E251: Why 95% of Funds Don’t Pass LP Diligence w/Alex Edelson
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode, LP Alex Edelson, founder of Slipstream and former COO of QED Partners, shares insider perspectives on how top seed funds are leveraging AI and what it really takes for emerging managers to secure LP capital today. (00:11) The conversation explores Edelson's unique approach to LP investing, which combines his operational background with deep venture expertise to identify GPs who can achieve top-decile returns. (02:16) He discusses the critical importance of "real talk" references, portfolio construction strategies, and how his experience at QED gives him a different lens on what makes venture funds successful. (10:48)
- Main theme: How sophisticated LPs evaluate emerging managers and what separates good GPs from exceptional ones in today's competitive landscape
Speakers
Alex Edelson
Founder of Slipstream, one of the most respected LPs backing elite seed funds today. Previously served as COO at QED Partners, a leading fintech venture firm where he gained deep operational experience in building successful venture funds. (02:29) Prior to venture, Edelson was a trial litigation attorney for seven years, which he credits with helping him conduct more effective reference calls with founders and VCs. (16:16)
Key Takeaways
Master the Art of "Real Talk" References
Edelson reveals that getting honest feedback during reference calls is often the source of LP alpha. (14:51) While other LPs might receive standard positive feedback, he consistently uncovers more constructive, nuanced perspectives from the same references. This happens through three key factors: having long-term personal relationships with founders and VCs, using a warm and disarming conversation style, and applying his litigation background to ask probing questions that lead to substantive insights. (16:14) The quality of references often determines investment decisions once basic screening criteria are met.
Focus on Portfolio Construction Over Pitch Perfection
Unlike many LPs who get distracted by polished presentations, Edelson looks for sustainable competitive advantages in sourcing, picking, and winning deals. (13:38) He's learned from his QED experience that great returns can come with operational "messiness" behind the scenes - what matters is whether a GP can consistently get in front of great founders early and convince them to work together. (11:57) This perspective allows him to invest in funds that others might pass on due to surface-level concerns.
Embrace Anti-Selling as a Filtering Mechanism
Rather than trying to convince every potential investor, Edelson practices "anti-selling" - being transparent about why an investment might not be a good fit. (32:06) This approach, learned from observing Nigel Morris at QED, serves as a prioritization tool that ensures proper alignment between LP and GP expectations. (33:14) By discussing potential downsides upfront, like illiquidity timelines and capital call schedules, he filters out misaligned LPs while building credibility with the right partners.
Increase Shots on Goal for Deep Tech
Edelson has evolved his investment thesis to favor funds with 25-35 portfolio companies over more concentrated approaches, particularly in deep tech. (06:54) While he still values high ownership relative to fund size, he recognizes that deep tech's potential for massive wins justifies taking more shots on goal. (07:23) This represents a shift from his previous preference for highly concentrated funds with fewer than 20 companies, reflecting the changing dynamics of venture capital and sector-specific requirements.
Build Relationships Through Value Creation, Not Pitching
Edelson's approach to winning LP relationships mirrors his GP evaluation process - he provides value before asking for investment. (04:04) By helping GPs think through portfolio construction, fundraising strategy, and LP base development, he earns his right to invest through demonstrated expertise rather than traditional sales tactics. (05:00) This consultative approach builds long-term partnerships and differentiates him in a crowded LP landscape.
Statistics & Facts
- Edelson's initial screening process eliminates 95% of funds before he even conducts references, highlighting how selective top LPs must be in the current market. (18:14)
- He estimates that LPs need to see 100-300 fund pitches to properly calibrate their evaluation framework, with at least 50 pitches required to identify obvious "no" decisions. (25:14)
- The median return in venture capital is actually slightly below private equity, but the mean return becomes attractive due to the asymmetric upside from 10x, 20x, or 30x fund returns. (22:52)
