Aram Verdiyan — Accolade Partners
We talk about how Accolade picks fund managers, why Accolade is raising a blockchain-focused fund of funds, the importance of references, their framework for direct investments and more!
Aram Verdiyan is a Principal at Accolade Partners, a Venture Capital and Growth Equity Fund of Funds which has invested in the likes of Andreessen Horowitz, Accel, Kleiner Perkins and others. Aram was previously at Andreessen Horowitz, Aviatrix and Deloitte.
We talk about how Accolade picks fund managers, why Accolade is raising a blockchain-focused fund of funds, the importance of references, their framework for direct investments and more!
NA: Hi Aram, thanks for joining me. I thought we could start with talking about your background, how you got into the VC space, and then blockchain and crypto?
AV: I worked in real estate during my college years. This was around the financial crisis and doing commercial mortgage financing in 2008/2009 was really difficult. It served as a tremendous learning opportunity while still in school.
My first job out of college was working at Deloitte in their financial services sector, around the time when a lot of local and community banks were shutting down. After that, I cold-called my way into Accolade, which was about 10 years ago.
Admittedly, I had limited knowledge about private equity or venture capital, let alone blockchain. After almost four years at Accolade, I decided to get operating experience, so I went to work at Aviatrix, one of our underlying portfolio companies. I was one of their early business hires, working in business development, marketing and sales. After that, I was fortunate to have the opportunity to attend Stanford Business School, which was a transformative experience for me. During graduate school, I worked at Andreessen Horowitz in the FinTech group and led the venture capital club at Stanford, allowing me to expand my Bay Area network dramatically. After finishing business school, I returned to Accolade. At Accolade, I focus on everything from investing to fundraising, as well as managing our team of investment analysts and associates. We are all generalists across strategies.
By way of background, Accolade is a fund of funds and we’ve been around for 20 years. We currently manage US$2 billion in assets primarily on behalf of endowments, foundations and family offices. We have three products. We have a fund which is half venture capital, half growth equity. Within venture, we primarily focus on early-stage (seed/Series A) managers. We define growth equity as bootstrapped software and healthcare companies.
We also have a growth equity-only fund of funds, and more recently we launched a dedicated fund of funds on the blockchain side.
NA: It’s great that you worked at a startup and also on the direct investment side. Why did you do you think that this was the best time for Accolade to get into raising a specific blockchain fund of funds?
AV: We started investing in blockchain in 2017. We invested in two firms.
Originally, we invested in the Andreessen Horowitz Crypto Fund. Chris Dixon started a dedicated effort under the Andreessen umbrella and we had known Chris for many years before that. He was investing in blockchain since 2013 and was an early mover in the space.
The other firm we invested in was Notation Capital and they dedicated a significant part of their fund to blockchain investing. Through that time, we learned about blockchain through those firms. I would also say in 2017–18, we didn’t feel like there was a critical mass of quality managers in the space that warranted a dedicated product and secondly, there wasn’t a lot of traction in the industry itself.
In 2017, we saw the run-up in ICOs primarily driven from retail. There were a lot of ICOs and white papers that amounted to mostly nothing. We felt like there was a lot of hype, but not a lot of traction.
If you fast forward to 2019, we began to see traction in various areas of blockchain from infrastructure, layer-1 protocols, decentralized finance, etc. and significant developer talent started to enter the space from universities such as Stanford, MIT and Berkeley. We even saw the Andreessen Crypto School gather thousands of applications in a few months.
Then, most importantly, we came to the point where we saw spin-outs from firms like Sequoia, Benchmark, Lightspeed and Union Square to focus exclusively on blockchain. We’ve now looked at over 80 venture only blockchain firms. This does not include actively-traded funds, quant funds or index funds. They can be open-ended or closed-end funds, but they’re taking a venture approach. Of those 80+, we do think there is now a critical mass of quality managers that warrants us to have a diversified portfolio via dedicated blockchain fund of funds.
LPs today, whether they be an endowment, foundation, or family office, want to get access to blockchain. They can do so in multiple ways, they can access it directly by buying an asset through custodians like Coinbase, but they will be taking a single asset risk, and potentially lots of volatility. Alternatively, they can invest directly in a VC fund. In that case, they are taking a single manager risk. Oftentimes those managers are specialized by geography, subsector, stage and fund size.
We believe that one of the most effective ways for our LPs to get exposure to blockchain is via a diversified portfolio of the top seven blockchain managers and commit to those managers over a multi-year period. The diversification would come across many dimensions — sub-sectors (infrastructure, DeFi, consumer applications, broader generalist), geographies, stage and vintage year. We believe we can bring our over 20-year history of conducting due diligence on venture funds to the blockchain space. We were also ranked the number one fund of funds by Preqin and have generated top-quartile returns relative to direct benchmarks.
NA: There definitely has been a lot of increase in high-quality managers in the space. In a broad sense, in your experience, where do you see prospective fund managers fail when pitching to LPs like yourself?
AV: We have extensive criteria when it comes to manager selection. On the team front, we are looking for an institutional investment track record. Many managers will make one or two angel investments in the blockchain space but we don’t view that as a relevant track record to start an institutional fund. We are looking for investors who trained at established firms, have constructed a deep blockchain portfolio by leading deals at the earliest stages and can reference well with entrepreneurs.
Being very technical is also important. Blockchain as an industry is totally different from traditional venture. The sourcing is completely different. For picking and diligencing a deal, you need to have blockchain specific technical skills. To win, you need to have an understanding of how to participate and assist in the governance of these networks. Many of the top firms have deep technical knowledge and PhDs in areas such as distributed systems and cryptography.
I think the third one is not a must, but it’s a nice to have. We look for teams who have a historical operating context in the space. Folks who have been early with some of the most established blockchain companies, whether you’ve been working at Coinbase early on, or been a co-founder of a blockchain company. That historical context is important as it helps to relate to entrepreneurs on a different level, as well as help in the company building process.
NA: How do you go about evaluating second-time fund managers, who have just finished investing their first fund? You can see their portfolio but might not be able to see returns.
AV: That’s a great point. If you invest in fund one, you’re most likely going to invest in fund two, unless something goes wrong. We look for consistency in the strategy, deployment and team relative to what they articulated when raising the first fund. So, if a manager said they’re going to come in early and have a concentrated portfolio, then we hope to see evidence of that in the portfolio. We also do significant reference calls with entrepreneurs to get comfort around the portfolio.
To your point, you’re not going to have a ton of traction in the portfolio, but at the very least you’ll get a good feel of the companies and how they’re doing. So as long as there are no significant changes on the team, the fund is tracking in the way they said it would, the portfolio has been constructed based on what they articulated when they raised fund one, you’re very likely to re-up with them.
Typically, it’s usually fund three in traditional venture when the rubber hits the road and you really have to have traction in fund one, whether realized or unrealized. That re-up becomes much tougher if you don’t have traction.
NA: Sure, that’s fair. You’ve mentioned a few times already, part of your due diligence process is reference checks. What would you say are the best types of references?
AV: The highest signal usually comes from portfolio company CEO references. You tend to get a lot of insight by talking to portfolio company CEOs — how the manager won the deal, adds value and, more broadly, how they compare to other investors. Then you also get a sense of the company and its traction. Portfolio company CEO references are a must, and we do that extensively with each manager. We also try to do off-sheets references as well, based on the mutual contacts we have and the connections we have with the firm. Lastly, we do LP references and GP references.
NA: I’ve seen that Accolade also makes direct investments. What really prompts that? What is the decision process to make a direct investment?
AV: We started making direct investments since 2012 in our fourth venture and growth equity fund of funds. The reason we started doing that is we saw an opportunity to put capital to work in some of the best deals from our venture and growth managers. We had access to those deals and we knew the management teams of those companies. Starting with our fourth fund of funds, we decided that up to 10% of our funds would be allocated to co-investments. The criteria would be deals that are post product-market fit, usually at least US$10 million in revenues, and they don’t exhibit any team, product or market risk. You’re really taking on execution risk as these companies have to scale sales and marketing.
In terms of our blockchain fund of funds, given how nascent the industry is, you don’t always have the same sort of revenue and traction comfort that you get on the traditional tech side to make direct investments. We have decided to stick to fund investments only and to create a first-class portfolio of fund investments for our LPs. In our successor funds, we may revisit making direct investments in blockchain.
NA: We talked about this in our last chat when you went to raise for the blockchain fund of funds, how was that experience with your LPs? Was there a lot of education involved? Were the LPs critical of it? Do they still view Bitcoin as a scam?
AV: We are currently in the process of raising our dedicated blockchain fund of funds. A question we get a lot during fundraising is, “is this blockchain or is this tokens/cryptocurrency?,” which is really interesting because blockchain technology by itself, is an open-source decentralized record-keeping system that has been around for many decades. The real innovation in blockchain is the token-based business model built on top of blockchain. Historically in technology, the value exchange was only been programmed into the application layer. With blockchain, you can have that value running on the actual protocol layer through token design where all participants in the company (suppliers, consumers, third-party providers etc.) participate in the upside of that company. That construct allows for far greater network effects and larger outcomes than traditional venture. That’s a big educational piece to our LPs, walking them through the token model and how that’s analogous to equity with the ability to have bigger outcomes than traditional network effects tech businesses. We also offer an educational component for our fund of funds, which resonates with a lot of LPs.
A number of the institutional LPs we talk to think they should have exposure to blockchain. It’s a great call option for their portfolio with significant upside. There are folks who think it’s very risky and we respect that too. It’s not for everyone, but we have had great reception with LPs who believe that if they want to have access to blockchain, our fund of funds is one of the most effective and efficient ways to do that.
NA: You did a little bit of time at Andreessen and making direct investments, how different is that in general?
AV: There are some similarities and some differences.
As for differences, it goes back to the concept of taking a single asset risk versus looking at a manager and subsequently, their whole portfolio. With fund investments, we take a 10,000-foot view of the whole fund portfolio versus looking at one company only. It’s a very different analysis in that we look at the team, the portfolio of the previous funds and the track record. There are a lot of qualitative aspects that go into it, such as portfolio construction, fund strategy, reference calls, value add to portfolio companies. So, I think from that standpoint, it is very different.
As for similarities, at the end of the day, you are evaluating a team. Whether you’re evaluating the CEO or the fund manager, you apply some of the same frameworks.
What is helpful is having been on the other side and doing direct investing, I have a really great sense of how venture firms operate from the other side. It is much easier to relate to venture firms, and much easier to understand and diligence them. I can speak their language. From that perspective, it’s been instrumental in building strong relationships.
NA: What is an investment that you have made that you can talk about?
AV: We have made fund commitments to Andreessen Horowitz’s second Crypto fund and Polychain Capital. These are two of our core fund managers in our fund of funds, and we’re finalizing two more fund investments that we are very excited about.
NA: They definitely do have a great reputation.
AV: The last thing I’ll say is if you think about blockchain today, it resembles the early to mid-nineties in terms of internet adoption. If you were constructing a venture fund of funds in those years, hopefully, you would be picking names such as Benchmark, Sequoia, Kleiner Perkins, amongst others. I’m not implying that we’re going have early nineties venture returns through our blockchain fund of funds, but I do think the upside is significantly high. At the same time, because we’re taking a diversified fund of funds approach, the downside is much better protected for our LPs.
NA: Well your first few investments seem like solid picks. I had a great chat Aram, thanks so much for taking out some time!
AV: Of course, I really appreciate you doing this. Thank you.