Alexa Binns 00:02
Alex, welcome to Swimming with Allocators the VC podcast, from the LP perspective, with your host, Alexa bins and Ernest Ceph. You ready? Let’s dive in on

Earnest Sweat 00:13
Today’s episode. We have Anthony Giambrone. He’s a partner at StepSTone Group, and he’s Formerly he was with green spring associates, where he helped scale the platform from five to 85 plus investment professionals. Prior experience includes growth equity and investment banking. Today, we’ll be talking about lessons from scaling a lead venture allocation platform, also why relationships and long term thinking matter more than ever in VC, and how emerging managers can stand out in such a crowded market.

Earnest Sweat 01:00
Looking at your bio from the website, definitely impressive. But what really stuck out to me when we originally spoke on a prep call was you had the standard background of starting as a gas station manager. So I would love to just kind of hear how you got from there to all the other points that I mentioned in the bio.

Anthony Giambrone 01:28
Yeah, I come from a pretty, pretty modest upbringing. Might be the most un pedigree guest that you’ve ever hosted. So you know, I was born and raised in Morgantown, West Virginia, which is where West Virginia University is based, attended undergrad there, studied finance, had the ultimate aspirations to be an investment banker, but was graduating in 2009 obviously at the trough of the GFC and West Virginia is, you know, not necessarily a target school. So I had to shelf that dream for a little bit. I had an opportunity to work with some real real estate developers locally that were family friends, and they were starting a new project that was going to be like an interstate exit that they were doing a bunch of different stuff. And instead of bringing in, like a national regional franchise to do the fuel and food, they wanted to develop a concept themselves. And, you know, they, they kind of just asked me, Is it something that I thought I could figure out? So they handed me a building that was for, you know, four walls, and basically said, go figure it out. And so I did that for like, two years, and helped them kind of establish that business, but kind of realized along the way that that probably wasn’t going to be my career. I was about to turn 25 and, you know, the markets were maybe getting a little bit better. And so I said, it’s kind of now or never. So I moved to Charlotte, North Carolina. I didn’t have a job, but ultimately picked Charlotte because the West Virginia network is very strong there, and obviously there’s a strong banking culture there. And the cost of living was much lower than New York, you know, to help pay the bills. When I was in Charlotte, I actually had a night weekend job. I was at a nightclub. So that was another, another one for the resume. But I was eventually able to network and got in front of an investment bank called McCall partners, and I became a part time receptionist, and that was how I broke into investment banking, and in the span of six months, went from receptionist to intern analyst to then a full time analyst. And then spent two years basically doing the traditional investment banking program. And in that journey, you know, I realized I was really passionate about tech and innovation, and started to learn about growth equity, which as an asset class going back to 2014 was much smaller than it is today. But that became a good go between, between venture and traditional private equity, and that took me to Salt Lake City, where I worked for a fund called Mercado partners, and spent two and a half years in that role, before, before green spring brought me back to the East Coast.

Alexa Binns 04:01
Man I love starting behind the front desk. Do you feel like having had every role has helped you manage all these people at this point? You’re running a huge team.

Anthony Giambrone 04:16
I think it’s been hugely important. It has always kept me grounded and very humble. You know, we would say venture has always been, and probably always will be, a very relationship driven asset class. We think EQ matters a ton. And, yeah, I mean, I think just having the empathy to be dealing with people at various levels, at different stages of their career, it’s, I mean, it’s, it’s been very portable from all of those different roles to ultimately working in venture So, yeah, something I would say has been super, super important, at least as I’ve built a foundation for my career.

Alexa Binns 04:53
Yeah, there’s sort of two interesting approaches to getting into this industry. One is, you sort of make yourself the boss and you. Start small. And one is that you sort of go to the apprentice space, then you work your way up. And I opted for the second and it’s never going to be less embarrassing to start at the bottom. And it was my logic. It’s like, just start answering the phones, you know, to get in the door and start seeing how the sausage gets made. Was, was definitely my approach

Anthony Giambrone 05:28
to, yeah, no. It’s been, it’s been super rewarding. I mean, I’ve had the opportunity to transition from someone that was just an individual contributor as a banker, and then obviously as an investor at what was a single strategy firm, and, you know, became a part of green spring when the firm was 45 people in total. And, you know, probably mid to single, high digits in billions, in sum. And you know, now have kind of seen all of that growth over the past eight years. And it’s, it’s been really rewarding to kind of get to build the plane as we were flying it, and have really enjoyed just all of the managerial exposure and opportunities to refine and optimize what we were doing from a people, process and technology perspective along the way,

Earnest Sweat 06:15
and they to that point of being exposed to the growth of green spring now into stepstone. What from those experiences have you now empowered you in this now kind of even more hectic environment for allocators, right? It seems like over that period of time, a lot has changed in venture. If you were allocating into venture from that period of growth for green screen, how do you apply it to today’s environment?

Anthony Giambrone 06:49
I mean, I would say we’re generally always optimistic about the asset class. I think the advantage of being in a really large platform like ours is that it also has multiple different products. Certain opportunity sets become more interesting depending on maybe what’s happening from a macro perspective. So when I started at green spring, the direct and secondary practice was much smaller than it is today. You know, we really were and that was kind of why green spring was recruiting me. They wanted to scale some of what they were doing at the growth stage on both the direct primary and secondary basis. So I kind of got to be a part of that. And that was a really successful part of what we were doing as part of the, you know, the tail end of the bull market, and the secondaries fund, you know, I would say it’s actually proven to be pretty all weather for us, like we’ve seen that whole practice grow from an $85 million proof of concept funds and now something that’s a few billion dollars. And as everybody knows, like there’s not a ton of liquidity flowing into the venture asset class. So you know, us having an strategy that can pursue investments on cap tables, doing things, you know, alongside our GPS,

Alexa Binns 08:15
mind just giving us a lay of the land of what, what StepStone’s venture practice looks like? Yeah.

Anthony Giambrone 08:21
Today we’re about 130 people. We’re now 90 people exclusively focused on investments in research. So, you know, as a platform, I think we’re probably one of the larger, you know, one of the larger groups in VC, you know, we’re probably managing somewhere around 25 billion in sum. We do that, you know, out of kind of the core office in Baltimore, but, you know, have since built out teams in the stepstone offices that were focused on venture and growth in La Jolla as well as New York, but also have a presence in London and across Asia as well. So, I mean, we’re really a global organization, and we’re doing, you know, everything through this fully integrated platform that does funds, directs and secondaries, and, as I mentioned maybe earlier, like pre seed to pre IPO. So we kind of get to see and do a lot which, which makes things really fun and interesting

Earnest Sweat 09:16
with so many, so many different, you know, types of products that you all invest in, and strategies. How do you all leverage? When is the right time, I guess, the collective you know, knowledge of the team. How do you best like leverage? Leverage that so teams are working together to understand, hey, this is probably the best time in this type of product, or this type of vertical or this region to invest in secondaries versus directs,

Anthony Giambrone 09:52
I would say the most important thing we’ve probably seen over time, and this is very pertinent for early stages. It’s probably impossible to time the venture market. You know, we would say you really need to have a strategy if you’re allocating to early stage VC, where you’re doing that incredibly consistently, you don’t want to pile in, you know, when the markets are really frothy and then be pulling back when the markets seem to have reset. So, you know, we would say the recipe for success in early stage is basically to always be doing it, but being measured in your approach and very thoughtful in how you may allocate and a lot of that’s just because venture returns are tied a lot more to innovation cycles and the innovation waves, they can be certainly supercharged by what’s happening from a macro perspective, too. This was definitely the case in 1011, and 12, where you had a kind of post GFC reset, but you also had the mobile and social wave. So you know, our advice to people is, especially in the early stage, basically figure out how to always be doing it, and then you may tactically allocate to growth stage directors or secondaries. But I mean, we’re, we’re, we’re never really trying to time the market. And that’s, you know, I think that’s a really important thing about our approach

Alexa Binns 11:12
addressing vintage volatility. Sounds like one way you do it in terms of your allocation strategy, I’ve heard you say it’s 100 about 100 companies generate 50% of exit value over the past decade. And anything else you can share about how your strategy sort of tries to address this unique, unique element of venture.

Anthony Giambrone 11:36
I mean, it probably won the consistency piece. So, you know, we’ve looked at analysis that has told us that over the past 20 years, it’s probably been five to seven vintages that created 80% of our performance. I mean, that’s kind of a really interesting stat that we think reinforces that message of being consistent. Because you don’t know if you’re coming into the best vintage or the worst vintage. But you know, if you are consistent over time and you are getting upper quartile exposure through your relationships, you should be rewarded for that. But you know, specifically on the companies. I mean, I think the power law everybody understands. I think it’s getting more acute because the outcomes for certain companies are getting even bigger and are having even more impact on vintage level performance too. So, yeah, I mean, as you mentioned, like we saw data, and it’s basically saying there’s been 100 companies that have generated almost, you know, 50% of the exit value. And if you look at companies that are still private today, it’s probably 15% of active unicorns that are 60% of that collective private market cap. f

Earnest Sweat 14:00
You mentioned overall that your team generally has been optimistic about venture and that says a lot, because given you know, with the consistency, that makes sense, but also understanding there’s going to be some tight, tight periods, and we’re in one for most of the market. What actually has you all excited about the venture asset class today?

Anthony Giambrone 14:25
Yeah, I mean, I would say the two opportunity sets we’re really excited about right now. One would be an early stage, you know, pre seed series A. There’s just so much interesting stuff being built. The ambition of entrepreneurs is really high right now. We’re seeing that in categories that are further out on the risk curve. So aerospace and defense, energy chips, you know, obviously AI and ML, just so many interesting companies being built that are very high risk, high rewards. And if you’re doing venture, I mean, that’s, that’s what you’re playing for. So, you know, I think we’re inspired by the ambition of the entrepreneur. Orders that get us really excited about what’s happening in the early stage, and at the same time, kind of the other end of the barbell is what’s happening in the secondary market. You know, there’s probably over a trillion dollars of unrealized nav in the venture asset class. You know, I think we’re maybe optimistic here today. But, you know, the windows sometimes close as fast as they open, so we don’t, we don’t ultimately know, but you know, as we look forward over the next decade plus, you know, we do think there’s going to have to be new and creative ways to solve the DPI and distribution dynamics in the venture asset class. I think we’ll hopefully have an opportunity to do that, but we certainly won’t be doing that ourselves.

Earnest Sweat 16:06
when there’s more like ambition from founders and they’re trying things that are further out in the risk curve. How has that adjusted your diligence of fund managers as well as, you know, founders themselves.

Anthony Giambrone 16:25
I mean, I think one of the things that we fundamentally believe is, you know, there is a lot of preferential attachment in venture and there is going to be a group of GPS that are going to attract the opportunities to work with the best founders. And, yeah, there’s a lot of self reinforcing dynamics within that. If a GP has been successful taking other companies to big exits or outcomes, you know, it’s just the fact that other entrepreneurs want to work with those same GPS. So, you know, I think for us, it’s identifying who are those people that we think can win in the marketplace and that can ultimately be partnering with who are going to be the, you know, the generational, defining entrepreneurs. And you know, a lot of what we’re doing is trying to assess that at a given time. You know, some of those people may be sitting, you know, still in traditional venture funds, but, you know, increasingly, we’re seeing some of those people maybe leave the platforms or the firms that they help build and are now spinning out as kind of emerging managers, albeit very experienced. But you know, those are, those are stories that that we get really excited about

Alexa Binns 17:33
and I’m curious, when you do think about sort of your emerging manager strategy, is it focused then on the spin outs, or is there another sort of bucket or category of emerging manager that’s also interesting to you?

Anthony Giambrone 17:50
I mean, I would say that has been the category that we historically have spent the most time on. I think one of the benefits to what we’re doing is we have so much information and data on all of the underlying assets and underlying companies having a really deep view on track records for all of these GPS across all of these different funds. So it kind of gives us a prepared mind, like, when we know someone is going to be spinning out from a firm, we probably have a view on what their track record looks like. And if that’s a story that we would want to be a part of. And you know, the reality is some of these, even if they may be fun ones for some of these spin outs, like the funds are very efficient in how they’re being raised.

Alexa Binns 19:15
any nuggets you can share, because you’re looking across so many managers on just insights you’re seeing, or just sort of some, like, interesting, interesting things you’ve pulled out of that have informed your own thinking.

Anthony Giambrone 19:36
I mean, some of it would be what I was describing. I mean, I think you just have to have tremendous conviction that someone is going to be able to go into that very competitive marketplace, and win the hearts and minds of entrepreneurs, as I mentioned, like it’s a really small number of companies that are going to drive disproportionate value. All of those entrepreneurs probably have the luxury of choice. From which VCs they’re going to take money from, and so how you show up and how you win in those scenarios, you know, that’s something that we think is super important. So whether that’s a network edge or some ecosystem advantage, whether it’s research, you really have to have some edge to be winning. And you know, it’s not just enough to identify like you do have to win that opportunity. And so if you’re a solo GP, or you’re, you know, spinning out and starting a fund, like you’re going to be competing against some of the best, best brands and venture at seed and series A and so you know how, how we kind of see people show up, and how we see people win. That’s what’s really influential on how we underwrite.

Earnest Sweat 20:46
Any tips for our other allocators on how you diligence after hearing someone say, hey, systematically, here’s my edge. Are there any tips and tricks on how you figure that out? If it’s true,

Anthony Giambrone 20:59
I mean, it’s always the element of art and science. You know, I think prior success, at least in venture, has been something that has been somewhat indicative to at least the potential for future success. You know, as I was describing preferential attachment, we think that the best entrepreneurs are often attracted to people that have been successful GPS in the past. So you know that that has been true adventure historically, but it’s always a blend of kind of matching where a person or a GP may be at a point in time with the firm. Obviously, in the early days in fund one, it’s going to look a lot different than it might look in firm or in fund three. And you know, you kind of have to have the belief that not only can they source and can they win, and can they add value, and can they drive these companies to successful outcomes, but can they build a firm and build an organization, organization and a team around them as well.

Alexa Binns 22:30
and for helping emerging managers stand out. Are there any common mistakes to avoid?

Anthony Giambrone 22:36
I think the biggest thing is just understanding one who is on the other side of the table. So, like, from an allocated perspective, what their program might look like. You know, as a fund of funds, we’re oftentimes very limited in the number of slots that we might have in a given cycle. So, you know, we kind of have a manager roster. That roster probably stays fairly consistent, fund over fund. So if you look at seed, for example, you could be talking about 15 or 1600 US funds. And in a given cycle, for a new seed relationship, we may be down selecting to one or two. So you know, the down selection is really tight, so just very competitive to kind of find a slot within a fund of funds, we also have advisory relationships and SMAs that, you know, we’re we’re able to partner with, what, maybe some, some additional groups. But just the overall down selection for a group like us is really tight. And so I think just understanding that, you know, at a given time we may not have an opportunity to invest, or in a given cycle, we may not have an opportunity to invest, but we’ve been doing this for 25 years, hopefully we’re doing it for another couple decades.

Earnest Sweat 24:23
Are you seeing across all the different managers, surprises and kind of underweight strategies, like, Are there any strategies you wish you saw more of?

Anthony Giambrone 24:35
I mean, we’ve never really had a hard view on people that may be investing broadly versus people that may be specialists. I think the reality in ventures performance is probably it’s got to be like, upper quartile performance has got to be absolute. Can be relative. So at the end of the day, like you have to believe that these GPs are going to be in the best companies full stop. But you know, we have partnered with some groups. There may be more specialists, but I think that within these specializations, they can build really big companies. And probably some of these people have done that in those categories from their prior roles. But there are certain segments, you know, like the micro growth segment, which is a segment we’re spending a lot of time on right now. That’s an exciting category. A lot of people that have grown up and maybe second generation growth equity funds that are now spinning out to start smaller funds, and, you know, we’re spending a lot of time there, so that’s that’s an opportunity set that we’re kind of excited about, that really slots within the emerging manager landscape. It’s just not kind of a traditional VC type underwriting

Alexa Binns 25:40
now, given that there you’re trying to get into those 100 companies, that’s probably the most clear and thoughtful answer we’ve seen to generalist versus specialists, that who cares what you are if you if you overlap with Those, those huge winners, and we have so many LPS who are listening who don’t have the kinds of data and 25 years of historical references. What’s your advice to them on entering this asset class?

Anthony Giambrone 26:19
it’s similar to how GPS might think about entrepreneurs. And, you know, having to have some mouse trap that enables you to get access to the best entrepreneurs for LPS, I think you have to be really thoughtful. You know, do you believe that you can get upper quartile performance either directly, and if you can’t do it directly, you know, can you do that through partnerships? You know, I would say we’ve seen interesting changes cycle over cycle. At the end of the last cycle, you saw more and more LPS going direct. You know, I think now some LPS look at what you know, vintages, 2021 might look like, you know, I think they’re now saying, hey, maybe it’s better to have this partner approach, to do things through a more diversified set of vehicles, and to rely on, you know, a group like stepstone that has 90 people exclusively focused on venture and exclusively focused on having relationships with anybody that might be in market, not just in the US, but kind of on a global basis. So, you know, there’s, there’s a lot of different ways to do it. I think you just have to feel really confident that you can capture the upper quartile. If you’re not capturing the upper quartile and venture then, you know, the risk and illiquidity probably make it not as compelling of the situation.

Earnest Sweat 27:45
A quick question on just that, on that part Anthony, because ventures in the early stage have become way more mainstream and more players have entered, even those from different asset classes. Is the top quartile good enough anymore?

Anthony Giambrone 28:02
I mean, I think our view is that there used to be a very wide dispersion in returns. If you went back, you know, 20 years of adventure, you know, the bottom quartile meant you’re probably losing a lot of money. The median, you’re maybe breaking even, and the top quartile was probably 20 to 25% Yeah, as we went through the bull market cycle, you actually saw that the bottom quartile lifted up to basically zero, and the median was maybe 10% so you had people participating in the bull market, and what was the riskiest asset class, and you couldn’t lose money. So, you know, we think that the next evolution of venture probably is going to look more like what it looked like in the past, where there’s going to be a wider distribution and returns. You know, one of the things that we do think is true, though, is that some of the outcomes that you’re seeing in venture are certainly bigger than, I think, what people have historically imagined. We’re definitely seeing that in AI and NML with what’s happened with the foundational model companies.

Earnest Sweat 30:08
One thing that we talked about in the kind of pre conversation was how to really approach secondaries. And you brought up a good point that you know, on some recent research about how to think about discounts connection. Can you share that with our audience?

Anthony Giambrone 30:27
I mean, it’s maybe a controversial view in our practice of doing secondaries, over 25 years, we’ve probably found that the discount matters a lot less than the underlying asset quality. You know, in our secondary business, we’re buying directly on the cap table of companies. It could be a single LP interest. It could be maybe GP led solutions. But you know, what we’re always hunting for is really high concentrations of nav in the companies that we believe are going to be, you know, those of consequence for the venture funds, and ultimately for the venture vintages. So for us, it’s been a lot more about pursuing absolute asset quality versus chasing discounts. You know, we think in broadly diversified venture portfolios, there could be a lot of fools gold. There could be stuff that, you know, depending on valuation policies, may look valuable, but you may find over time and at exit, those things could be less valuable. It’s one of the benefits that we have of being like a really big primary investor, is we have valuation viewpoints. We can have valuation viewpoints on one company six different ways across venture funds. So when we’re looking at secondaries, you know, we’re also really leaning on that informational advantage that we have from our primary fund business.

Earnest Sweat 34:33
You mentioned, we all know it’s a relationship business, but now with more automation, I think the end with everything that’s happening in AI, the markets are swiftly changing all the time. It’s actually, in my opinion, kind of removed. Mean, FOMO in a real way, because everything could change. A ton of revenue can be gained. A ton of revenue can be lost and churned. How do you, what do you see as the impacts for the actual venture capital role with all these things that are happening around AI?

Anthony Giambrone 35:22
I mean, I would honestly say that the relationship piece starts to matter even more. I think that you’re going to have the identification of companies become ubiquitous, like everybody will have access to at least the public sources of information. Everybody will be able to identify these companies. But you know, why are you going to win if, if this is truly an elite entrepreneur building what could be an elite company, it’s kind of like, how are you going to show up to that entrepreneur and earn your place at the table? It’s hard for me to imagine a world where there’s a digital venture marketplace. An entrepreneur says, I want to raise X amount of money. And on the other side, there’s a series of bids, and they’re going to make their decision based on what the highest bid is. I just think that the human elements of the venture are going to be consistent. But I do think the identification of companies, you know, I think that that piece is already being very automated. I think, yeah, some of these companies are probably being called on by dozens of different associates from different funds. And so, you know, when you see people winning, you know, that’s that’s a big signal for us, obviously, at the early stage, you know, we’re paying a ton of attention to this and this would probably be like a pre-seed and seed, how are the companies developing operationally? What do downstream investors look like in those businesses? So there’s just a, there’s a lot of stuff that I think we’re ultimately tracking, but I think there’s just a human element of venture that’s, that’s always going to be a play. Because, you know, as of now, it’s, it’s still people that are building companies. AI is obviously a much bigger part of what’s happening in every industry, but you still need great people to build great companies.

Alexa Binns 37:10
You spoke briefly to the maybe opening of the IPO markets, and we’ve seen MQ finally heat up with AI talent acquisitions, curious with your relationships, with your LPs, what the conversations are like around liquidity, or, you know, how you where you’re coming to terms there, if there’s any agreements on how I don’t know timelines or how you should be approaching it,

Anthony Giambrone 37:34
Everybody wants more of it. I do think it is, it is something that is an asset class. GPS does need to be thoughtful about it. And they do need to be thoughtful if there’s no MQ and there’s no IPO that can generate liquidity in your portfolio. If you’re coming back to market with a new fund, you know a lot of LPs are in challenging positions, depending on what their program looks like. They do need some DPI to be able to support new strategies. So you know, that’s why for us, like what we’re doing in the GP LED market right now, with just a ton of education, a ton of content, a ton of resources to provide to GPS, really, how to think about things, whether those are continuation vehicles, if you’re registered, how to think about tender offers, how to think about strip sales, things that you can be doing from a portfolio management perspective, to generate DPI and to generate distributions for your LPs. I do think it’s, it’s an existent, existential thing for a lot of people in the venture asset class, and something that, you know, outside of building the portfolio up front, something you need to be thoughtful about building the portfolio at the tail or, you know, exiting the portfolio at the tail end.

Earnest Sweat 38:48
Anthony, you got you all have been both at green spring and now stepstone really leaders of the allocated kind of industry. Where do you see the next 10 years for your platform going?

Anthony Giambrone 39:03
I mean, at the end of the day, North Star for us is to be the most valuable life cycle partner that we can be to, you know, the entrepreneurs, to the GPS and to our LPs. I think we believe capital gets more and more commoditized over time. We wake up every day and ask ourselves, How can we be a better partner across you know that that spectrum of people that we’re working with investing into things like our portfolio Impact Program, you know, at the end of the day, like our manager success is our success, and they’re really sitting at the center of our universe. So, you know, everything that we’re doing is really oriented around how to make our GP relationships and our portfolio companies, whether they’re direct or indirect, more successful. So I don’t think that will ever change. You know, I think at different times for some of our funds, we’re going to optimize the strategy based on where we think things are more interesting from an opportunity set perspective. So, you know, we think the US is a great place to be investing in innovation right now. A lot of stuff that we were describing around, you know, what’s happening in some of the more you know, some of the more interesting categories of deep tech, like that’s, that’s great exposure, in many ways, feels like we’re in what’s a technology Renaissance here, in the US. So, you know, we’re going to continue to lean into that. We’re going to be thoughtful about how we execute in the secondary markets, because we think that they’re interesting buying opportunities. But it’s also going to be a really important part of the venture asset class that looks probably different from how venture looked in the prior decade or two. So, you know, I think the reality is we will see very scaled companies, companies like Stripe, like Databricks, like open AI, these companies are doing private IPOs today. And I think the reality is, you will have early stage venture funds that may be invested into the next generation of these companies, and the entirety of their hold may ultimately be in the private market, they may never see the public market or an MQ event. So, you know, there’s going to be more off ramps, certainly. And we think that’s already happening today, but in the next decade, I think that’ll be a huge part of the asset class.

Alexa Binns 41:16
Man, thanks so much for being here and and generally, just being a super open partner to everybody in the industry, because it’s so it’s so interesting always to read everything you’re publishing, and now we’re getting to hear what

Anthony Giambrone 41:31
you have to say, what’s it’s an honor to have been invited here, you know, from, from humble beginnings in West Virginia. And, you know, we, we just, we kind of keep a healthy paranoia. I think we’ve, we’ve enjoyed some historical success, but, you know, we continue to make significant investments into our team and into our technology platform to better serve our LPs, our portfolio companies and GPS, you know, in the future too. So, you know, we know that the competition will always come, and we continue to innovate ourselves