Being Unfashionable is Fashionable - Especially with Venture...

I live very close to Tysons Galleria - a mall described as “destination luxury.” While I love having coffee meetings on the 3rd floor (great acoustics, tons of space, and never busy), I usually only walk out with a to-go dinner order. However, last time, I rode the escalator up one level from Sweetgreen, and walked into the Balenciaga store. 

Kim Kardashian is a brand ambassador, and has been a longtime supporter. Although I keep up with plenty of trashy reality shows, I don’t keep up with the Kardashians. So, I know very little about the brand…outside of my wife telling me their products are all heinously ugly.

Based on the store layout and products consistently featured in their window displays, purses are clearly the intended stars of the show. While luxury purses actually seem to hold their value well (even with the absolutely insane markups on materials), they’re appealing to a pretty narrow buyer base. Kim K’s $7,900 Bel Air carry-all bag is not affordable for most consumers. However, they do have some slightly better priced options - including the $1,500 small tote bag.

While purses were the main feature, shoes also featured prominently on their display cases. I don’t ever carry a purse, but I do wear lots of shoes, and don’t mind a wild color pattern. While my son would probably get a kick out of the $1,125 Autograph shoes - I could also buy a blank white shoe and hand him some markers. I’d also end up with a true 1 of 1 shoe with random squiggles and some sentimentality…for 5-10% of the price. 

Since I cannot remotely justify buying a $1,125 pair of shoes, I asked about another wardrobe staple - a t-shirt. Since he’s not the cleanest eater, any shirt can quickly become a splatter painting. Even before we had our son, I usually spent less than $25 or $30 on my shirts. I was quickly out of luck with shirts too…the cheapest t-shirt was $575. And, best of all, it looked like someone went to a free logo creation site, picked the first random logo, and printed it on a shirt.

I do see plenty of people wearing Balenciaga shirts, so they may be the ones laughing all the way to the bank. The profit margins have to be absolutely ludicrous - and it’s free advertising for their other pricey items. However, since this is not a fashion blog, I’ll get to the point and tie-in:

The big name venture funds are the closest equivalent to luxury brands. Some of them have earned their status, and continue to produce very high quality products for LPs. However, lots of big name funds have generally bad returns - and continue to rake in large commitments. Some of this comes from their amazing marketing teams, and built-up aura with their prospective LP bases. For years, LPs fought for allocations, and bragged about having the privilege of investing. However, these days, most funds are accessible to everyone (via wealth advisors and other institutions). 

Every fund is a bit different, even inside the same firms. However, most big name venture funds tend to underperform (they’re almost always the biggest ones) vs. their lesser known, much smaller peers. There are plenty of other data sources for venture fund returns too (pensions and endowments tend to list their holdings/results) - and most of them point to the same story. While LPs are rarely going to brag about investing in a solo-GP’s $20m fund, or a no-flash fund - they will likely have far better returns. 

At this point, I’m working with around 380 other funds - very few are in SF/Silicon Valley, and almost none are the biggest name funds. My investment style does not mesh with the largest funds – most of my companies are acquired many stages before these funds write real checks. But, I do see their returns via my own LPs, and hear about non-core deals from my fund network. Some of this comes from having a really wide net (generalist investor) and network, but most of it comes from being obsessed with the asset class. I want to read anything I can, see everything, and know how deals went (especially the ones I almost did). 

While I do see a lot of things from day to day vantage point, I’m biased toward smaller funds. I’m also biased toward the funds I work with - I want more LPs in their funds, and more LPs in the long tail of the venture asset class. However, the data is pretty unequivocal - smaller, lesser known funds will usually have the best returns. 

At the end of the day, LPs are not exactly choosing between a $1,050 Balenciaga shirt (that looks like a high school pep rally product), or a $37 NBA shirt. However, one represents a “feel good” purchase, and the other represents a practical one. Most big name funds are the $1,050 shirt - and most smaller funds are the $37 shirt. Both are 100% cotton shirts and have NBA logos. But, that $37 shirt will be a far better investment…it just won’t be a fashion statement.