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Hemant Taneja shares advice for first-time venture capital investors
Key Takeaways
- Technology is driving significant changes in multiple industries. Identifying these changes can help you identify potential venture investments.
- Alternative investments, such as venture capital, are generally higher risk but higher reward, and illiquid. Investors need to consider the share of their portfolio they are comfortable allocating to illiquid investments.
- Premium fee structures are necessary to attract the investment teams that generate competitive returns. Investors should focus on returns and investment team quality more than fees.
Transcript
Hi, I'm Hemant Taneja. I’m the managing partner of General Catalyst.
The number one advice, I would say, is look around you and think about the change that you see happening the most. And chances are technology has a big role in driving that change. And further your conviction around which of those trends you want to go play in. So I think there is sort of an intentional part of this.
The other thing I would say is there is a power law in this business. The concentration of returns in the top certain percentages of firms is a real thing. And the reason is because the concentration of returns is in the iconic companies that get built in each of these dimensions.
I think that alternative investments are generally higher risk, high reward. They are illiquid if you invest in funds that do really, really early work. They're not so illiquid if you invest in firms that also are investing, sort of, let's say, pre-IPO because those things end up becoming liquid much sooner than not.
I think it's two tiers of portfolio construction. One is, what percentage do you want to be in the illiquids? And if you think about the endowments, you probably typically think about this like 15 to 20% of their holdings. But then you can also think further from that to say what stage of illiquidity is that? You can invest in firms that are doing super early work. And that's going to be illiquid for a decade. Or you can invest in firms that are doing technology growth investing, and that starts to be liquid in a couple of years. Or you can actually go find platforms that do all of that and sort of blends you into having a nice mix. So I think it's a set of choices that are highly personalized, but that’s the framework I would use to think about it.
We end up having discussions about fees with our own investors, right? Surely they would like as low a fee as possible as well. And my answer not only is it, that we look at the returns is premium returns and warranted. I also think if you're not a place with premium fee structures, you're not going to attract the best people. And so it's a self-fulfilling prophecy where if you really want a team that's truly best in the world and is shooting for the best in class returns, you have to create an economic incentive as well that attracts them by having the most competitive fee structure.
I could not build the best investment team at General Catalyst, if our fee structure wasn't going to mirror what the other firms of our caliber have, it just would not be possible. So I think there's a reason why that fee structure exists and is sort of a self-fulfilling prophecy. And, you know, I would focus on what are the kinds of returns you generate from managers versus what fee structure they're taking. There's not many firms that can do this. So there's a scarcity of asset around this as well.
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