategy. Risk is minimal between pre-seed and seed stages.
• 😀 A fund’s size can be increased to $75-100 million if previous success allows for larger check sizes and increased credibility, but this needs to align with the firm’s value proposition.
• 😀 Adding a new partner is a valid reason to scale up a fund, as it allows for more resources and better strategic positioning in the market.
• 😀 Morgan Creek adds value to micro VCs through thought leadership, data-driven insights, and being a strong advocate for their partners in LP conversations.
• 😀 Keeping a high LP Net Promoter Score (NPS) is a priority for Morgan Creek, ensuring they maintain strong relationships with their LPs and demonstrate ongoing value.
• 😀 Micro VCs increasingly seek help with secondary solutions for follow-on investments. Morgan Creek provides these services by setting up SPVs for founders, preserving long-term investor relationships.
• 😀 The early-stage venture capital space offers expansive opportunities, and Morgan Creek is passionate about working closely with emerging managers to identify and capture these opportunities.
• 😀 Personal relationships and collaborations are key to success in venture capital, as seen in the invitation for continued discussions and partnerships outside of the formal investment context.

Q & A

Why is Morgan Creek focusing so much on venture investments today?

Morgan Creek is focusing heavily on venture investments due to the power law at play in early-stage venture investing. A few key positions, like Lyft, Uber, Stripe, and SpaceX, have generated returns that significantly outweigh any other returns in their diversified portfolios. Early-stage investments tend to offer the strongest power law outcomes, and Morgan Creek aims to capitalize on this potential.

What is the power law in venture investing and how does it apply to Morgan Creek's strategy?

The power law in venture investing suggests that a small number of successful companies drive the majority of returns. Morgan Creek's strategy is to target these high-return opportunities, particularly in the early stages of investment, where the potential for such outsized returns is strongest. They have observed that a few key companies can contribute a large portion of the total returns for a fund.

How much of Morgan Creek's portfolio returns are driven by its top positions?

In one of their global diversified vehicles, two positions account for over a quarter of the overall fair market value, illustrating the powerful impact that a few key investments can have on the overall portfolio.

What is the role of co-investing in Morgan Creek's venture strategy?

Co-investing allows Morgan Creek to extend their capital alongside top-tier funds, amplifying the returns of strong investments. For example, a co-investment in Beyond Meat alongside Kleiner Perkins returned 157 million to investors, which was more than one and a half times the value of the fund itself.

What is the relationship between Morgan Creek and Anthony Pompliano (Pomp)?

Morgan Creek partnered with Anthony Pompliano in 2018 when Pompliano and his partner Jason Williams launched Morgan Creek Digital. Pompliano is known for his ability to synthesize trends and themes in the market and has been instrumental in Morgan Creek's foray into digital assets and venture investing.

What makes Pompliano's work ethic stand out in the venture industry?

Pompliano's work ethic is notable for his consistency and dedication. He has written a daily newsletter for over five years, missing only a handful of days, and has completed over 13,300 podcast episodes. His impressive social media following and growing business further highlight his commitment.

How did Morgan Creek originate and what is its history?

Morgan Creek was founded in 2004 by Mark Yusko, who was previously the CIO of the University of North Carolina's endowment. The firm began with a focus on offering alternative solutions to endowments and has since evolved to specialize in venture investing and digital assets.

Why are endowments an attractive asset class for venture funds like Morgan Creek?

Endowments manage large pools of capital and are ideal for venture funds due to their long-term investment horizons. Endowments need to partner with specialized managers like Morgan Creek to access high-quality venture investments, especially given the fragmentation in the venture landscape.

What is the importance of being an early adopter in the venture industry, according to Morgan Creek?

Being an early adopter is crucial in venture investing because it allows firms like Morgan Creek to capture emerging opportunities in areas such as digital assets, blockchain, and early-stage investments. Morgan Creek has a history of investing early in promising trends, which has been a key part of its success.

How does Morgan Creek approach portfolio construction, particularly in early-stage venture investing?

Morgan Creek primarily focuses on early-stage investments, particularly pre-seed and seed rounds. They tend to favor smaller, more targeted funds (usually under $100 million), and have developed a model that includes both core funds and nano funds, which allow them to invest in emerging managers and increase portfolio asymmetry.