Ted Tagalakis

I was at the LP conference this week, and one of the most common questions I got was whether you as a seed fund manager should be investing in some of the hotter, more expensive seed rounds. This is an incredibly challenging question to answer because venture is a game of exceptions, and our business is to partner with the best founders and generate the best returns. Some managers stick to their portfolio construction model like Billy Bean trying to Moneyball the industry, and they end up passing on deals because they're too rigid, believing that the Excel model will be a better decision maker than their own gut. Inevitably, I get text messages or have lunch conversations with these managers several years later where they lament the fact that they passed on a generational company because the price was too high. This type of conversation has actually become a bit of a meme in my life because it's so common. Every investor thinks their way of doing venture is obviously better than their peers' otherwise they wouldn't be running the strategy that’ve decided to pursue. So what is the best move in these situations? If you meet a founder who is going to build one of the 10-20 companies that matter every vintage, then of course you should pay up and invest in one of the earlier rounds, no matter the price. The critical piece here is understanding that in your barbell of core strategy and exceptions, you better be right a majority of the time or else it’ll look like strategy drift. If you have you have a close relationship with your LPAC (which you should), keep them in the loop on what you're thinking when you do want to break your own model, and most of the time they will support you. And when you're fundraising, be sure to talk about the exceptions whether they worked out or not. Those investments will stand out in your data room so you might as well get ahead of those conversations and explain your underwriting logic. These are also some of the most interesting conversations, and I guarantee that the best LPs will trust you to know when to break strategy & pursue the really special deal.