The GuidePost: September 2024
The Vintage Year Power Law
Market Signals
35% of farmers: 35% of US farmers would switch to regenerative farming practices for soil health benefits linked to reduced input costs.
50% reduction: Regenerative farming practices could halve food system GHG emissions by 2030.
25.5% decline in one year: The USDA forecasts a year-over-year decline in net farm income for 2024 of 25.5%. In 2023, there was a 16% drop. If the USDA’s forecast is correct, it will mark the most significant two-year farm income decline in US history.
From the Trail
The conventional wisdom in venture capital is that manager selection is a primary driver in the performance of venture capital funds.
But in a recent report by the Stepstone Group, they uncovered an additional driver that separates top-quartile funds from the rest: the vintage year of the fund.
Here’s the insight: a small number of vintage years in venture capital have historically produced most of the returns for the asset class. They define this as the Vintage Year Power Law.
Following the 80-20 Pareto principle, of the 23 vintage years Stepstone assessed, 80% of venture returns have come from just 5-7 vintage years.
Judging purely by industry-wide measures, 2021 will likely not be a power law vintage year. According to research by Pitchbook, 2021 was the highest valuation environment in venture history, and 2x more capital was invested in 2021 than any other year in the history of the asset class.
It turns out that 2021 was also the year that we launched Fund I. Based on the industry as a whole, experts might have predicted that we would struggle, but we are currently a top quartile fund (as measured by TVPI, against peers in the 2021 vintage for funds under $250M).
We credit our performance to four factors:
Discipline: Nearly half of Trailhead’s first fund is still in dry powder and reserved for follow-on investments.
Thesis-GP fit: Our conviction about our thesis is only getting stronger, and we have “GP-thesis fit:” a strong team (listen to a recent podcast profiling Pete Oberle, Trailhead’s Managing Partner), strong deal flow, an outstanding advisor network, and a clear, repeatable strategy.
Ultra-high standards in a growing market: We invest in less than 1% of the deals we see. Before we invest, we perform deep diligence and work with each company on charting a viable path towards targets.
Rolling up our sleeves to drive value across the portfolio: We dig in with each of our portfolio companies, adding value and supporting them to achieve exponential growth.
But we aren’t fully satisfied. It’s still early days, as most funds don’t settle into their final quartile ranking until their sixth year. With a goal of being in the top decile of funds, we have more work to do, as Mark Lewis emphasized on a podcast last month.
To hear more about our future plans and our soon-to-be-released impact report, we’ll be sharing more details at our Annual General Meeting in New York. Learn more below.
Join us in New York
Will we see you in New York?
We’re hosting the Annual General Meeting at Stone Barns in New York on September 23rd and 24th. We have over 100 confirmed attendees, including nearly half of our portfolio companies.
We are also participating in a number of Climate Week NYC events. On September 25th join us for two events at the Regen House: Mark Lewis is speaking at 2:30pm and a party at 9pm.
Please reach out to Andrew Keesee to learn more.
Founder Fundamentals
Managing a team is hard, especially for a founder who is spread thin. But the fundamentals of management are straightforward. According to management guru Dave Kline, 90% of management issues come from skipping one of the following basics:
Clear expectations: To set clear expectations to the people on your team, you need to communicate how you’re keeping score (the What) and what rules you expect your team to follow (the How). Learn more.
Weekly 1:1 meetings: A weekly 1:1 meeting of only 30 minutes can keep employees engaged and focused. As a manager, your job is to use this time to help your direct report in three areas: 1) Impact (Does my work matter?), 2) Development (How can I get better?), and 3) Support (Can you get me unstuck?). Learn more.
Consistent feedback: Everyone needs help seeing themselves clearly. As a manager, your job is to help the self-critics on your team to catch themselves winning and those who are overconfident to uncover their blind spots. Kline says, “Minor corrections compound into major improvements. Withheld feedback grows into mistrust like cancer.” Learn more.
Portfolio Updates
Fractal (addressing the key gap in farmer financing) held a first close on its Farm Fund with $15M AUM.
EarthShot Labs (nature-based carbon project development and financing) closed a $5.5M series A round.
Clean Crop Technologies (technology to reduce crop loss and improve food safety) received a $1.2M grant from the Massachusetts Manufacturing Innovation Initiative.
Team Updates
In Trailhead Capital team news, we are excited to announce that Nick Schroer has been promoted to Investment Principal. Listen to him here discuss investment opportunities in regenerative agriculture.
What We’re Reading
Can dirt clean the climate? An Australian start-up believes fungi can pull carbon dioxide from the air and stash it underground. It’s one of several ventures trying to deploy the superpowers of soil to slow global warming. The New York Times (9 minutes)
How North Dakota has become a hub of agtech innovation. Innovators, entrepreneurs, and farmers are building an agtech innovation ecosystem in Fargo. AgFunderNews (9 minutes).
Founder Mode vs. Manager Mode. Is the conventional wisdom about how to run large companies wrong? Instead of "hire good people and give them room to do their jobs"—a mode described as Manager Mode—there’s growing interest in Founder Mode, where leaders don't delegate too early and stay deeply involved. Paul Graham (5 minutes)
Book: The Third Plate: Field Notes on the Future of Food by Dan Barber: We were drawn to this book’s premise that the farm-to-table food movement failed to change how we eat. We need a “third plate” where good farming and good food intersect.