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We’ve highlighted before that private companies are raising larger amounts of capital and waiting longer than ever before to go public. As a result, the rate of crossover investments—when firms that traditionally focused on PE expand into VC investments—has increased precipitously. 

Research shows that hedge funds, mutual funds, PE firms and corporate venture capital firms across the US have been on a VC spending spree in 2021. These firms and other nontraditional investors have participated in $184.7 billion worth of venture deals through Q3 2021 according to PitchBook’s US VC Valuations report. That giant figure is already nearly $60 billion higher than 2020’s total.

Matt Kinsella is a managing director at San Francisco’s Maverick Ventures, the VC arm of hedge fund Maverick Capital. Founded in 2015, Maverick Ventures focuses on VC investments in early- and growth-stage startups. Before taking on his current role, Kinsella worked at the Dallas-based hedge fund. With more crossover investors becoming active in venture capital, we wanted to get Kinsella’s perspective—as someone who has experience with both hedge funds and VC.

Here’s what he had to say about the crossover investing trend and functional advice for hedge funds considering their next steps:

Perspectives on crossover investing

Hedge funds get involved in private investments for many reasons

Maverick has been making private investments since it was founded in 1993, but the motivations have been broad. Prior to 2014, we had been doing early-stage investing out of the hedge fund—it was opportunistic. A lot of it was investing in tiny companies to get an understanding of what might be disrupting the large, publicly traded companies in a few years or who might be partners. It was almost part of the research process for the big dollars we were putting to work in the PE market. We continued to iterate and noticed it was actually quite profitable for us. We said, if we’re going to keep doing it, we need to standardize and put real capital behind it.

There are a number of different reasons why hedge funds will want to get involved in the private markets, and they can range from helping influence their research process on their big public equity funds to applying the same type of methodology they're doing for the research and the public equity market to the later-stage private companies, because often they're not that different. A lot of these later-stage private companies have been private for much longer than they used to stay private. You could actually do quite a bit of analysis on the financials, and it doesn't look that different from doing an analysis on a publicly traded company.

Investing in early-stage companies requires more focus on people

At the end of the day, you're still trying to find great companies that you think are going to be worth a lot more in the future. The signals you look for in the analysis you do are very different and the skill sets are transferrable to some extent, but really quite different.

The biggest difference is the focus on the people. When you are doing early-stage investing, a lot of that is really just understanding what makes that entrepreneur tick. Why are they so focused on doing this? It's a really hard to look for signals as to why they're the right person to do this and whether they are going to have the grit to stick with it and grow the business over time.

Of course, in public equity, investing in management is very important, but it's one of the only things that matters at the early, early stage. That was a big mind shift for me.

There’s a greater deal of uncertainty with early-stage companies

In PE, if a company gives you some indication of where the business is going to be, they have a reasonably good understanding of what that's going to look like. They're not going to be off by a ton. You can be off by orders of magnitude easily every day in the early stages. You have to always take any forecast that you're relying upon in the early stage of the business with a grain of salt because you have to be understanding it's going to end up being quite different than people think it's going to be.

Advice for hedge funds considering a crossover into VC

Don’t over-optimize your calendar

If I could go back and give myself some advice in 2014 [when I moved over to help launch Maverick Ventures], it would be to do less. To not over-optimize your calendar. A lot of venture capital is serendipitous—you never know who you will meet if you stay an extra day on your trip to India or go to that developer meetup, etc. It also allows time to do deep, thematic work, which always gets pushed to the wayside when your calendar is booked.

Also, as you join more boards, the time commitment will go through periods of intensity. You need space in your calendar to flex into so that you can devote the time you need to help your founders.

Evaluating the subjective qualities of entrepreneurs is a skill that can be learned

The skills [necessary for evaluating entrepreneurs] can be learned. It’s all about knowing what great looks like—and that comes from seeing many different founders and being able to spot great when you see it. It also comes from learning to ask the right questions to help suss out if founders possess the qualities you’re looking for.

Partner up to avoid risk

Investors who are risk-averse but interested in working with early-stage companies need to partner with great founders. It’s the best way to minimize your risk.

On the podcast: Why a hedge fund joined VC’s cybersecurity arms race

Revisit our recent conversation with Maverick Ventures’ Matt Kinsella in full on PitchBook’s ‘In Visible Capital’ podcast.

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