Allocate's Private Markets Foundational Education Series Recap
by Hana Yang, Allocate CXO & Co-Founder
This summer, Allocate hosted its private markets foundational summer education series focusing on the venture capital asset class, grounded in first principles. The series began with an overview of the current venture capital landscape and explored four key areas: venture strategy formation for family offices, fund due diligence frameworks and techniques, LP portfolio construction, and performance metrics.
Here are the key takeaways from each education webinar session:
1. Mid-Year Venture Capital Industry Update: A Tale of Two Cities
Hosted by Samir Kaji, CEO and Co-Founder of Allocate & Nic Millikan, Managing Director, Investments at Allocate
The series began with a data-driven discussion on the current landscape of venture capital, highlighting a significant shift in the market. There was a 60% decline in capital raised and a decrease in the number of funds from 2022 to 2023, indicating a return to more normalized levels after the extraordinary boom years of 2021 and 2022. The market's current state, once described as "A Rising Tide Lifts All Boats," is now more accurately reflected by "A Tale of Two Cities."
This dichotomy is evident between traditional venture investments and artificial intelligence (AI) companies. Early-stage AI valuations have soared above $70 million, with mid- to late-stage companies reaching around $100 million. The stark contrast underscores a market currently defined by distinct segments, with AI emerging as a dominant focus.
The cyclical nature of the venture capital market suggests that success often involves investing before hype cycles peak or after they deflate. The current market interest in AI is reminiscent of past cycles involving the internet, social media, and cryptocurrency, which have delivered substantial returns to patient and strategic investors.
Samir offered a perspective on artificial intelligence, “View AI no differently than you would view the internet; mobile — essentially it’s a platform that will be used by multiple verticals. Where I hear the most excitement is less around investing in LLMs, but investing in vertical solutions.”
Watch the Mid-Year Venture Capital Industry Update: A Tale of Two Cities webinar
Download the presentation
2. Venture Strategy Formation for Family Offices
Hosted by Nic Millikan, Managing Director, Investments at Allocate & Taylor Adams, Founder and CEO, Belief Partners
This session focused on the importance of shifting from reactive, opportunistic investing to a proactive, programmatic approach for family offices. Given the opaque nature of the VC industry and the significant dispersion in returns, a structured approach to venture capital assets can provide a significant advantage.
A playbook for a programmatic approach to building a venture capital portfolio was provided, along with a foundational framework for non-financial returns. Taylor Adams emphasized the value of proactive, programmatic engagement, noting that this approach allows family offices to leverage their position in the legacy economy to enhance their standing in the innovation economy.
“The landscape of technology startups is broad and noisy and challenging. There’s a lot of nuance. The real message here is proactive, programmatic engagement gives family offices an upper hand. The goal isn’t to transition legacy assets into assets that exist within the future economy. The goal is to leverage the family office’s position in the legacy economy, in order to create a compounding capability that puts families in a better position in the innovation economy,” Taylor noted.
The investment framework highlighted in this session includes personalization, cash flow modeling, performance benchmarking, and a blended platform approach using fund-of-funds, single funds, and direct co-investments. This comprehensive strategy can help family offices navigate the complexities of venture capital and optimize their returns.
Watch Venture Strategy Formation for Family Offices
Download the presentation
3. Fund Due Diligence Frameworks & Techniques
Hosted by Nic Millikan, Managing Director, Investments at Allocate & Eitan Meisels, Associate, Investments at Allocate
Venture capital, as an asset class, is driven by innovation and presents unique challenges for investors. Adopting a proactive and personalized due diligence framework is crucial for moving beyond a private equity-style playbook that may not fully capture the nuances of venture investing.
Venture capital due diligence requires a mosaic approach, combining quantitative and qualitative inputs from various sources. Two core components of diligence were emphasized: a venture capital fund’s edge, or competitive advantage, and the general partner's (GP) alignment with their investment thesis, referred to as GP-Thesis Fit.
Eitan Meisels summarized Allocate’s approach, explaining that due diligence in venture capital focuses on identifying the unique edge of a manager and assessing whether the GP is the right fit for the thesis they are pursuing. This holistic approach enables investors to make informed decisions and maximize the potential for strong returns.
“We’ve distilled VC due diligence into two core components. Edge is simply what sets this manager apart. Is the manager articulating their edge clearly and is it authentic? Have they demonstrated that edge? Is the edge sustainable? With GP-Thesis Fit, we want to know if these are the right folks in the right space at the right time executing the right strategy,” said Eitan.
Evaluating a venture capital fund along these dimensions helps prospective investors identify the right people, at the right time, with the right fund size. This holistic approach enables investors to make informed decisions and maximize the potential for strong returns.
Watch Fund Due Diligence Frameworks & Techniques
Download the presentation
4. LP Venture Capital Portfolio Construction
Hosted by Nic Millikan, Managing Director, Investments, and Peter Epstein, Managing Director, Relationship Management at Allocate
This session covered everything from the basics to the nuances of building thoughtful, customized, and effective venture capital exposure within a portfolio context. Taking a thoughtful approach to construction means personalization in portfolio construction, aligning investments with an LP’s unique risk tolerance, return objectives, and liquidity needs. Regular review and adjustment of the portfolio were highlighted as key to maintaining alignment with changing goals and market conditions. Thorough due diligence on fund managers is essential for maximizing potential returns and ensuring long-term portfolio success.
The importance of consistent manager selection was also underscored, given the wide dispersion of returns between top- and bottom-performing managers in venture capital. Consistently investing in venture capital fund managers requires a critical ingredient – access.
Nic shared his perspective on how much access matters in venture capital: “Being able to have access to the top-tier managers is critically important. As you survey the market and opportunity set, it can take months to make a decision to invest. A good starting point is the historical track record. Past performance isn’t an indicator of future performance, but in venture, there is persistence with top-tier managers. So being able to access top tier managers, and on a consistent basis is key to maintaining a venture exposure that will be the median or beat the bottom quartile as well.”
Watch LP Venture Capital Portfolio Construction
Download the presentation
5. Performance Metrics, Benchmarks, and Analytics
Hosted by Nic Millikan, Managing Director, Investments at Allocate & Eitan Meisels, Associate, Investments at Allocate
The final webinar of the series focused on the metrics and benchmarks that are crucial for evaluating venture capital fund performance. Key metrics discussed included MOIC, TVPI, DPI, and IRR, each offering unique insights into a fund’s performance.
Understanding the power law and its impact on venture capital returns is critical. In venture capital, a small number of investments typically drive the majority of returns, making it essential for LPs to understand how a GP’s strategy aligns with this principle.
Nic expanded on the power law and its relevance for LPs: “For LPs, understanding how a GP strategy aligns with the power law is key. Is the GP focused on high-risk high-reward sectors where the power law is most evident and impactful? Or are they balancing this with more stable and low-risk investments? The strategy will significantly impact the overall return expectations for investors.”
The session also explored the practice of recycling capital to enhance fund performance. GPs can amplify a fund’s overall performance by reinvesting returns from early exits. Recycling up to 120% of initial committed capital is common for the venture industry.
Watch Performance Metrics, Benchmarks, and Analytics
Download the presentation
Conclusion
The Allocate Summer Education Series focused on foundational insights into the venture capital landscape and providing practical strategies for building a venture capital-focused investment portfolio.
Looking ahead to the Fall, a new Allocate Series will focus on private equity and other thematic topics in private market investing. The goal remains to offer content grounded in first principles, empowering the investors with the frameworks and insights needed to navigate these complex asset classes.
Upcoming sessions will continue to explore new opportunities in private market investing. Stay tuned for more information, and join the journey this Fall.