How I Invest with David Weisburd
EP135: How to Access Top Quartile Venture Capital Funds w/Mel Williams
Tue, 04 Feb 2025
In this episode of How I Invest, I have a conversation with Mel Williams, Co-Founder and General Partner at TrueBridge Capital Partners. We dive into TrueBridge’s pivotal role as Forbes' data partner for the prestigious Midas List, its strategic approach to venture capital fund-of-funds investing, and how the firm consistently identifies and backs the top-performing fund managers. Mel provides a masterclass on portfolio construction, risk management, and scaling a successful venture investment platform. Whether you’re an institutional investor, a fund manager, or simply intrigued by the inner workings of venture capital, this episode is packed with essential takeaways.
Chapter 1: What are the best practices for venture capital investments?
We're not distracted by what's happening in other asset classes. And as a result, we think we're simply broader and deeper in the asset class than many other investors are. We've been generating best-in-class returns for our investors for almost 20 years.
All of our mature funds are generating somewhere between a 3x and a 5x TVPI, or total value to paid-in capital multiple, and a 3 plus x DPI, or distributions to paid-in capital multiple. We believe we have one of the best networks across the venture industry, which increases our insight and our access to the best performing investment opportunities.
And then finally, we've got a team of over 14 investment professionals with over 100 cumulative years of experience investing in the top performing venture managers and the best performing venture companies in the industry.
Tell me about the story about how Truebridge got involved in the Midas list.
Chapter 2: How did TrueBridge Capital become the data partner for the Midas List?
Forbes started publishing the Midas list back in 2001. And in 2009, they stopped publishing the list as a result of the global financial crisis and the pressures it was putting on the publishing industry, including Forbes. We reached out to Forbes in probably 2010 to begin a conversation with them about how we could be helpful to them in relaunching the Midas list.
And today we're really the part of the data partner to Forbes for the Midas list. And what that means is we collect all the data, We confirm all that data with the best performing GPs and the CEOs of the companies that are really driving performance in the Midas list. We generate the list through a model that we manage every year with Forbes.
We work with Forbes to kind of vet the list every year with a blue ribbon panel of industry experts and industry advisors and consultants. And then Forbes publishes that list and we help publish additional content around and about the list. But that's the genesis of the list and our role in the list. We've been the data partner to Forbes on the list since 2011.
The Midas list, the number one list for VCs. Does that give you an unfair advantage when it comes to accessing GP, talking to LPs? And talk to me about that.
Chapter 3: What advantages does the Midas List provide for venture capitalists?
Our role as a data partner in the compilation of that list certainly gives us access to a level of information that other limited partners might not necessarily have access to. It's very granular deal performance and deal attribution data that other limited partners may not necessarily have access to. We certainly think that helps us make better decisions and be better investors.
Tell me more about TrueBridge's fund-to-fund strategy.
Sure, so I think the most important thing about TrueBridge is that number one, all we do is venture. That's our entire focus. We have five distinct investment strategies on our platform. We have a core fund-to-fund investment strategy where we build a concentrated portfolio of very best, well-established, high-performing fund managers.
We have a seed fund to funds investment strategy where we build a concentrated portfolio of seed and small managers, including numerous emerging managers. We have a dedicated direct investment investing strategy or fund on our platform where we're investing in the breakout winners in our underlying portfolios and investing alongside our managers in those companies.
Chapter 4: What is TrueBridge's fund-to-fund strategy?
We have a dedicated LP secondary investment strategy or fund where we are investing in LP secondary positions and or directly in companies through the secondary market.
And then finally, we have a dedicated blockchain fund to funds investment strategy, where we're investing in and building a concentrated portfolio of the best performing blockchain dedicated managers in the industry, as well as investing in companies alongside those managers.
So you have a couple of different aspects, secondary, directs, core, emerging managers. How are these all strategic to each other?
We like to think that our participation in one of those strategies impacts the other strategy. Certainly being close to some of the most well-established managers in the industry and understanding whose seed deal flow they want to see the most.
informs our investing in the seed landscape, investing in the seed landscape and seeing companies at their inception, seeing how those companies grow, how management teams perform, how markets develop and customers respond to product offerings, informs our direct investing strategy. And so, you know, they really all layer on top of one or the other.
Crypto and blockchain, arguably the most volatile asset class in history, even more volatile than venture capital. Does that somehow change your portfolio construction or do you have a venture-like portfolio construction for your blockchain fund?
David, that's a great question. I think across all of our portfolios, we definitely believe in the power law nature of venture returns. in that a limited number of companies drive the overall performance for the industry, and as a result, drive the overall performance for underlying fund managers. We wanna get as much exposure to those power law companies as we can.
We definitely believe in the quality of our deal flow and our picking ability. Across all of our investment strategies, we tend to build concentrated portfolios, and the same is true in blockchain. With our first blockchain fund, we are building a concentrated portfolio of no more than 10 managers in that fund.
The way we account for volatility or increased volatility in the blockchain space is through sizing our positions in certain managers in different ways. And we also expect to see more manager turnover in both our blockchain portfolios and our seed portfolios, because those two segments of the venture market are simply less proven.
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Chapter 5: How does TrueBridge manage portfolio construction across different strategies?
David, when we started TrueBridge Capital Partners, both myself and my partner, Edwin Poston, were coming from very well-known institutional investing shops where we had front row seats in the venture industry. We had previously invested in many of the managers you see in our portfolio today in our prior roles.
And so we were able to bring those relationships from the University of North Carolina's endowment and the Rockefeller Foundation's endowment. We were able to bring those relationships to TrueBridge to help begin building our first portfolio. And so that was a huge positive for us in funds one through two or three. We also started our firm in a close partnership with the Kauffman Fellows Program.
which is the only program of its kind whose sole mission is to identify, network, and train the future leaders of the venture industry. And that partnership arguably gave us connections to and access to some of the best performing fund managers in the industry. And those are really the two ways we launched the business and we built the first couple of portfolios.
You're obviously incredibly talented. If it wasn't for this advantage of being at the North Carolina Endowment and Rockefeller Foundation, would you have been able to build the same high quality GP portfolio?
I think it would have been really difficult, you know, without those relationships with the top performing fund managers, many of whom remain in our portfolio today. Without those relationships and without being able to secure sizable allocations to their funds, I think it would have been really difficult to start the firm.
I think it would have been really difficult to get institutional limited partners interested in what we were doing. And so it had been very difficult to launch. But, you know, with those advantages and we built fund portfolio funds one and two, it's really like success built upon success, which has put us to where we are today.
You have an interesting forced ranking to your portfolio where you force rank your funds against each other. Tell me about how that's done.
David, because we believe in the power law, nature of venture returns, and because we believe in our deal flow, quality of our access and our investment judgment, we do believe strongly in building concentrated portfolios across all of our investment strategies. We believe building a concentrated portfolio is the best way to generate outsized performance for our investors.
Building part of the process of building concentrated portfolios is force-ranking all of our fund managers every year. And so we do go through that process every year where we force rank all of our fund managers as a collective group effort. Force ranking helps us concentrate our portfolio.
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Chapter 6: What is the significance of force ranking fund managers?
So what would make you not want to re-up with a core position?
The number one reason we don't invest with someone who's in our core portfolio is because we're able to put more capital to work with a higher performing manager. Other reasons include team turnover. So if we see one or more good or very high quality investors leave a firm or a fund, that influences our decision to reinvest with them.
If we see strategy drift within their portfolio or their investment strategy. So, you know, fund managers who as a result of a larger fund might be investing in sectors or geos or stages where they have no real competitive advantage, you know, that's a red flag for us.
And then finally, you know, we're always looking at fund size increases and not those fund size increases are met or matched with an increase of the capabilities of the firm from a an investment standpoint, an investment standpoint, and frankly, a cultural standpoint in terms of writing bigger checks into companies.
And we've often seen a lag between fund size increases and an increasing capabilities within an investment firm. And so we're always watching that as well. And that would be another reason why we wouldn't reinvest with someone.
If you have this interesting vantage point in that you've seen many funds scale, some scale effectively, some scale not effectively. What are the best practices for a fund that's trying to really scale and maintain their edge in the market?
David, it's really, we think, really building those investment capabilities ahead of an increase in fund size and very, I'm not gonna say very few fund managers do it. It's hard to do. Some are able to build those capabilities in advance of an increase in fund size. For most those capabilities lag their increase in fund size. But I'll give you an example.
You know, we have seen managers who will double the size of their fund, which means they need to double the size of an average check or a large position in their fund. but they're just not culturally able to meet that bar. And so they end up with a portfolio of more companies with smaller positions relative to their fund size, which is a drag on returns.
And so we're really watching how firms build their capabilities as they scale and do those capabilities lead the size of the fund as they grow their funds. The best ones do it well. Others, there's just a lag, which is hard. It impacts returns.
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Chapter 7: What factors influence TrueBridge's re-investment decisions?
It was certainly unfortuitous timing, which we got out of our control. I would like to think that it certainly hardened us as fundraisers and gave us the where to keep our heads down and our nose to the grindstone and to plow through it till we got to success.
It did set the foundation for what our portfolio looks like today, because we, as a result of our first one or two closes in Fund 2, which was raised in 2010, we did have capital to commit in an environment where a lot of institutional investors were pulling back. And we had a lot of
foundations and endowments at that time who were investors in some of the best performing GPs in the industry and were asking those GPs not to call capital or not to raise their next fund. And the fact that we had capital available to commit in that environment allowed us to get into some fund managers that we might not otherwise have gotten into or it might have taken longer to get into.
And so I would say the biggest benefit to us from the global financial crisis was having capital and really solidifying the quality of the relationships and the portfolio we have today.
Is there always this friction between easy to raise, easy to deploy? Are these kind of inverse relationships?
I might think those are inverse relationships, but I think we've been through a unique period of time in the venture industry from let's call it 2012 to 2021, where we were in the, what was called the zero interest rate. policy where it was both easy to raise capital and easy to deploy capital because venture returns were high. Your better performing venture managers were scaling their platforms.
Venture backed companies were staying private longer and as a result, providing more opportunities for private market investors to invest. And so that was a unique period of time where it was easy to raise and easy to deploy. But I think otherwise, your friend holds true.
What investors should be accessing venture capital through fund of funds versus direct? Give me some granularity to that.
So because we believe in the power laws of venture returns and the fact that a handful of companies drive returns for the overall industry as well as at the manager level, we believe it's really important to invest in the best performing managers. You are either an institutional investor who has those relationships
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