Differentiation in a Crowded VC Market: a Big Money Q&A with Sharmila Kassam, Executive Director of the AIF Global Institute

Our Big Money webinar series has yielded invaluable expert advice for emerging managers navigating today’s unique market conditions. In the latest webinar installment, we had the pleasure of hearing from Sharmila Kassam, Executive Director of the AIF Global Institute. In the Q&A below, Sharmila shares her take on institutional readiness, new investment relationships, due diligence, and check size dynamics. She also addresses how to uniquely position your fund's thesis in the market as well as how to compete for LP dollars as a first-time fund.

Q: Can you share your thoughts and experiences that may be helpful to emerging funds on the path to becoming institutional ready?

A: In my role at Texas Employees, we ran a billion-dollar emerging manager program. We spent a lot of time talking to smaller fund managers and we often found they had great investors who came from very large institutions with excellent pedigrees. However, running a business is a very different challenge, especially without the platform that they had at a prior shop. Investing in and starting a fund is akin to creating a business with all the growing pains of a startup, which can feel overwhelming. Success is born out of the combination of the desire to start a business and the patience required to get to a stage where large institutions can be part of that growth. Emerging fund managers must ask themselves whether they have these innate qualities and ambitions.

Q: Given your broad experience among various asset classes, including venture, we’d love your advice for building new investment relationships and conducting due diligence.

A: Managers coming out of a larger shop may be used to dictating terms. However, when starting a new firm, managers should be mindful that these new relationships don’t come with the same leverage or guarantees of funding. Even existing investors who were engaged with them before may not be willing to take the chance on a new firm. It isn’t personal -- the investors are underwriting the whole new enterprise. For this reason, when it comes to high-level economics and legal terms, it helps to be creative and to show alignment to a firm’s goals. For example, we expect access to co-investments at no additional fees because we cannot do direct due to legal constraints in terms of how much we can get involved. For managers who were willing to give those types of deals, we get more interested and have been successful as a co-investor by being a value-add and making quick decisions.

Lastly, telling the story of the investments becomes just as important as telling the story of how you expect the firm to grow. An emerging manager may have certain operation limitations such that they’ve outsourced certain components or are juggling roles within a small team; however, giving the investor an idea of what the vision is can forge new relationships. Even large investors, such as pensions and endowments, can find value in writing smaller checks to high-level leap growth with the managers. Managers should show that they're looking at the vision of their firm, just as much as the underwriting investments in the companies they're invested in.

Q: If a firm is seeking institutional capital, how important is it to do the homework and understand check size dynamics? How often do investors stretch their requirements?

A: Our firm was $30 billion assets under management. We thought we were nimble enough to stretch requirements as compared to a large public endowment or pension with over $180 billion. Our average check sizes were sometimes around $150 million, but we would try to be creative -- through fund-of-funds or other partners -- to see how we could access the smaller firms.  We sometimes even for the right investment and manager could go smaller but it had to be differentiated and also investor-friendly.  We did accelerate the growth of some managers who were willing to work with us. Knowing the investor is just as important as thinking about what else your firm can offer. We would sometimes ask for revenue shares or other metrics to de-risk the investment if we were going to commit allocation to a new firm.

Q: How competitive is it for LP dollars among first-time funds? How did you differentiate yourself?

A: It can be hard to compete for funding, especially given the limitations LPs have with the number of relationships they can manage. Some large institutions don't have access to venture capital. For this reason, there are programs to encourage access and smaller checks. Large institutions are also embracing differentiators. For example, a firm may seek to back a specific market niche, such as sustainable or environmental solutions, or foster diversity in the investment community with a female or minority manager. Institutions are investing resources to access those opportunities. Many impactful access points are going to be through smaller managers, as opposed to the large funds. We'll start seeing this trend reflected in more and more programs.