Ryan Akkina: How MIT Builds Their Venture Fund Portfolio & How MIT Approach Direct Investing | E1109

Market Conditions and Industry Evolution

• Venture capital has transitioned from a high-margin "boutique" cottage industry to a commoditized, low-margin business with seismically changed dynamics.
• The investment landscape is now more complex due to expanded stages, geographies, business models, and sector specialists, making the "sit back and wait" strategy used for top Series A firms ineffective.
• MIT Investment Management Company (MIMCO) faces increased competition and reduced capacity for large checks in top-tier funds, often being relegated to smaller allocations that may not be worthwhile for the firm.
• The current downturn offers a favorable environment for emerging managers, as it reveals which firms are truly dedicated through their ability to raise capital amidst scarcity and lower valuations.
• MIMCO's annual venture deployment fluctuates significantly by cycle, peaking at $3 billion in a single year (c. 2021) and dropping to approximately $1 billion in the current constrained environment.
• A 43% reduction in entry valuations for the last nine companies compared to 18 months prior suggests that while deployment is slower, entry prices offer better potential returns.

Manager Evaluation Framework: "See, Pick, Win, Service"

• MIMCO evaluates managers across four dimensions: seeing a high volume of deals, picking the best ones, winning allocation against competitors, and servicing founders effectively.
• While many managers are excellent "pickers," MIMCO prioritizes "winning" and "service" because hundreds of GPs have good deal flow, but few secure allocations or maintain high Net Promoter Scores (NPS) with founders.
• Track records are weighted by career maturity; for new funds, MIMCO biases toward managers with an angel track record but places greater emphasis on qualitative factors like likability and founder feedback.
• A successful investment thesis requires "winning" allocation; a GP cannot succeed if they can only see deals or pick winners but cannot close the transaction against competing firms.
• Founders select GPs based on long-term partnership vibes; MIMCO notes that firms like Sequoia succeed by maintaining partners with distinct "flavors" that appeal to different entrepreneur profiles.

Risk Management and Lessons Learned

• Successful funds often fail due to three main factors: growing too quickly and moving out of their sweet spot, arrogance leading to worse decision-making after a spell of success, and a loss of internal motivation.
• It typically takes 3–5 years for a fund's trajectory to become clear, as the necessary feedback loop of wins to secure better deal flow often requires this duration to establish credibility.
• MIMCO's most significant direct investment loss occurred in a high-leverage shale oil venture that failed due to high decline rates, the need for continuous balance sheet reinvestment, and unfavorable market timing during an oil price drop.
• The firm regrets "errors of omission" regarding major opportunities like OpenAI, citing unclear technical success paths at the time and unusual structures as reasons for passing, though they acknowledge the opportunity cost.
• Direct investing allows MIMCO to use structured notes with protected downside (e.g., Coupang's senior note), enabling high conviction even when blind pool fund exposure is limited.
• MIMCO rarely sells secondary positions at a discount because they wait for prices that preserve IRR, only considering sales if forced by dire liquidity needs.

Operational Strategy and LP Relations

• MIMCO maintains a portfolio of 6–8 core large partners ($50–150M checks), ~20 mid-sized managers ($10–20M checks), and ~3 early-stage/co-investment partners ($1M checks).
• The firm avoids "12-month deployment" timelines, viewing the lack of discipline in 2021 as a missed opportunity for risk management, though they acknowledge market forces made this common.
• Liquidity constraints remain a challenge due to the prolonged absence of exits for late-cycle giants like Stripe and Databricks, keeping private market valuations and cash deployment under pressure despite public market recoveries.
• MIMCO operates with a target 50/50 split between public and private assets and maintains 5–10% in cash/short-duration securities, targeting a drawdown beta of 0.75 or less.
• Incentive structures for LPs are critiqued as lacking "risk-taking" motivation; the speaker suggests a family office model would require team members to invest personal capital or receive carry to align interests.
• Manager fundraising should be treated as an enterprise sales funnel involving relationship building over time, with caution against premature evaluation by picky institutional LPs.
• MIMCO views large Investor Relations (IR) teams with skepticism, preferring direct human relationships to avoid the "messaging layer" that can impede direct deal flow and GP-LP connection.
• Geographic exposure to China is being reduced due to regulatory uncertainty, with a focus on ensuring no involvement in sensitive investment areas.
• Generational transitions are the most common point of failure for scaling firms, often due to a lack of exceptional successors, delayed economic sharing, and insufficient mentorship programs.

Direct Insights and Quickfire Takeaways

• MIMCO has increased its positive stance on hard tech investing due to the proven success of companies like Tesla, SpaceX, and Enduril.
• Specialization is not a mandatory requirement for success in the venture space; generalist firms can still compete effectively.
• The "box-checking" nature of modern institutional investing is viewed negatively, with the preference being for deep, unique due diligence rather than compliance-driven decisions.
• Ryan Akina cites "When things are going well, you're never as smart as you think you are" and "When things are going poorly, you're never as dumb as you think you are" as his core guiding principles.
• MIMCO is not currently invested in Founders Fund, primarily because they did not establish a relationship during the firm's early years and now feel it is too late to enter the partnership.
• The hardest aspect of the job is disappointing potential investees, given the high rejection rate (investing in roughly 1 out of every 100 meetings).