Satya and I approached fundraising for Homebrew as if we were building a company, asking ourselves who were the investors that would give us a solid platform, who were aligned with our values and where we learn from them. Over the first two funds we’ve ended up with just that – a group of LPs representing college endowments, foundations and fund of funds who are committed to us and the early stage venture segment. 

The James Irvine Foundation joined us in Fund I and has been a great partner since. They provide assistance to Californians in building a vibrant, successful and inclusive society, distributing more than $1.5b in nonprofit grants to that extent. How could we not get up each morning excited to help that cause!?!

We work with the entire Irvine team but through our first two years spent many hours with Anne Dinneen in their investment group. Anne recently became CIO of Hamilton College which is a fantastic and deserved opportunity for her after many years of success. I approached Anne last month about sharing some thoughts behind how LPs evaluate venture partnerships and she was game, especially since we both share an interest in diversity questions within VC. 

Oh and Anne is DEFINITELY still interested in venture as part of Hamilton’s investment strategy. If you have the opportunity to work with her, I highly recommend it.

Hunter Walk: Let’s start by covering a basic question – why is venture part of Irvine’s investment strategy?

Anne Dinneen: Nothing has contributed more to the growth of the Irvine endowment over the years than our venture portfolio. For an investor like Irvine, who can embrace the asset class’ illiquidity and long time horizon, venture has produced significant returns with less capital at risk. These managers sit in our Privates bucket and are therefore expected to beat the public markets by at least 4.5%.

As you know, the standard ”excess return” and “diversification” benefits attributed to venture are widely debated among institutional investors.  An investor needs much more than patient capital and an appetite for illiquidity.  At Irvine, we have spent two decades building an approach to venture that we believe enables us to identify and partner with the best firms consistently, throughout cycles.

HW: So over time how do you decide allocations to different funds? And what leads to adding or removing a fund from Irvine’s portfolio?

AD: A small group of the more established venture firms with whom we have partnerships have consistently produced excellent results, fund after fund.  Deciding allocations to those firms is based on a detailed quantitative analysis of the track record and a more qualitative analysis of the team, strategy, opportunity set, domain expertise, etc.  We have a preference for strong local teams in certain geographic regions or those focused on underserved sectors and inefficient markets.  An addition to the portfolio typically offers some differentiation or new value proposition.  Removing a fund from the portfolio can be for a variety of reasons – strategy shift, team dynamic, assets under management, performance, etc.

In terms of velocity, we attempt to make a steady set of commitments to exceptional partnerships without making an effort to time the individual partnerships. There will be years with few compelling opportunities and years with an abundance of outstanding opportunities. We probably meet with twenty venture managers a year. Over the past five years, this has resulted in one to two new relationships per year.

HW: When you’re adding a fund that’s been around for a while you have their track record to evaluate. In cases of a new fund, like Homebrew in 2013, what does Irvine evaluate?

AD: The Foundation’s venture portfolio currently has a mix of established as well as new managers. Emerging managers do not have track records, established franchises or teams. As a result, we have to rely on the qualitative metrics previously discussed. We spend a lot of time understanding the talent proposition and the investment strategy.  We triangulate with investors, entrepreneurs and large company operators to assess probability of success and ability to attract in-demand entrepreneurs.   Given the abundance of capital in today’s market, we want to feel that an entrepreneur will pick this team to sit with at the table.  Similarly, a GP might be in the middle of great flow, but we need to have conviction that they can identify the right deals, structure creatively, and negotiate effectively.

HW: Recently there’s been a spotlight on the lack of diversity – especially gender diversity – in the VC GP ranks. Is this something you’ve thought about as part of Irvine’s investing strategy? Does diversity explicitly come up in discussions with your GPs?

AD: Yes. The basis for modern portfolio theory rests on the power of diversification. Diversification can come in many forms and flavors beyond the garden variety, including gender.  While we would not invest in a fund simply for the sake of gender diversity, we believe that assembling managers with different backgrounds can contribute to a more diverse set of perspectives and hence investment opportunities.  I have also seen gender factor into an entrepreneur’s decision to partner with a GP.

HW: I’m often asked by people earlier in their career about breaking into venture. My recommendation is basically to spend 10+ years building operating skills at tech companies (founder or meaningful contributor), expand your network and put together an angel investing track record. What would your advice be?

AD: I think that is sound advice. While there has been meaningful growth in the number of early stage venture funds, very few are able to provide meaningful operational and product guidance. We felt that Homebrew filled the growing mentorship gap that exists today. We believe deep engagement yields better outcomes. A powerful network is always valuable. It can provide superior access to investments, talent and strategic relationships. Finally, we were attracted to Homebrew because of the combination of deep operating experience and solid investing backgrounds. If you are early in your career, an angel track record will help to quantify your talent and develop portfolio management skills. That all said, some of the best teams we have backed do not have operational experience or a track record.

thanks Anne!