Uncapped #34 | Mel Williams from TrueBridge
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, venture fund-of-funds expert Mel Williams shares his unique perspective on the current state of venture capital from the vantage point of someone who picks which VCs to invest in. (01:33) Williams reveals his excitement about the early stages of an AI wave that will power business opportunities over the next 10-15 years, while acknowledging the frothy investment environment, particularly at early stages. (01:59) He discusses the paradox of venture today: expecting both significant carnage and unprecedented value creation over the next decade. (05:07) The conversation explores venture fund dynamics, the importance of concentration and conviction, and the characteristics that separate exceptional investors from the pack.
- Main Theme: How to identify and invest in exceptional venture capital managers during an AI-driven market cycle characterized by high valuations, increased competition for deals, and the growing dominance of platform firms.
Speakers
Mel Williams
Mel Williams is co-founder and Partner at TruBridge Capital Partners, a fund of funds with $8 billion in assets under management focused on venture capital. Since 2007, his team has backed premier firms like Thrive, Founders Fund, Sequoia, and Altcap, and powers the data behind the Forbes Midas List. Before TruBridge, Mel co-founded UNC Management Company (UNCMC), where he worked closely with the President/CIO to manage over $2 billion of endowment capital for the University of North Carolina.
Key Takeaways
Follow the Signal vs. Create the Signal in Competitive Markets
Williams distinguishes between the 10% of venture that creates market signal (firms like Sequoia, Founders Fund, Thrive) and the 90% that chases it. (10:51) In today's environment, being associated with signal-generating brands provides founders with advantages in raising additional capital, attracting talent, acquiring customers, and navigating regulatory environments. For most investors, especially early in their careers, following proven signal rather than trying to create it offers better risk-adjusted returns. (38:16) As Williams notes, "I would rather cry over the investments I didn't do than the ones I did put in the portfolio."
Concentration Drives Exceptional Returns
The most successful venture firms concentrate heavily into their winners, often having 60-70% of their portfolio value in just three names. (20:32) Williams identifies two critical characteristics of exceptional investors: approaching markets from a contrarian or first-principles standpoint, and having the conviction to "push their chips on the table" when they see something working. (19:07) TruBridge has concentrated their own portfolio from 18 managers in their first fund to 11-12 managers today, force-ranking their portfolio annually and making tough decisions to drop underperforming managers.
The Platform vs. Seed Specialization Dynamic
Large platform firms have historically struggled with seed investing due to negative signaling effects that hurt their downstream investing capabilities. (21:21) This creates opportunities for specialized seed managers who can focus exclusively on that market segment. Williams seeks seed managers with three qualities: exceptional track records, unique angles that generate proprietary deal flow, and the ability to build personal brands that help them stand out in competitive situations. (24:43)
Fund Size Must Match Firm Capabilities
While fund size matters for returns, the critical factor is how fund size relates to a firm's capabilities - their investment team size, strategy, conviction level, and access to founders. (16:20) Research shows that firms get into trouble when fund sizes more than double from one fund to the next. (17:10) Williams illustrates this with firms going from $700M funds with 25 companies and $15-20M average positions to $1.4B funds requiring $40M average positions and $70M in winners - a shift that requires significant changes in conviction and decision-making processes.
Network Building Is the Foundation of LP Success
For institutional limited partners, network quality directly correlates with deal flow, insight generation, and decision-making capabilities. (37:21) Williams emphasizes that distinguishing between luck and skill in venture managers requires having a strong network to understand what really happened in successful investments. (32:09) His advice to young LPs is to "focus on building your network" and "work really hard to make those relationships authentic" because in venture investing, "you're only as good as your network." (37:38)
Statistics & Facts
- TruBridge Capital Partners manages $8 billion in assets under management focused on venture capital, having backed firms like Thrive, Founders Fund, and Sequoia since 2007.
- AI represents 50-60% of venture activity today, creating a supply-demand imbalance where there's more demand than supply in the AI space. (04:23)
- TruBridge has concentrated their portfolio from 18 core managers in their first fund to 11-12 core managers in their eighth fund, consistently concentrating over their 18-year history. (33:53)
