Jordan Stein | How Cresset Partners Raised $40B, Invested in Andreessen Horowitz + Founders Fund
Palo Alto Partners Perspective:
This podcast is relevant to emerging managers as it delves into the nuanced dynamics of securing access to top-tier venture capital firms, a critical challenge for newcomers in the space. Jordan Stein’s insights on how Cresset Partners navigated these hurdles—leveraging relationships, establishing a compelling narrative, and employing a systematic approach—offer a blueprint for emerging managers looking to differentiate themselves. The discussion underscores the importance of building a robust ecosystem, cultivating relationships with both established and emerging GPs, and demonstrating persistence and value as a limited partner (LP). This approach aligns with the need for emerging managers to position themselves strategically to attract quality investment opportunities and develop a sustainable presence in a competitive industry.
Furthermore, the conversation highlights the role of diligence and referencing in evaluating emerging managers, showcasing how LPs can discern quality among the vast array of new entrants. For emerging managers, this serves as a reminder of the importance of track record, founder networks, and demonstrating an “edge” in deal sourcing and selection. By addressing common mistakes made by first-time LPs, such as insufficient due diligence or being overly influenced by marketing, the podcast provides actionable insights for emerging managers to avoid these pitfalls. Overall, the episode offers a rich mix of strategic advice and practical steps, making it invaluable for those aiming to establish themselves in the venture capital ecosystem.
- Jordan Stein, director of venture capital at Cresset Partners, joins the podcast to discuss his experiences, with Cresset Partners being a large multi-family office managing over $45 billion 00:52.
- Cresset Partners has invested in well-known franchises such as Andreessen Horowitz, Lightspeed, and Founders Fund, and the episode will explore how they secured these allocations and the importance of access in being a successful limited partner 01:01.
- The conversation will also touch on Jordan Stein’s thoughts on the rising role of emerging managers in the Venture Capital ecosystem 01:13.
Allocating the venture capital space 01:28
- Venture capital returns have outpaced every other asset class over the last 20-30 years, but they also have the widest dispersion, with the difference between top quartile, median, and bottom quartile being bigger than any other asset class 01:43.
- Unique to venture capital is the concept of persistence, where top-quartile managers are relatively more likely to have their next fund in the top quartile, with a 45% chance, and about 70% likely to beat the median 02:06.
- Venture capital is also capital-constrained, with limited capital that can be appropriately put to work at the earliest stages, making it difficult to access top firms 02:31.
- Accessing top firms is crucial due to the dispersion and adverse selection among non-tier one firms, making it not worth investing in venture capital without access to top firms 02:44.
- To access top firms, it’s essential to have scale, a strong ecosystem, and the ability to contribute significant amounts of capital consistently, as well as other differentiating elements 03:10.
- General partners (GPs) look for limited partners (LPs) that can contribute significant amounts of capital and have other interesting elements that diversify or differentiate them from the rest of the LP base 03:28.
- Having a unique position, such as a large and growing asset base, an aggressive Catalyst program, and a strong network of entrepreneurs, can make an LP attractive to top GPs 03:49.
- Many family offices struggle to access top GPs due to their sub-scale size, lack of differentiators, or unique abilities to get into top firms, making it hard to find alternative investment opportunities 04:41.
- It’s essential to create an entry point for clients and outside investors to participate in top-tier VC firms through a unique position or differentiator, rather than investing in just one or two firms 04:57.
- It’s crucial to wait until the right moment to launch a venture strategy, ensuring that the necessary scale, ecosystem, and differentiators are in place to access top firms 05:10.
Building his portfolio 05:29
- Cresset Partners started thinking about building their portfolio in a programmatic way around mid-2021, identifying firms they wanted to talk to and leveraging their ecosystem to get introductions to these firms 05:52.
- The firm had previously tried to get introductions to VC firms before launching their fund, but it was not a guarantee of success, and they needed to tell their story to get access 06:25.
- Cresset Partners’ story, which includes growing from scratch to managing over $40 billion in capital in just over five years, resonated with potential investors and helped them gain access to top VC firms 06:54.
- The firm used a flywheel approach, talking to established firms like Andreessen Horowitz and asking for introductions to emerging managers or peers they respected, which helped them scale their network 07:22.
- Over the last two years, Cresset Partners talked to around 700 different Venture Capital firms and invested in 15, with a focus on a mix of established and emerging managers 07:38.
- The goal is to create annual access points for clients and external investors, making this a key part of their broader allocation and portfolio strategy 08:04.
- Cresset Partners believes that showing up, being likable, and responding to conversations is important in building relationships and generating access in the ecosystem 08:33.
- The firm’s portfolio-building effort was a ground-up, brute-force approach that involved using every conversation as a way to learn more and meet new people 08:48.
Evaluating emerging managers 08:56
- Evaluating emerging managers involves looking for Venture Capital firms or individuals with the right edge, who can see the best opportunities and Founders, and have the persistence to source deals through their networks 09:11.
- Emerging managers need to participate in the circle of getting in front of the best opportunities and Founders, and then pick the best deals and win investments in those opportunities 09:53.
- It’s essential to assess whether the emerging manager can compete with established firms like Andreessen Horowitz, and if they have a strategy to look for opportunities in a different pool 10:16.
- To prove their capabilities, emerging managers can show a track record from a prior firm, which can be evaluated, and attribution can be understood by talking to the GPs at their former workplaces 10:33.
- Many emerging managers spin out of great institutional names, such as West Chan from Redpoint and Lujang from Sequoia, which can provide a track record and signal value 10:48.
- LPs following emerging managers from their former firms can also be a great signal value 11:16.
- Referencing is a crucial piece in evaluating emerging managers, involving talking to people who know the best deals and assessing the manager’s relevance in the VC ecosystem 11:32.
- Evaluating emerging managers also involves talking to founders they’ve invested in, understanding how they sourced and won opportunities, and assessing their working relationship 11:59.
- The quality of the founder network is essential, and recommendations from founders can be a powerful signal 12:12.
- Emerging managers often have a chip on their shoulder, are hungry, and have a killer instinct, which can lead to outperforming later funds 12:44.
Main mistakes for first-time LPs 13:05
- First-time Limited Partners (LPs) in the Venture Capital ecosystem often make mistakes due to being wooed by Venture Capital firms, which are skilled salespeople who build strong relationships to win investment opportunities 13:28.
- These LPs may invest in funds that appear attractive on the surface but lack substance, such as not taking markdowns when necessary or failing to add value to founders 13:37.
- Pattern recognition can help LPs identify these issues over time, but it requires talking to many funds and digging deep to understand the nuances and differences between them 13:56.
- Many first-time LPs lack the resources to thoroughly research and understand the Venture Capital ecosystem, leading them to believe what some Venture Capital firms tell them without doing their due diligence 14:25.
- As a result, these LPs may invest in lesser-known funds without fully understanding the broader ecosystem and its potential impacts, rather than trying to get into more established funds like Sequoia or Founders Fund 15:02.
- There are over 4,000 Venture Capital firms, many of which have emerged in recent years, making it easy for LPs to get sold on an investment without doing their homework 14:43.
- To avoid these mistakes, LPs must be willing to put in the time and effort to thoroughly research and understand the Venture Capital ecosystem 14:39.
Sponsors: AngelList 15:20
- AngelList is a software company that powers the startup economy, and it has recently rolled out a suite of new software products for venture capital and private equity that digitize and automate manual processes in traditional fundraising and operating workflows 15:31.
- These software products provide real-time insights for funds at any stage and connect seamlessly with any back office provider, making them a valuable tool for those in private markets 15:44.
- AngelList also offers a modern, intelligent equity management platform for private companies, which includes features such as equity issuance, employee stock management, 409a valuations, and more 15:59.
- Thousands of startups, ranging from $4 million to $4 billion in evaluation, have switched to AngelList for cap table management 15:54.
- AngelList is a presenting sponsor of The Limited Partner podcast, and listeners can visit www.angelist.com/TLP to get started with their software products 16:15.
Concerns of VC in 2023 16:27
- Concerns about venture capital in 2023 include the potential for lower returns due to increased competition and crowded markets, but this concern has been expressed every step of the way for the last 20 years and has not come to fruition 16:29.
- The acceleration of technology, including the internet, iPhone, cloud computing, and now AI, has decreased the cost of starting a new company and will likely lead to another boom cycle in the next 10-20 years 17:00.
- AI is expected to have a significant impact on both reaching users and reducing the cost of starting a business, making it an attractive area for venture capital investment 17:11.
- Technology has become ubiquitous in every type of company, and venture capital groups will be able to participate in the accrual of value created by this trend 17:36.
- While AI may be a bit “frothy” right now, and there are general concerns about whether VC is overvalued as an asset class, innovation is secular and will continue to drive advancement and the creation of great companies 18:00.
- The best vintages in VC history, such as 2008-2010, demonstrate that the industry is cyclical, but VC remains an attractive asset class going forward 18:21.
Range of allocators 18:40
- The allocation of assets for Limited Partners (LPs) with a long-term horizon should consider various alternatives, including venture capital, private credit, secondaries, growth equity, and hedge funds, with the understanding that each has its pros and cons 18:46.
- A key consideration for LPs is their taxable status and liquidity needs, which can impact their investment decisions 19:15.
- A three-bucket approach can be used to categorize investments: Diversified Income, Growth, and Aspirational, with each bucket having different time horizons and investment goals 19:25.
- The Diversified Income bucket focuses on generating a cash yield and may include investments such as music royalties or private credit funds 19:29.
- The Growth bucket typically includes traditional private equity investments with a four to seven-year hold period 20:09.
- The Aspirational bucket is for investments that can be held for more than seven years, with a focus on maximizing absolute returns, and may include venture capital investments 20:23.
- Venture capital investments are often held for 11 years or more, making them a long-term investment that requires patience 20:46.
- A holistic, cross-asset class approach is recommended, with diversification across multiple asset classes and managers to minimize risk 21:14.
- The ideal allocation to private equity, venture capital, private credit, and secondaries will depend on the individual client’s needs and goals 21:47.
- Having a balance in investments is important, but individuals with a higher risk appetite and longer time horizon may increase their exposure to certain assets, while considering the resources and skill set required to execute these strategies effectively 21:59.
- Venture capital has a wide dispersion of returns, and if an investor cannot access top funds, it may not be worth investing in this asset class 22:25.
- Private credit has a smaller distribution of returns, with the difference between great and good managers being less significant, but scale can play a crucial role in generating returns, such as negotiating preferential terms and co-investing 22:33.
- Utilizing scale can help reduce fees in asset classes like private credit, and investors without this advantage may consider partnering with groups that can leverage their scale 22:45.
- Investment strategies should be individualized, taking into account an investor’s specific needs and goals for the next five to 10 years, and diversifying to maximize value within each time frame 23:15.
Practices and mistakes in co-investing 23:30
- Co-investing is a challenging and often controversial subject, particularly in Venture Capital, where allocation can be small, and it’s hard to do well without a unique edge, such as top-quartile performance year over year 23:39.
- One common mistake in co-investing is attempting to do early-stage co-investment opportunities without the necessary expertise or access to leading funds or groups sponsoring Special Purpose Vehicles (SPVs) 24:12.
- Co-investing is also difficult at various stages, including Series A, B, C, D, and E, if one lacks access to leading funds or groups and the ability to underwrite venture capital or growth equity 24:34.
- A key challenge in co-investing is doing the work to understand whether an opportunity is good or not, especially without the necessary skill set or ability to underwrite venture capital or growth equity 24:51.
- To overcome these challenges, it’s essential to leverage resources, both inside and out, to generate deal flow and pick winners, which can be achieved by being in the market, attending events, and having relationships with firms and investing in them 26:00.
- Family offices with a unique edge, such as those that have made capital from a successful business, may be able to co-invest successfully, but this is not the case for most people 26:21.
- Co-investing requires diligence and understanding of the business, as well as outside opinions from experts in the space, including tier-one VCs, to avoid adverse selection and making mistakes 26:49.
- VC funds may not always show their best deals to co-investors, and there may be adverse selection, making it essential to do thorough diligence and get outside opinions 26:41.
- Co-investing can be successful when done consistently and reliably, but it’s hard to achieve without the necessary resources, expertise, and relationships 26:18.
Co-invest programs 27:04
- Co-invest programs can be challenging due to timing issues, with some deals closing quickly, making it difficult for general partners (GPs) to manage co-investment opportunities 27:05.
- To address this, it’s recommended to have upfront conversations with GPs to understand their co-investment interests and the types of investments they’re interested in 27:46.
- This proactive approach allows GPs to develop a roster of potential co-investors and immediately know who to reach out to for specific deals 28:02.
- Co-investors can also proactively identify potential co-investments by analyzing fund reports, identifying portfolio companies with strong growth potential, and reaching out to GPs to express interest 28:42.
- Some GPs have full co-investment programs, where a separate pool of capital is set aside for co-investments, making it easier to manage and draw from 29:41.
- Webinars can be a powerful tool for co-investment programs, allowing companies to present opportunities and answer questions from a broad base of limited partners (LPs) 30:03.
- Establishing the desires of the LP base early on, working with them in real-time to identify opportunities, and using a one-to-many format to present opportunities can also strengthen co-investment programs 30:24.
- A strong co-investment program should have a proactive approach, clear communication, and a well-structured process for managing co-investment opportunities 31:00.
Cresset Partners 31:03
- Cresset Partners aims to differentiate itself from other wealth management firms by optimizing for both wealth and life, rather than just wealth, and has structured itself to be decidedly different from traditional wealth management firms 31:16.
- The company is about 70% owned by its founders and employees, and 30% owned by its clients, which has created incredible alignment and a phenomenal feedback loop 31:53.
- Cresset Partners has curated specific events, including a speaker series, to bring people together and engage in something productive and thoughtful, with past speakers including Eric Schmidt, Ray Dalio, and Matthew McConaughey 32:34.
- The company’s goal is to be a multi-generational, $100+ billion dollar firm that cares about its clients beyond just their wealth and is there for them in various aspects of their lives 33:24.
- Cresset Partners aims to democratize wealth management by allowing people to have access to high-level services and private investments, regardless of their net worth 33:42.
- About 55-60% of the capital raised by Cresset Partners is from its clients, while about 40% is from other family offices and high net worth individuals who like the setup but don’t know how to execute in certain areas 34:08.
- The company’s goal is to continue to further democratize access to private investments and allow more people to participate in the ecosystem 34:28.
- Jordan Stein is available to chat and can be reached at jstein@cressetpartners.com
