Three Levers to Longevity in VC

Kauffman Fellows in conversation with Alan Feld, Co-Founder and Managing Partner of Vintage Investment Partners

This week we’re chatting with Alan Feld, Co-Founder and Managing Partner of Vintage Investment Partners, a leading Israel-based venture fund of funds, secondary fund, and late-stage co-investment firm. Feld pulls back the curtain, sharing three key principles that guided him as he founded and built Vintage, which today manages $2.5B through its 13 funds, with over 160 primary and secondary investments in funds and over 200 technology companies.

1. Allowing Space for Honest Self-Criticism

Feld credits the act of being brutally honest with himself and his firm as the primary lever for Vintage’s success: “There is no better medicine in venture than analyzing your own firm as you would analyze your portfolio companies. You may be very surprised by what you find when you look in the mirror. The venture funds that survive the bad days aren’t the ones that drank the Kool-Aid of overconfidence and hype, but the ones that took the preventative medicine.”

Overconfidence and the lack of critical self-auditing, Feld proposes, is the Achilles heel of investors. A humble honesty, rather than assuming prescience over the market’s direction, is what supports longevity. Feld and his partners meticulously built Vintage Investment Partners to embrace a culture of transparency by regularly taking his prescribed preventative medicine, even when the dose is bitter.

“There is nothing more humbling than losing money on deals,” says Feld. “It’s good to lose money periodically. Losing money on deals you thought were going to be winners is part of becoming seasoned. It’s a red flag if a VC comes to me and claims every deal they’ve ever touched is a success and they haven’t lost any money.”

In Feld’s eyes, a lack of failure roughly means that an investor is not taking enough risk or he or she is financially supporting companies that will not be accretive to the fund’s returns: “Venture capital is built on investors taking risks that produce outsized returns,” notes Feld. If every deal, particularly every early-stage deal, is a win on the books, you’re more likely than not playing it too safe or you are supporting losers to avoid admitting that the investments are not working out.”

Feld leans into his mistakes to help foster a corporate culture where the Vintage team members aren’t admonished for failure but are celebrated for being honest about what was wrong with the investment and what should be learned going forward.

“We understand that losing money on a deal is part of the business. But, over the years, I have noticed that when I honestly analyzed what went wrong on my deals and what I could have done differently, other team members started to analyze what they could have done differently in their weaker deals. Each team member started shouldering some of the responsibility for the other’s loss.”

Feld gives this as an example of building a constructive team culture, something he believes is the primary ingredient for venture firm longevity.

“Organizations without strong and positive cultures don’t last,” says Feld. “The leaders of venture funds should go the extra mile to make sure that the junior team develops as both investors and leaders, including learning from the Partners’ mistakes.”

To make this happen, the entire Vintage investment team participates in investment committee meetings: “We make better investment decisions when people with different life experiences and expertise have a seat at the table and in the investment decision-making process, especially if we want to develop people to become future partners.”

But, team development does not end at participation in decision-making. “My partners and I want every person at Vintage to be a partner in our success,” says Feld. “Venture funds incentivize employees at portfolio companies with stock; there’s no reason venture groups shouldn’t do the same for their employees. After one year, every, and I mean every, full-time employee gets a piece of the carried interest in the most recent Vintage fund and in every fund going forward as long as he or she is at Vintage.”

Approximately 30% of the carried interest in Vintage is in the hands of non-GP full-time employees. In addition, each GP at Vintage also owns part of the management company. “Management companies in the hands of one or two people,” according to Feld, “don’t last because talented investors simply won’t stay long-term if they have no real say in the management of the firm.”

2. Promoting Diversity Internally and Externally

“We have become a much better firm because of our diversity,” says Feld. “Diversity and inclusion is not just the right thing to do; it’s the smart thing to do.”

Vintage has worked to encourage diversity within its firm and its ecosystem for years. Feld is proud that 40% of Vintage’s investment team consists of women and minorities in the Israeli ecosystem. Vintage is also the Founder and a large funder of the Power in Diversity Israel Initiative. Today, the initiative comprises over 130 startups and over 35 venture funds to help promote and facilitate the participation of more women and minorities in the Israeli startup ecosystem.

In Israel, facilitating the participation of Palestinian Israelis in the high-tech and venture industry means that people who were otherwise strangers in difficult circumstances now have lifelong friendships: “Given recent events in the region, it is more important than ever to bring Israelis, Jews, and Arabs, to work together to build great technology companies, rather than wallow in hate and violence.”

Vintage also recently led an effort to reduce the likelihood that female entrepreneurs will face sexual harassment by potential VC investors. Over fifty Israeli venture funds signed on to Vintage’s proposed policies and collectively appointed a retired female judge with an expert level of experience in this area as an ombudsperson to address harassment claims.

3. Navigating the Web of the Venture Capital Ecosystem

As a fund of funds, secondary fund, and direct venture capital fund, Vintage simultaneously has its fingerprints on multiple angles of the industry. Endearingly described by Feld as a grandfather that invests in the child and the grandchildren, Vintage has evolved into a key node for multiple different venture capital-related ecosystems.

On any given day, the Vintage team will likely interact with VCs of funds they have invested into, startup founders with whom they have a direct or indirect relationship, shareholders of startups wanting liquidity, and LPs seeking guidance or liquidity.

Feld and his team have honed in on a simple recipe to interact with each party in a way that caters to the unique dynamics of the relationship: integrity, transparency, and accountability. One sees this in Vintage’s approach to even non-binding offers: “Vintage has never backed off or renegotiated a signed term sheet in our nineteen years. We may not always be the best price or offer the best valuation, but when we sign even a non-binding term sheet or LOI, we act as if it’s binding.”

On Being LP-Centric

Venture capitalists tend to urge their portfolio companies to be customer-friendly, but rarely practice what they preach. Vintage aims to be as LP-friendly as possible by making themselves useful beyond the immediate scope of their engagement.

“Our investors are loyal and come back to us, fund after fund, because we don’t try to squeeze every last drop of value from them,” says Feld. “LPs appreciate not being nickeled and dimed through SPVs on every small deal. We give our LPs free co-investment. We help them look at deals that we’re not in, help their IT teams find new useful products, and we present technology trends and whatever information will be useful.”

Vintage doesn’t show their LPs Gross IRR, MOIC, or other numbers that may hide inconvenient truths about performance. “Our LPs care about what we’re generating for them, and we show them Net IRR, Net TVPI, Net DPI,” explains Feld. “Gross numbers can be misleading and are often presented to make up for showing bad net numbers.”

Vintage’s reporting is “net of fees, net of carried, net of excuses,” an expression coined by Vintage General Partner Amit Frenkel.

“Our LPs get the right information at the right time presented in the most useful, transparent, and efficient manner,” elaborates Feld. “This also means hearing the bad news, if any, from us before they hear it from the market. While investors obviously care about returns, the “little” things like a partner leaving or over-selling a portfolio can undermine the crucial trust from investors who essentially gave us a blank check of trust.”

Feld lists a few more ways Vintage keeps itself accountable to its LPs:

  • It always finishes the investments of its current funds before starting a new fund, as Feld finds it unfair to take investment period-level fees concurrently on two funds with the same strategy.
  • One hundred percent of rebates from companies or funds go to Vintage’s LPs and not to the management company.
  • No one on the Vintage investment team personally invests in any private tech companies or funds:“We simply are not prepared to put ourselves even remotely in a potential conflict of interest with our LPs or the VCs in whom we invest.”

On Being GP-Centric

Vintage started its fund of funds activity in 2005 and has a 91% re-up rate on commitments over $5M. In other words, in nine out of ten cases, Vintage continued to the next fund from a prior fund.

“We do a fair bit of due diligence before we commit to a fund but, when we commit, we look to be there for the long run, unless the GPs do not get along, they fundamentally change the strategy, or exponentially increase the fund size,” says Feld. “We view down technology markets as an opportunity to increase our allocations, not pull out of the sector and invest in the latest hot thing.”

Adding Value to the Greater Ecosystem

Vintage seeks to act in deeds rather than words. For example, Vintage’s Value-Added Services is a completely free program pioneered by Partner Orly Glick to facilitate in-person introductions between top decision-makers at major corporations with key technological pain points and portfolio companies with solutions. It has generated nearly 200 purchase orders for portfolio funds and portfolio companies in the last four years.

Vintage tries to help the greater ecosystem and even competing funds of funds by introducing them to funds Vintage likes, not to the funds it decided to reject.

The firm is mindful of the long-term sustainability of a fund, and it typically takes less than 20% or less of funds: “We think it is unfair to force GPs to give one LP too large of an allocation to a fund. What happens to a GP if an LP with a 50% stake doesn’t re-up? A 50% hole to fill in future fundraising could be a franchise-killer, especially in a down-market.”

Vintage refuses to compete against its portfolio funds and therefore does not generally lead direct investment deals. It also doesn’t do secondaries in the portfolio companies of venture funds without checking with the GPs of those venture funds first.

Being Founder Friendly

“The greatest tech companies are built by founders who can scale with their companies,” says Feld. “Many of today’s most notable companies that went public in the last 20 years are still largely completely or partially managed by their founders, including Alibaba, Amazon, Facebook, Google, Salesforce, Shopify, Snap, Tesla, Zoom, and so on.

Great venture funds are magnets for great entrepreneurs. Some VCs mix up micro-managing a founder with adding value. When VCs start managing a portfolio company, the death knell is not far away. We think that the role of a VC is to help with stakeholder introductions, recruiting, and providing market data and guidance on strategies or tactics we’ve seen successfully used elsewhere. That is what we try to do when we invest in a company.”

Another way Vintage tries to be founder-friendly is by giving founders the peace of mind to focus on the business. Feld is a firm believer in giving founders the option for partial liquidity on their shares before an exit.

“It’s only fair to let founders take some money off the table through the sale of up to 10% of their holdings in the company,” states Feld. “As investors, we have a broadly diversified portfolio, whereas most entrepreneurs have one ‘portfolio company,’ the one that they started. An entrepreneur with a paid mortgage can better focus on building the company, rather than sacrificing a potentially bigger outcome to satiate the urgency of short-term liquidity needs.”

“Permitting secondaries for founders isn’t just the right thing to do; it’s the smart thing to do as an investor.”

GPs that tend to immediately distribute all of their public stock to LPs immediately after the lifting of the IPO lock-up strike Feld as both unfriendly to founders and problematic generally. “Many LPs don’t have the tools to manage public stock effectively and, usually simply dump the stock as soon as received, pushing down the IPO’d company’s share price,” explains Feld. “This behavior depresses the short-term valuation of thinner traded shares, hurting the chances of an orderly secondary offering where founders or early-employees can also see some liquidity. We distribute or sell public shares in an orderly way over an extended period to avoid having a meaningful impact on the portfolio company’s stock price.”

Final Thoughts

Despite gradually implementing his succession plans, Feld is far from taking his foot off the gas at Vintage. “We still have a long way to go and there are several things that we have to do much better,” admits Feld. “We want to continue to make our team more diverse, particularly at the most senior levels in our organization. Also, nobody likes to say ‘no’ to a venture fund or potential portfolio company; we’ve taken too long to say no or not been sufficiently transparent with our rejection justifications for example.”

At the end of the day, Feld views Vintage’s role in the burgeoning Israeli and global ecosystems as simply adding value to every company that comes through its doors (or Zoom chats), regardless of whether Vintage invests in them or not.

Originally published at https://www.kauffmanfellows.org.

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