What LPs Wish GPs Knew According To One Of The Best LPs In The Industry, Beezer Clarkson of Sapphire Partners

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July 1, 2021

On this week’s episode I chat with Beezer Clarkson of Sapphire Partners. Sapphire Partners invests in early-stage venture capital funds and Beezer leads their investment team, focusing on both domestic and international funds.



Beezer is a star and began her career in financial services over 20 years ago at Morgan Stanley in its global infrastructure group. Since, she has held various direct and indirect venture investment roles, as well as operational roles in software business development at Hewlett Packard. Prior to joining Sapphire in 2012, Beezer managed the day-to-day operations of the Draper Fisher Jurvetson Global Network, which then had $7 billion under management across 16 venture funds worldwide.



In 2016, Beezer led the launch of OpenLP, an effort to aggregate and amplify insights across the entrepreneur-to-GP to LP venture ecosystem.

There’s a lot of helpful information in this conversation with some great tips for GPs to keep in mind when working with LPs. If anyone is interested in raising capital from institutional LPs, this is a worthwhile listen.

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Transcript

MPD: Welcome. Beazer thanks for being here.

Beezer Clarkson: [00:01:49] Thank you for having me.

MPD: [00:01:51] All right. So the way I usually run this is instead of asking you to do your background, I do it for you with the idea. Yeah. I might brag a little bit more than you would be willing to otherwise. So if that's okay, I'm going to start and introduce you. You're the best. Thank you. I'll save you the awkwardness.

Here we go. Today. We have Beezer Clarkson of Sapphire partners on the show. She's a partner at Sapphire partners, which is a division of Sapphire ventures. I think I got that right. One of the preeminent Silicon valley firms, Sapphire both directs of invest directly in companies and invest in venture funds as a limited partner.

And that's a side of the house is on, they're a big firm. They run about $7 billion of capital, and they're invested directly in about 120 companies, 20 of which have already gone public 40 have been acquired. It's incredible stat through Sapphire Beezer has been involved with launching open LP. A website that helps educate VCs on LP perspectives.

So if you're a VC and you're listening to this or checking out before Sapphire Beazer had held a variety of investment roles at firms like DFJ, which is where we first met. And before that at the Omidyar network she got her professional training at Morgan Stanley towers, Perrin Hewitt Hewlett-Packard, and she has way too many logos to go through.

At this point, that's a hell of a resume. What did I miss? Anything that we should include? Beezer

Beezer Clarkson: [00:03:15] the only thing it's not really a, you don't notice it on my resume because it literally was about a nine month job was when I came out of business school in 2000, I joined what would now be called a microfund, but at the time was a major fund.

It was a $40 million seed fund in the meat packing district in New York, which unfortunately did not survive the 2001 train wreck that was took out. Most of it. Those called launch center 39. It's really, it was endemic of of the era, but it was cool. Cause it was like the first sort of VC in house.

We had an incubator and I got to do both. One of the founding partners was Albert Wenger. Who's now with union square. So in my first job in VC was this micro signed accelerators. So now it's very hip, but back then it was a big fund is 40 million,

MPD: [00:04:00] right? Yeah. The world is very different New York now than it was back then.

Beezer Clarkson: [00:04:04] Oh my goodness. Talk, we can talk about that if we want, but it is wildly different, which is. So

MPD: [00:04:10] let's start off though, with just baselining for everybody giving him a little color on Sapphire, would you mind just giving us the high level overview on the firm? I've already covered some of the basic stats, but more how you guys do what you do and how you operate.

Beezer Clarkson: [00:04:23] As you said, I represent stuff, our partners, which is the LP arm. We have actually three different investing activities on the platform. And they're all managed by separate pools of capital, separate teams. We love each other and we like to talk to each other, but we don't, co-mingle the activity some folks do.

And we don't. And so the L we can talk about the LP side. So I'll put that aside for now, but the large growth fund that you were talking about, all those logos that you see on the website, all the discussion of direct companies that you ever hear, associate Sapphire ventures, that's all the direct team.

And they invest at. I would say post product market fit is the best way to think about it. So sometimes that can be as early as day, but usually more B plus, and I'm going to brag on their behalf. They're amazing. Like you read the roster of their investments. It's just really impressive. What they've been able to.

And then we have a newer fund, which is actually the series a fund on the platform and it's called Sapphire sport. And that was launched two years ago now. Sorry, the pandemic makes timeframes just really wonky in my head and they focus again at the early stage they're direct and they focus at the intersection of media technology and sport, which when they launched this started thing about three years ago was much more nascent.

And now it's no in the midst of all discussions. So it's been really fun watching them do that. And that's a newer fund and it's smaller their own fund one. They're currently investing that you can, all the information's on our websites. You can check out each district.

MPD: [00:05:47] So between those different divisions, how has the capital split seven?

Billion's a lot to run. Yeah, I'm sure not all of that's actively being deployed at the moment. So how much do you know how much it's being deployed and how it's kinda divided? So

Beezer Clarkson: [00:05:59] you can go into, so we're registered with the sec. So I have to caveat everything with the RIA voice, but the sport fundraiser last, it was like 110 million ish.

Yeah. That's out there and in the growth funds deploying an $1.5 billion vehicle. Honestly I can't keep up. So what you're seeing on the website, it's a large vehicle and what you're seeing. And I also have the ability to ride up to the 75 or a hundred million dollar check. So they can really. So companies,

MPD: [00:06:27] so they're doing more series C and D and you can't move that kind of capital in a round.

Beezer Clarkson: [00:06:33] No, they tend to come in a little bit later as, post product market fit and you can do one of the things that's changed over time. And they've grown with it is that in the beginning, when they did their first growth fund in 2011 ish, when people raise growth funds, there wasn't a lot of additional wraps, right?

You raised a growth round and then you went public or got acquired. But now. We don't have a state private, forever narrative as prevalently in the market, but there's still a significant number of rounds that go and a lot of larger dollars. So they follow on and they support their companies. So the initial check might not be 75 million, but you can certainly move that into a company over time.

That's fantastic. We see it in the market. That's fantastic. And then on the LP side of the house, our fund is structured very differently. So the, both the sport and the growth fund, the Sapphire ventures, funders structured as traditional venture funds were structured very differently because as an LP art, we came to life in 2012 and the context is we had a chance to think through.

What do people want and help pay and what makes a great LP. And one of the key attributes is permanent capital. So we raised it's really an evergreen structure. We created it. It's synthetic, it's a complicated LLC, but we have the ability to take proceeds, right? When we get money back from our funds and use it to make future capital calls or other GPS.

And that's just an entirely different story. Than what the other vehicles use. And we do that because our GPS want us to have money when they need it. And that's our way of doing

MPD: [00:07:57] it. We're going to have to talk about this. We're gonna have to pause right there okay. So who are the LP? So for everyone who's listening, when, when you hear the LP it's limited partner, And those are the investors in venture funds in this context.

But LPs who are fund of funds also have their own LPs. So who's behind you guys. So

Beezer Clarkson: [00:08:18] We're just a different beast and we love it. And we're unusual and we bring unusual from day one and different is better than better. So we have a single source of capital for the LP side of the house. And we origin out of money from SAP, the large enterprise software company based in China.

And they are a fantastic LP because they understood that building our LP vehicle would take significant amounts of money and it's takes a significant amount of time. And then stopped. But now since we can roll the money for the ideas to really be a self-supporting sustaining vehicle, because as you make, as we make our proceeds, we can use that to meet our future needs.

So they've launched it, but the idea is that we'll just become our own.

MPD: [00:09:00] Okay. So you're let's just bring this down to reality. So let's say you're a super wealthy person. Who's going to fund a fund of funds that is an LP and other funds. Okay. If the money always gets recycled. When does your family get it back?

How does this work?

Beezer Clarkson: [00:09:17] You can meet you make more because the simple answer is we do have a high, we do have a high recycling need. But that doesn't mean to say, you have to use all of it. Like as long as you meet the needs of what. But also we is true about our platform is that we're very consistent in how much we deploy per year.

So we don't think of it as a people always ask what's your fund size. I just don't think that way, because it's not how we're structured. We deploy about 125 million in commitments per year. Again, this is the LP side. And is it flex up or down any given year? It doesn't matter. It's just, it's a number to shoot for what you're not going to do zero one year and be like, oh, the market's crazy.

And we're going to set it up. And then try to do 500 million the next year, like that, that will mess things up. But if you're consistent in how you're doing it, you can actually then plan for the future. And we do work with a carrier structure. So you can like Dell PC get fee and carry. And that's part of our structure.

Whereas an endowment and foundations, they have different structures because they don't work on a fee and carry basis. And we chose that purposely because also some out some fund to funds don't work on fee and carry. They get points. For the dollars under management. So if they raise a billion dollar vehicle, they'll get paid, whatever the basis points is on that kind of regardless of performance.

But if their performance is terrible, obviously they can't race in the future, but it's a different way of doing it. And we pick fee and carry because we live and die by the success of what we do. And we live and die by the success of our GPS. And we just want it to be aligned. Like we are, we're all in on venture.

That's all we do. We focus on it. And when we decided, when we launched the LPR and that's.

That's great.

MPD: [00:10:53] You guys are budgeting inflows based on fund cycles and outflows based on how much capital you have to make that. So

Beezer Clarkson: [00:11:02] we do a lot of math and also it's why in the beginning, for anyone who wants to start and evergreen LP base you do need to have commitments for a significant amount of money.

And it's not my place to share, but we have backstops. So if needs take a little while longer and you can do modeling usually. If you're a GP. And you're wondering when you're going to get most of your money back, typically it's between years, eight and 10. Now, when companies want to stay private longer, that pushes the curve out.

As one kind of imagined, which we can talk about whether or not that's actually healthy for the ecosystem because PSE employees of companies that are waiting on their options to mean something don't get as much. So there's some downdrafts to that, but you can model it out and assuming performance, you see when things are coming back.

So you do need. And I say this to people launching their new fund of funds. You really need to be able to see three or four fund cycles down the road for each of your GPS. So when we went to structure our business without sharing too much of the inner workings, like we, we were very conscious that it takes a lot of money to get this going.

MPD: [00:12:03] Yeah, it's fascinating because the risk in that for folks listening to me is. The varying time to exit for companies. And we're going to talk about that. I'm sure in this conversation a little bit more, but I want to talk about in the context of this in the three, four years ago, the liquidity in the market, there's no end in sight.

There's a lot of companies sitting, post unicorn status with no way out and the back boom was not about specs. I think it was about unclogging the back end of the phone. And so now we've got a, hopefully a more reasonable timeframe, but it's, I can imagine this is really hard to plan, but I guess works.

If your benefactor is wanting to write more cash or checks, you guys get stuck.

Beezer Clarkson: [00:12:52] How do I say it? You want to be, you want to lean forward, but still make sure you're thinking through all the different permutations of what the oh, things aren't going as well as you thought it might. What else do we do?

So we launched with that in mind. So we are mindful in the beginning. The other thing is when the LP perspective you have to take a very long-term view. It is extraordinarily unlikely. You're going to see any money back in any meaningful way from a fund before it's eight or nine years old. And if you don't land for that, It's historic.

You can look at it. Now, what we're noticing, just to throw an interesting curve ball out. We have crypto has been producing much faster and I don't know, it's just a blip because of this recent crypto market that we're in, but there has been a, you can see it everywhere in the market and this isn't just Coinbase.

You can see it in the tokens. You can see at different areas that there's been a lot of liquidity generally. I would call it more in a four to five year timeframe and that's, but it's very crypto specific. And who knows if that's gonna repeat beyond my powers of knowledge, that

MPD: [00:13:50] doesn't surprise me because I think everyone's betting they're on long-term prospects.

We were, we did see a Coinbase is series a

Beezer Clarkson: [00:13:56] congratulations. Thank you. You can speak more about, than about how crypto.

MPD: [00:14:00] No, but we there's, you're always betting on future prospects and. The crypto companies very often when they make money are in the flow of the capital. And so it's really easy to have a really substantial revenue model.

Cause transactions is, as most people know is one of the best revenue models out there on the web. All right. I want to take a step back though. So Sapphire is huge. You've got a lot of money under management. You've got a lot of companies. You have a lot of partners, too. How many partners are on the LP side alone?

Beezer Clarkson: [00:14:28] When you say partners, do you mean people on the team or do you mean investments that were.

MPD: [00:14:33] People on the team. Oh, we're tight.

Beezer Clarkson: [00:14:36] We're a tight team of about six we're hiring someone who is supposed to let me know tomorrow if they're going to take the offer. So

MPD: [00:14:43] if you're listening, take the job on the listener,

Beezer Clarkson: [00:14:46] let's see if he's there.

But Mickey, we keep the team tight for multiple reasons. It w we like being a small cohesive team, so it works for. The go team has. And if you look on the website and see everybody's names and faces, the growth team has grown. I was thinking I was person number 11 to join Sapphire in 2012. And I think we're going to be a hundred people in the next 12 ish months.

It's hard to judge because we've been, and a lot of the growth is on the growth team because as their fun sizes have grown, they've grown more people. We have a very robust, we call it portfolio growth, but think of it as this value adds a lot of thought leadership, talent, marketing, business development, connections, that team has grown significantly over the last.

Eight years. We have a number of people doing talent. And as I said, business development marketing, we also have from operations have to flex with you. Like any company you don't grow what you do without the infrastructure that goes with it. So we have a lot more people now in kilos, like heads of people and finance and all that.

That's

MPD: [00:15:48] fascinating. You don't hear that with a lot of the financial institutions having the full company been managed. Yeah.

Beezer Clarkson: [00:15:53] I would say, I think this is one of the benefits. I know I'm biased on that. Of being both an LP and a GP, is that when you're like if we're talking to our GPS and saying, this is best practice and we don't do it ourselves, like Adam apps, that's crazy.

So it does help, right? Because you know that, and we also on the direct side, invest in these amazing portfolio companies and you see how thoughtful they are and operating. And if you don't learn from that again, right?

MPD: [00:16:21] Yeah. Yeah, all the information is there. So how many funds are you guys invested on the LP side?

So you've got six people on the team. And how many funds do you. It's an

Beezer Clarkson: [00:16:31] excellent question. So the LP answer is actually a bit more about who your relationships are, because if you think of it as a firm, like interplay, like if we were an LPN interplay and you did four funds, I wouldn't think of it as if you asked me how many funds I'd be like.

Right. And then you might have an opportunity fund and the life science fund. So like these things so I honestly don't know how many funds we have of lost

MPD: [00:16:55] funds. We

Beezer Clarkson: [00:16:58] do run LPL portfolio constructions, just the same way GPS do. So we'd like to run a fairly concentrated world. So we have.

Baker's dozen for us relationships and our, I should give a little context. We do about 70% of our commitments on a dollar basis and to us managers. Okay. And then about call it 20 to 25% into European managers. And then the rest is in Israel and these are all early stage. Which we define as series a and some seed.

And we sometimes flex, like in Europe, we started out with more seed, which we can talk about if that's interesting and the same thing in Israel, but predominantly in the U S with focused on the series a and are exploring seed more, I should say now. But that also Dixon, your, we have another cancel for managers.

So we begin, we want to make sure that we the right size team for what we're doing, but you also, from a portfolio construction site standpoint, want to be mindful of all that because it plays, you. What's

MPD: [00:17:53] the profile of the fund that you guys invest in. So for folks listening, who are thinking about coming to Sapphire partners for the next fund, what's the number of partners are that?

What makes something a fit is it's gotta be more than series a,

Beezer Clarkson: [00:18:08] correct? Correct. So I answered this question in a way that I hope is helpful because we don't have a purse. We've definitely seen what best practices look like historically, but that doesn't mean to say. That's what it's gonna look like in the future.

And I think it's really important to be open to that. Otherwise you'll miss things. So instead we think about it as the return, the potential of a vehicle. So for series a, we underwrite them to a three X net. Meaning when we look at the collective, what they're investing in, who they are, their portfolio construction.

How they're doing all their stuff. Do we think that can produce a three X net? And it's easier if there's historical numbers to look at, but we have backed net, new company, net new funds to the world, and then it's, it's harder because you can't rely on past history to tell. And then for seed, we underwrite to a five X net and just to throw something funky out, I'm now hearing LPs ask about 10 X net, but he very smaller funds because I got to tell you the performances there.

In this market, if you had a piece of Coinbase and a $10 million fund, and you'd a significant piece like that could be it. We have funds, have we have funds that have double digit DPI and multiple double digit TVPI, which again, 18 months ago was less true. But in this market has just been. For certain areas on fire, not for all areas, but certain.

MPD: [00:19:27] So for folks listening, it's good educational opportunity where you explain DPI and TVPI

Beezer Clarkson: [00:19:33] sure. So the simplest way I think about DPI is that the money back. So if I invest $10 interplay, At the end of everything, net of everything, every cost, every tax, every everything. Do I make $3 back on my $1 or five or 10?

Or did I make $1 50 that's DPI because you have to net back the management fees and all these things, which ends up being, not that hard math, but you have a lot of line items and TVPI think of it as the numbers on papers. Your companies are still, some of your private companies can still be included. So let's say you have a position in what's a big company that hasn't gone public.

I don't know, pick your favorite. What's

MPD: [00:20:11] your course hero where we park as a couple we're

Beezer Clarkson: [00:20:13] in will have value of that. It hasn't matriculated as money back into your pocket or my pocket or wherever your LPs are. But on paper you might be, you show the growth and that's TVPI is total value to paid in capital, but just think of it as your paperback.

MPD: [00:20:30] And so not entirely realized.

Beezer Clarkson: [00:20:32] Correct. So there's a risk in there. Heaven forbid the markets go significantly sideways for a long period of time. It could evaporate. And the conversations that we end up having with our managers, I actually had one this morning with somebody who has a piece of a very significant unicorn.

It was do I sell 25% into the next private round because I can one X my fund on it. And you're like,

MPD: [00:20:56] It's hard

Beezer Clarkson: [00:20:57] decisions, hard decisions, and it there's an argument for doing it.

MPD: [00:21:01] What's your general advice? We faced that decision before for a newish fund. Take the fund off the table right now, the restaurant,

Beezer Clarkson: [00:21:10] I would say yes, that is the common wisdom, which is if it's maybe a max 30% of your position, if you can return your full fund.

And again, it's usually presumes. We usually have had this conversation with earlier investors, like on a cap table, because you also are less able than any GP can control when a company goes public or things of that. But you were more removed from the decision making. You might not have as much information rights.

So you want to make sure that you take some of that risk, but also don't you be sad if you sold everything. Maybe not because who knows, maybe it goes, it's a tough call. So people have been doing that as a way of managing the two options.

MPD: [00:21:48] I'm fascinated by something you said just a few minutes ago, you said you'll underwrite a series, a fund to a three X, even if they don't have any historical track record.

Beezer Clarkson: [00:21:58] No, not that it's, they're net new, so we haven't, we, and we're asking ourselves these questions should we include, wait, is backing somebody that's never managed institutional capital before we have not done. We have backed people who are spinning out of a sun and starting something new. We've back people who, where there's call it two or three GPS.

And only one of them has the long, longer institutional track record. And maybe the others only have angel and maybe some have the operating strength, but we haven't done the I've never invested in anybody. Else's capital. And that's, we can talk about this, but it's harder for institutional funds to do that.

And I know you had Graham from Sandana on your podcast before, right? And this is one of the reasons why I, there should be more Sandana is in the world, right? Because they need to be more people like lo Tonya plexus. I'll sing all their praises because people help somebody institutionalize for the first time is meaningful.

And we like partnering with them on offense because. It's not that we think there's a lot of opportunity there. It just demands a slightly different go to market by the LP. And you want to make sure you're prepared to do that. Otherwise I think Katie, if your GPA is hanging, so it's a bit of us thinking through how does it go to market?

And you're seeing like what your, when you were talking about with thunder and some of these other ways of matching people and an operator, and we cast these ways of also helping some of the new managers think through

MPD: [00:23:20] institutionalizing. Absolutely. Okay. So you talked about return history. I think we knew that was the.

The main thing to look for. How about what other factors that are a little softer underbelly of a selection process, maybe strategy or,

Beezer Clarkson: [00:23:33] We follow the same process for everybody, which is getting to know you through your investment world, because that's who you are from an investing standpoint.

If I took away mark and I just looked at interplay, I would hopefully build a sense of what you like and what you do and which entrepreneurs you're picking and who picks you. The simplest way. I say it as the why you question, which is why you, why are you doing this fund? Why are you going after this market?

And why do you think you're going to win? And then if there are people that you've invested in and we can talk to, to understand the role that you play those up, that's basically what we do. And the blocking and tackling looks like quantitative analysis references. And understanding the market. We tried to spend a lot of time understanding the market.

So when someone tells me what their strategies, it can resonate. I think it's a lot harder if you don't like, we're pretty, pretty focused on venture. It helps them cause things, you can hear stories and they make sense, you know, they're worse than even, and even, we back some strategy.

That you, to your point of does it always look the same? It just doesn't always have to. And right now I think is what's so fascinating is the distribution of ways funds are happening, like ventures, both becoming incredibly concentrated in big funds, like the rise of the mega funds and all the fundraising last year.

And this year clearly is getting hoovered up by a lot of big funds. But at the same time, the new end of venture is being really distracted. Amongst Scouts and angels, the syndicate structures. And there's, I don't have account. They're just not clipped accountant. The number of smaller five to 10, $15 million funds operators getting involved, that's super distributed,

right?

MPD: [00:25:09] An angel list is putting all that.

Beezer Clarkson: [00:25:12] Yeah, which is so interesting to see how all that's going to play out. I definitely hear traditional seed funds getting crowded out because of those newer entrance

MPD: [00:25:19] interrupts little side note here, I was talking to one of our LPs recently who was asking me for trends.

He's one of the reasons he invests is market insight. And I said, one of the most fascinating things I'm seeing happening is the full depth of institutionalization of capital for the entrepreneur. When I started in this business in oh six, it was the series a was the first one. And friends and family was everything before that.

And then the seed came out and to see pre-seed as a category is so exciting for me because I believe it's going to take thousands more entrepreneurs who don't have an uncle rich uncle to write that first check and put them in play. I think that break it, talk about democratizing. One of the things we wanna do a thunder, I think it democratizes the playing field in a really productive way to get more people with good ideas, regardless of background into the game.

Getting training and maybe building something awesome. Yep.

Beezer Clarkson: [00:26:13] And we're seeing. I don't have a front row seat to this. I always joke around and be like, the LPs are like the peanut gallery in the back row of the baseball field, but we see syndicates come together as operators. So that you'll say you're starting a company.

You can get money from people who are doing it at the angel level, who individually may only have a couple of thousand dollars. But correctively can support you. And that's super interesting and cool and democratizing. And that zero to one is so hard.

MPD: [00:26:42] What happens in the world? If everyone. Or at least a huge chunk of people.

Good things. I think good

Beezer Clarkson: [00:26:47] things. I think when I look at the world and my son's mom, why are you guys all destroying the world? Don't, climate change is an issue I'm like, but wait, there's smart people fixing it.

MPD: [00:27:00] Okay. So there's other two other dimensions that come up a fair bit for folks who have ever raised capital one it's around the team, obviously. And one of the heuristics, I hear that a lot of LPs are focused on is the time the team has worked. Usually as a signal for the durability of the strength of the relationship an