Interview: Court Lorenzini of DocuSign on being a LP

Watch the interview with Court Lorenzini, co-founder and former CEO of DocuSign, and LP in 15 funds with over 60 additional investments in early-stage companies across the world.

On the VC Asset Class

VC typically performs equally or better than other less risky assets

If you look at the asset class of private equity and sub-segment that down into startups you are looking across the ecosystem and saying “Where is this performing relative to other assets in my portfolio?”.

I’ve got many options to put capital to work and as an asset class even though this one is riskier it typically performs equally or better than what others would classify as less risky. To me, it’s a combination of asset allocation performance but also when you find managers who are outperforming they are generally radically outperforming. So you tend to pile up on those and that’s fun to watch and help those managers.

On VC Asset Allocation

I don’t have a specific number and I’m not aiming for a target amount with respect to my overall portfolio

This for me is a community with which I’m very comfortable. So as an asset class, I walk into this with my eyes wide open and I understand the risks, metrics and value. That being said, my portfolio to some might feel over-allocated to VC. I’ve probably got around 25% allocation in this class. 

But I’m not looking at the percentage. If I have a huge win in the portfolio I’m not really going to slow down my allocation to this asset class. I’m constantly looking at where my currently illiquid assets are and I have a bet that they’re going to become liquid at some point, or some portion of them will. So I’m not strict about that, to be honest.

On Evaluating New Fund Managers

I get very worried if I see a first-time manager saying they’re going to raise a giant sum of money

How much money I put into new fund managers really depends on many factors. I usually invest anywhere between $300k – $500k the first time out, depending on the extent of the manager’s track record. This gives me a feel of what this person will be like. Over the long term, I can put in around seven figures.

In evaluating a manager in the early stage, I firstly look at their deal warehouse, if they have any. I look at what those companies look like and talk with a few founders to see what really attracted them to this particular manager. I want to see if they have access to deal-flow that I want but am currently not exposed to. 

Importantly, I also look at the size of the fund they’re planning to raise and how they plan to allocate that. If a new fund manager says they’re raising a very large sum of money, that’s usually a red flag for me. To both raise and deploy large sums of capital is not a great thing for new managers. I also look at the size of the partnership, relative to the amount of capital being raised. I want to determine how many firms they can actually invest in or what they plan to invest in. Additionally, I look at how much time they’re willing to spend on each investment.

On Follow Up Investments

At this point, I can assess the fund’s performance

I have a couple of managers in the portfolio that have come back for second funds. I will say that in most cases I have re-upped with a bigger number in the second fund as generationally the funds get larger. 

I will put a certain amount of capital to work in the first fund and then wait to see how that performs. And then when they’re back in the fundraising mode I assess again and ask some questions. How do they pick? What are those companies looking like right now? Have they had any exits? Have they had any follow on investments? What do those look like? What are the things that they’re doing that make them stand out amongst fund managers?

On Sector Focus

I stick to markets in my experience base which is B2B Enterprise Software

One thing I check is if we are sector-aligned. I tend to know the sectors that I’m most comfortable in and can make a reasonable assessment. I tend to stick to my knitting in the sense that I’ll invest with folks that are going to build funds in areas that I probably have a deeper level of understanding.  

For example, there are some terrific pickers in the healthcare space and they’re successful as hell out there. However, because it’s not in my experience base it’s hard for me to initially judge whether they’re good or not. And so I tend to remain on the sidelines. 

There are lots of LPs who come from that space who are better suited. Flip that around and say enterprise software and consumer-facing companies, I know that space quite well. I’m very comfortable there and even climate, greentech as well as fintech, I can get comfortable with. So there’s a lot of spaces I’m okay with and there are a few sectors that I know I need to probably stay away from.

On Terms and Economics

Co-investment rights are very important to me

I have one other strong request that I make of all fund managers. I want to support the fund I want to be there and put a big chunk of money to work. But I also am very specific that when I make that investment, I also want co-investment rights when those opportunities present themselves. 

If the fund is looking for other people to jump in and add more money to the company it’s my expectation that I’m acting more like another venture investor than an adjunct to the fund in that context. So in such situations, I want no fees or carry on those co-investments as I’m in the fund already

On Being an LP

When they call I respond

I’m very active in the funds I’m an LP in. Again, part of my ethos is to operate in a way that not only provides capital but also my layers of experience to portfolio companies in the moments they need it. I’m always offering myself up to all the funds that I participate in as a resource and I’m extremely active in those funds.

As an LP, I want to economically grow the basket and put capital out where the entrepreneurs are, as opposed to pushing them into 5-10 economic centers. I think that model is tapped out. So as a significant backer of VC Lab, it’s important to me to back fund managers that are focused on undercapitalized and underserved markets. This is really important, however, these businesses must make economic sense. The deal still has to pencil out as that cannot be the only vector you judge.

One of our prime theses for myself and my wife is backing people from diverse backgrounds. We have a family foundation that my wife runs and we also have a for-profit entity that I run. In both of those, we look to deploy more than our fair share of capital to minorities and women investors, who themselves are investing in that sphere.

On How VCs Can Add Value

Support founders not just in lip service but roll up your sleeves and spend hours with them

As a founder, the thing that made the most impact on me was when the VCs were willing to lean in more frequently and with more direct help than strictly attending board meetings. This is to the degree they offered their time, resources, and personnel in critical moments when I needed them. Whether that would be help in recruiting, access to somebody to help build out a new financial model, or ideate brand development, a product roadmap modeling …etc. 

Be there for companies when times get tough. Most companies are statistically not going to make it or going to scuffle, struggle and have all sorts of weird development trajectories. It counts a lot when you are there in those moments as a supporter.

You’re trying to sell yourself in a competitive landscape. Talk to people that have had that experience with you. Give founders those referrals and let them hear how you’ve made a difference in those other companies. That’s a huge deal.

On Advice to New Managers

As a new manager, you are learning your craft as much as the company is trying to learn its trajectory

You need to balance and spend an adequate and appropriate amount of time with each investment to nurture them in a proactive way. Not over nurturing and stifling them or, under allocating your time to them so that you’re meeting them on a quarterly basis only at the board meetings.

The size of the fund and ticket sizes are important. If you’re going to raise a $10 million fund and you want to put $250k to $500k in the first ticket, I expect you’re not going invest in more than 20 companies. If you think you’re going to invest in 50 companies I probably have a problem because that’s just spreading yourself too thin.

The size of the fund and the partnership team size relative to that is also very important. I like to see more than one partner and also I like having at least one ex-founder in the partnership. I think this brings an absolutely essential view to governing and managing companies in their lifecycles. 

On How LPs Pick Fund Managers

If they’ve demonstrated good team development I’m willing to give them a shot

I’ve backed quite a number of new fund managers. New managers are out there just sorting through the piles of opportunities that exist. And they’re all are looking for a way to demonstrate that they’re good pickers. Statistically speaking you’re not going to win on all or even most of your picks and that’s okay.

The real thing that I look for is their history in picking people and judging how to build good teams. If you can demonstrate to me that you have the ability to find, recruit, hire, train, develop and allow groups to succeed at a significant level, that is a great sign.

This is because you can take a great company and run it into the ground with mediocre people and a great idea. But if you have a mediocre idea and you put great people around it you’re more likely to succeed. So I’m first and foremost looking at that as a judgment and frankly, I think that’s a pretty decent pattern to match.

On Fund Operations and Reporting

I don’t need to see how the sausage is made
What I need to see is the sausage in the packaging

As an LP I just want the information available for me to consume. For example, one of the best fund managers in my portfolio has a semi quarterly status letter that gives me an overview of the operations of the fund with concise updates such as what they are excited about and what they are looking at. They have information on the portfolio companies, which allows me to dive deeper into individual performances.

The fact that they are taking the time to keep me informed of their progress, with documentation, gives me a lot of confidence. I don’t know that necessarily denotes a better manager, but it definitely gives me as an LP more confidence in their ability to organize their thinking, their communication, strategy, and keep their LPs involved. This, by the way, is one of the funds that has come back for more money, and I have put a lot more money in.

On Big Competitors

New fund managers are not competing with the likes of Tiger Global, if you think you are then you are wrong

First of all, you’re competing for different deals. You’re competing with the other folks who are also $10-$20 million funds and are writing similar-sized checks to you, or maybe slightly bigger than you. But the bigger the fund, the more money they have to put to work in each deal. It doesn’t make sense for an Andreessen Horowitz to invest $100,000 in anything. 

They can’t make the numbers work. They don’t have enough partners, time or energy to go around to compete with you at that size. So make sure you know who your competitors are as those peop

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