The Exchanges

Q Ed was on the show last year, so just for perspective, before we dive into what's going on in venture capital, why don't you share a little bit about Gresham and how venture fits into what you're doing?

A So Gresham, we're a thirteen billion dollar multifamily office. What that means in practice is we manage money for about a 130 different folks. Think of these as people who generally made the money themselves. A lot of them are GPs. The commonality across that subset is they all are worried about taxes. It's a very important component of our investment mandate. There's a lot of things we can do on estate planning, carry planning, things that are very valuable. They're also very astute investors. They're looking for a high class portfolio. What that means on my side, Is we're trying to build essentially an endowment portfolio that's tax-systemized. The tax side, on the public side, we have lots of strategies. And private's generally a tax-efficient part of the portfolio. If I think about venture specifically, we want venture to be the highest performing part of our portfolio. We lean into the risk. Like most LPs, we certainly have our multi-stage funds. We have two folks we think are fantastic. They give us exposure. They give us alpha. Most importantly, they give us the confidence to think risk forward. What that means for us is the rest of the venture book looks early. It looks small. Most recent deal we did was a fifteen million dollar solo GP. We want to essentially be the first check into a company's life cycle. The real goal there is the last 20 years, it's been the best p…

AI assessment note: “we're a thirteen billion dollar multifamily office... If I think about venture specifically”

Q Let's say those special assets are five percent and Ed's made up example. Where are you funding that illiquidity budget from if it's not venture?

A In the case of our clients, when a capital call comes, it's going to come out of their equity or fixed income books, essentially their liquid portfolios. That's the reality of how we've positioned the portfolios and rally for most investors in our position. However, we've got models that help make sure that our clients overall illiquidity, we think out multiple years, we'll be in a position where they do have a safety net. The most important thing to us is if there is a violent drop in equity prices, I mean, public equities, at that moment, we cannot be in a position where we're taking money out of the public book and sliding it into the private book, because that's the ultimate sin of our job. That's the worst trade you can make as a limited partner. So we build buffers. We have parts of people's portfolios that would be more bond-like ways that we could draw from and avoid those dynamics. As that alluded to, where it will be getting pulled from in this scenario, Real estate might have to be a little lower, and the buyout book might have to be a little lower. We will have to make some subtractions to account for that special position. These are high-class problems, so we want to make sure we continue funding a great asset class and not determining long-term results.

AI assessment note: “it's going to come out of their equity or fixed income books”

Q Sean, you started out saying as venture as the core engine. You have these multi-stage and then early stage. Can you walk through your thought process on risk reward with that as the construct of your portfolio?

A First and foremost, we have to put up at least benchmark results or what are we doing? When we have our multi-stage portfolio, I view those as the ballast of our book. It's about a third of what we do in venture. We expect that piece of the portfolio to give us the breath, give us exposure in a big way to some cool companies, much like Ed, I'm sure. He's seen it too. They've had some nice M&A exits coming out of those portfolios over the last couple of years, which we've been excited about. Importantly, they give us the confidence to lean into risk because we know the allocation is covered with those groups. As we build out the venture portfolio, we think there's smart risks that we can take. Like I noted the solo GP earlier, that's an advantage we can play into. The real goal is to build a venture book that covers the asset class, but then we think has meaningful levels of alpha that may come through some exciting results.

AI assessment note: “Importantly, they give us the confidence to lean into risk because we know the allocation”

Q Sean, have you guys dealt with that same issue?

A Some similarities the way Ed described it. I said the big difference between our profile, which look, these are families. We have humans. We don't have institutional committees behind this. The way we've thought about this is let's split up exposures and illiquidity. The first part of that equation is exposures and using as example, SpaceX or Stripe. The reality is those are not venture risk the way we think of venture. We've taken the approach that it's fair to think of those as a different asset class. They're just almost equity risk is the way we think about it. We don't want to penalize our clients and their return potential for these assets doing a phenomenal job and having continued growth ahead of them. However, our clients are humans and humans make interesting decisions with their wealth. And maybe it's a shocker, maybe it's not, but someone lives a somewhat simple life and they have a little money, they start buying houses and things come up. So the illiquidity part of the equation is very important for our families and the advisors that support them. We have to be thoughtful around the commitment sizes they make. The way we like to design it is let's change the exposures such that this is really equity, but let's make sure the illiquidity side is in a position where clients are in a nice position. We never want to be pulling from Publix to fund capital calls at the w…

AI assessment note: “Some similarities the way Ed described it. I said the big difference”

Q out on A-sixteen Z, and when they raised their first four funds, people said, oh, if you do the math, you're going to have to generate two hundred fifty billion dollars of value. And it turns out they were eight hundred billion. How do you think about the importance in this power law business of being able to pencil out what you think could happen at a certain fund size?

A The hard part as an LP, and if we look over time, we're always thinking about what's the exit market today. The exit market in 10 years is the one that generally matters. Maybe it's 15 to 20 years. And if you look over time, the company valuations have been much larger than anything any of us would have ever predicted, which is why returns have essentially gone up. Where we think about the math, it really boils down to the VC's right to win the check they're going to invest. What we mean by that is if someone's trying to own 20% of a company at the seed stage, They better have a good argument why that founder wants their money, why it's still a special company, and how they're going to box out the other great venture capitalists out there. When we say the math, a lot of times what we mean is this person's trying to own X percent of a company. Does their gravitas, their technical ability, their ability to help sell the next round of capital justify that check size, that ownership relative to the situation? And the rest of it's pretty simple. They want to do 25 deals. That should equate out to Excise fund. That's how we think about the math. The exit valuation to us matters, but we do accept, again, 10 years forward, we're not really sure. We want to make sure that initial math makes sense, and then we're hopeful the rest of it plays out well in our favor.

AI assessment note: “Where we think about the math, it really boils down to the VC's right to win”

Q How do you think about the evident risk of a solo GP that something happens to that person?

A It's something we think about every day, the hit-by-the-bus risk, the less polite version of that. Look, it's very vibrant, very real. It's probably more critical in other parts of our book. If someone's doing control buyouts, 80% ownership, and they get hit by a bus, the LPs have a problem. We now have to take the keys of a company, and none of us are equipped to do that. The positive of the venture is, you know, in a small percentage in these situations of a company that's hopefully going to get much larger. Back to our early point is the power law game, where it's only a handful of positions. While it wouldn't be fun, our belief is we could find A person, an entity that could manage the position and the tail, because when we do a small early stage fund, there is value add that they offer at the beginning of that company.

AI assessment note: “our belief is we could find A person, an entity that could manage the position”

Q Sean, are there other countries or frontiers that you have tried to find where you have the dynamic you describe of China several years ago where there may be a significant company created and a venture capital firm can own a lot of that company?

A You could make the case Brazil and Nubank. Fintech is maybe the space I allude to is there's been some fintech examples of that. We've missed it, and I think it was missing it in the sense that we have a small team. Many of LPs do. We have a four-person team. We want to be really good at the spaces we cover, but we accept that we can't cover everything. We have not pushed hard to get outside of the U.S., at least in venture, outside of China. We do think a lot of the startups, if you look at AI, the best AI founders generally find their way to the U.S. right now. It feels like bandwidth cheat code to think harder here, but we accept we're going to miss some really special companies like a new bank.

AI assessment note: “You could make the case Brazil and Nubank.”

Q How do you put together the idea of you want to be partners with the GP over time? And those types of situations sound like they're very finite. It's somebody with a relationship, maybe the company they left, but after a couple of people leave that company, those relationships get exhausted.

A We love operator funds. One thing my colleague and I talk about a lot is the shelf life of someone's experience and experience really means network. There's not a single amount of time that everyone has in terms of shelf life. But we do think there's a time when someone has the most vibrant network that can come out of a certain node. So we do evaluate that. And as someone gets further from it, we start to ask the question of, okay, what are the new nodes? Where are the new places this person's finding entrepreneurs? What we love is when someone's day-to-day has them around these people. Sometimes that's the life these people live, but we have to be honest with ourselves. Someone's five years away living in a different state. They probably don't have the same access to that as a network as they once did.

AI assessment note: “shelf life of someone's experience and experience really means network.”

Q Ed mentioned earlier with the Kauffman research using as a tool to scare people out of the market, and Venture has always had this interesting blend of competition and cooperation. Would love to hear in an increasingly crowded landscape for the things that you both like investing in, how do you make yourself valuable to a GP?

A What we're trying to be to these GPs is not necessarily a friend, but we do want to be a thought partner. As we look at the LP world, it's not the most transparent industry in the way we communicate. There's a lot of ambiguous conversation. What we try to bring to the table is we're straight shooters. We're quick decision makers. We'll offer our view of why it's good for Gresham. We're also pretty good about giving the overall perspective of how it's going to impact them and other LPs. We try to come at this as a thought partner, and we try to be easy to communicate with. My colleagues and I are incredibly quick on email, so we just try to be the easiest LP they'll ever work with. And such that we hope that they're going to connect with us when something goes wrong. The most important thing we do, though, is that we spend a lot of time with the people in person. That's the one thing we learned post-COVID is that you can meet someone on Zoom, but the relationship's built in person. And if you have a relationship, you tend to be early on that list of calls. That's the way we think about it, Ted, is straight shooters and do as much as we can in person.

AI assessment note: “we do want to be a thought partner... straight shooters. We're quick decision makers.”

Q Why is it smaller today than it was several years ago?

A This is a personal view. Several years ago, you had a really interesting opportunity to own a large chunk of special companies. The nuance today are there fewer firms. The founders know who those firms are. When companies see success, you move into party round environments pretty quickly. To own 10, 15% of a company is hard. There might be structural aspects where maybe the VCs and founders don't want someone owning that much of a company. So we have to assume smaller ownership, and we have to assume probably something of a governor in terms of max size, so we've adjusted ourself down. Now, here's the one thing that's interesting, Ted. There really isn't a small fund market. The smaller funds in China are still a couple hundred million dollars. Yeah, there's some really small ones, but you just don't have this solo capital world. In a world where there were some interesting, successful operators doing twenty-five million dollar vehicles, we might be thinking of that. It doesn't exist. We are small fund investors, and it's tough for us to do that in China. We've got a few bets placed, but reality is, I don't know where else the money would go until the market restructures to some degree.

AI assessment note: “we have to assume smaller ownership... so we've adjusted ourself down.”

Q As you look out over the next couple of years, what do you have your eye on either is the biggest opportunity or the biggest risk in the space?

A Something we're thinking a lot about is capital intensity. There's been almost an acceptance in the marketplace that capital intensity is here and it's almost a good thing. We're not going to fully buy into that view and we'll make the exceptions where we think they're deserved to be made, but we're not going to broadly focus on capital intensive areas. Because historically, those haven't put out the venture scale returns we want. That's something we're avoiding, Ted. The other thing we're leaning into, and this is a little counterintuitive, the world went very sector specialized, and I understand why, but one thing we've looked at our portfolio and said, over time, the generalists spend the best funds, and we're making a concerted effort to make sure we have enough generalists, that way we capture that weird thing that doesn't fit in a bucket, that special founder that's doing something way over here. We want to make sure we have somebody that could find it. Sounds a little odd. It's like the least sexy thing you can say as a general's VC, but we do think there's a place.

AI assessment note: “That's something we're avoiding, Ted. The other thing we're leaning into”

Q Sean, have you looked at China and India?

A Focus these conversations on China. That's where we've spent more time. You know, Gresham's had a wonderful, successful run in China. In our early days, we were part of many of the biggest positions and outcomes there. What I'd say about China is the first 15 to 20 years were phenomenal, and there were some truly monster outcomes. More recently, PDD, you had Xiaomi, Kuai Shao, monster positions. A hundred billion dollar companies were one VC and went on 10%. If you were part of that, it was special. Those days are over in the sense of there's a lot of things telling you that there's not really going to be the next two hundred billion dollar company, or at least it's harder to get there. And there might be structural reasons why we shouldn't count on that. And that doesn't mean there's not an interesting opportunity. That's our view today is it's less of our portfolio. It's still an active position. It's smaller. The potential is there in that there's talented people. They will have an ecosystem that looks different than the U.S. And we generally think the world is the U.S., And then China, and a lot of the rest of it would fall into some version of those two. The question that the exciting opportunity to ask about China is if you ever saw a world in five to 10 years where the state-owned entities were using their own software, their own AI, and essentially their own version of …

AI assessment note: “Focus these conversations on China. That's where we've spent more time.”