To be successful investing in venture capital, access is key. It takes time, perseverance, and scale to gain access to top-tier venture fund managers1 who have developed reputations for success.
At Cresset we believe that, unless you have access to top-tier managers, investing in venture capital is generally not worth pursuing. There is a wide dispersion of returns between these top-tier managers and “everyone else”2. The best entrepreneurs and startups know who the best venture capital funds are and approach them first, creating what we believe is an adverse selection for those not in that top-tier. Unfortunately, top-tier managers are very difficult to access as early-stage investing is capital constrained and these managers are almost always oversubscribed. They typically favor working with large, institutional investors who can be reliable long-term partners, with the ability to invest significant amounts of capital fund after fund after fund.
With these considerations in mind, Cresset recently launched Ventures II (“Fund II”), a venture capital fund raising $200 million to invest in a diversified portfolio of 15-20 top-tier venture capital funds. Fund II also seeks to invest in compelling, later-stage co-investment opportunities. We connected with Jordan Stein, Managing Director of Cresset Partners, to further explore key factors to consider if you are interested in investing in venture capital, how we believe the current environment may benefit investors, and how Cresset’s Ventures II Fund aims to capitalize on that environment. Below is what he had to share:
Jordan, it is certainly an interesting time to be a venture capital investor. How has Cresset structured Ventures II with the intention to capitalize on the dynamics at play?
Generally speaking, we don’t believe in trying to time the market. Our goal with Ventures II, and really our entire venture fund series, is to provide an entry point for our investors and clients to access certain top-tier venture capital funds. Our approach and philosophy are very similar to how a large endowment would approach venture capital investing3. That is, consistently investing over time to create not only fund diversification, but vintage diversification as well.
That said, we do observe some tailwinds in the market. Per Pitchbook, 2021 into 2022 was the most founder friendly environment of the last decade4. Valuations were incredibly high, way too many deals were being done, and diligence timelines were very compressed. Now, Pitchbook’s work shows that the pendulum has swung all the way back and we are seeing an investor-friendly environment. We believe valuations have come back down to earth, only the better companies are receiving capital, and companies are building themselves more durably given the difficult fundraising environment. Beyond that, we are seeing a massive technology transformation through AI which should lead to significant value creation over the next decade. Putting this all together, we are very excited about the potential of Ventures II.
How does Ventures II differ or build off Cresset Partners’ first venture capital fund?
From the beginning, Cresset has firmly believed in the power of private markets. Our founding story is based on our Co-Founders’ desire to build a firm that is capable of offering compelling private investment opportunities. We have always viewed venture capital as core to that vision, but we knew we needed to wait to build out our venture offering until we had the ability to access the top-tier venture capital managers.
That is why we waited until 2022 to launch our first venture capital fund. By that time, Cresset had crossed a threshold in terms of its size and ecosystem and had become an attractive, long-term LP, allowing us to curate a portfolio and provide exposure for our investors
Building on the success of our $140M Fund I, Cresset launched Ventures II. Fund II has the same strategy as its predecessor fund, providing diversified exposure to a variety of sectors, including artificial intelligence, software, fintech, biotech, and other cutting-edge technologies.
Overall, it’s very similar. The fund is a bit bigger and targeting ~50% of the same managers we partnered in Fund I along with new partnerships of equally compelling top-tier managers. Investors have responded very positively to this portfolio construction as it may substantially mitigate blind pool risk. From Day 1, we have line of sight to the majority of our portfolio. So far, we’ve already made 5 commitments including Andreessen Horowitz, Founders Fund, Y Combinator, Caffeinated Capital, and Saga Ventures.
Over the last couple of years, we’ve spoken with more than 1,000 venture firms, and we’ve invested with ~less than 20 of them. That has laid the groundwork for our second fund by seeding a robust pipeline of opportunities. We are thrilled with the quality of managers we’re seeing and are very optimistic about the Fund overall.
Who are the investors who would be best suited for Cresset’s Ventures II Fund? What else do they need to know?
It’s interesting to look at the difference between how institutional investors and individual investors approach venture capital. Perhaps more interesting is how few people realize the quantum of this difference. Just recently, I spoke at a venture conference and asked a room full of venture capital funds, LPs, and angel investors what they thought large endowments targeted as an allocation to venture. In a room full of 100+ people, less than 5 knew the answer. Yale, for example, allocates about 25% as their target to venture capital, which is in line with many of their similarly-sized peers. On average, endowments over $1 billion have 14% exposure. On the other hand, small endowments and individual investors3 are often in the low single digits of allocation to venture. More than that, only ~50% of family offices in the US have any venture exposure at all, according to a JP Morgan report. Ultimately, I think access and a lack of dedicated resources has been the biggest barrier for small endowments, individuals, and families. While there are likely to be differences in liquidity needs between individuals and institutions, for certain investors, this still feels like much too big of a gap.
For Ventures II, we’re democratizing access to these top-tier firms that have historically been unavailable to non-institutional investors. If you can afford the speculative risk and illiquidity inherent to venture and want to generate the same type of exposure as these sophisticated institutions, Ventures II could be a fit for your portfolio.
Thank you for your perspective, Jordan. How does an investor learn more about the Venture II Fund?
My pleasure. If you’re interested in learning more about Ventures II or venture capital investing in general, please reach out to us. We’d love to talk to you!
Source:
- Top-tier venture fund managers typically have high minimums and are defined as managers or individuals who have historically delivered consistently high returns on their investment funds. These managers are often associated with highly regarded venture capital firms and have robust networks and relationships. They have a deep understanding of the market and the ability to identify and invest in promising startups.
- There is no complete data set for private investments. The information is limited, and most data is compiled from funds that elect to self-report and tend to be biased toward higher performing funds. Losses may be underreported. Funds included in these measures may lack commonality and transparency. Over time, components of the data may change. Funds may begin or cease to be represented based on these factors, thereby creating a “survivorship bias” that may additionally impact the data reported.
- The liquidity needs, lower costs, and concentration limits of endowments greatly exceeds that of retail investors who cannot withstand a loss of part or all of their invested capital. This investment is speculative and not suitable for all investors
- The PitchBook VC Dealmaking Indicator as of 12/31/23. This indicator utilizes PitchBook’s deal terms, deal attributes, fundraising, and deal flow data. There is no complete and reliable data set for private investments, including Pitchbook. The information is extremely limited, and most data is compiled from funds that elect to self-report and tend to be biased toward higher performing funds. Losses are underreported.
Disclosures:
The Cresset Venture Fund II (“The Fund”) is considered highly speculative, illiquid, and should only be considered by investors who can bear such risk for an indefinite period of time and can afford a complete loss of investment. This investment product is not suitable for all investors. There is no assurance of positive investment returns. There is no guarantee that any income will be generated, or distributions will be made. The shares are illiquid meaning you will likely not be able to transfer or redeem shares on demand or in the quantity desired. An investment will involve significant risks due to the nature of the fund’s investments. The fund does not represent a complete investment portfolio. There can be no assurance that the investment objectives of the Fund will be achieved. The managers and portfolio structure provided herein may be subject to change.
Lack of Operating History. The Managing Member, the Management Company and the Fund are each newly organized entities and accordingly, have limited operating history upon which prospective investors can evaluate the Fund’s likely performance.
Reliance on Certain Principals. The ability of the Managing Member to manage the Fund’s affairs currently depends on the management team of the Managing Member and the Manager of the fund’s underlying funds (including the Principals). There can be no assurance that the members of the management team or underlying fund’s managers will remain .
Conflicts of Interest Among Managers of Underlying Funds. This may result in competition among managers and funds for the same investment opportunities, and conflicts of interest in such investment manager’s decision-making in managing portfolio companies held by such investment manager’s different funds, particularly if such different funds own different portions of the portfolio company’s capital structure. In addition, such Underlying Funds may engage in other transactions with affiliated parties on terms and conditions not determined through arm’s -length negotiations.
Developing and managing relationships with joint venture or operating partners, on which some of the Fund’s strategy depends, is highly competitive. A failure by the General Partner to identify attractive investment opportunities, develop new relationships and maintain existing relationships with managers of the Underlying Funds, joint venture partners and other industry participants would adversely impact the Fund.
Minority Equity Interests. The Fund may invest in minority, non-controlling, equity interests in the Portfolio Companies. As a result, the Fund typically will have a limited ability to exert influence over its Investments.
Enhanced Scrutiny and Certain Effects of Potential Regulatory Changes. There continue to be discussions regarding enhanced governmental scrutiny and/or increased regulation of the private investment fund industry. There can be no assurance that any such scrutiny or regulation will not have an adverse impact on the Fund and Underlying Fund’s activities, including not being able to meet the Fund’s investment objectives.
Unspecified Investments; Availability of Suitable Investments. The Fund may be unable to find a sufficient number of attractive opportunities to meet its investment objectives. There can be no assurance that investments will be available for investment by the Fund or that available investments will meet the Fund’s investment criteria. There can be no assurance that the Fund will be presented with an adequate number of new investment opportunities. Investments may decline in value. A total loss of one or more Investments is possible. Furthermore, the expenses of operating the Fund and any other related entities (including Alternative Illiquid Investments.
The Underlying Funds are highly illiquid, long-term investments, and the Fund does not expect to be able to transfer its interests in, or to withdraw from, such Underlying Funds. In addition, the investments of such Underlying Funds generally will be investments for which no liquid market exists or will be subject to legal or other restrictions on transfer. The Underlying Funds may face reduced opportunities to exit and realize value from their investments in the event ofa general market downturn or a specific market dislocation. As a consequence, an Underlying Fund may not be able to sell its investments when it desires to do so or to realize what it perceives to be their fair value in the event of a sale.
Potential Lack of Diversification; No Minimum Condition. Since the Fund will invest in the Underlying Funds, which will generally be venture capital and growth equity focused funds, the Fund’s indirect exposure to the underlying portfolio companies of such Underlying Funds could potentiallybe concentrated in relatively few industries or regions.
Please read the Fund’s Private Placement Memorandumfor a complete discussion of all risks related to an investment in the Fund. Foreside Fund Services, member FINRA, provides marketing services.
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