Alexa Binns 00:12
Today on Swimming with Allocators, we are thrilled to have Renata Aráuz-DeStefano, an investor at Pivotal Ventures. We learned about lessons from her early career in micro lending. Pivotal’s unique approach to identifying top quartile managers and a handful of blue ocean opportunities where more LPs and GPS should be putting money to work.

Earnest Sweat 00:34
Today on Swimming with Allocators, we have the pleasure of speaking with Renata Aráuz-DeStefano, Investor at Pivotal ventures. Pivotal Ventures is an investment and incubation company created by Melinda French Gates, French Gates has made a breakthrough commitment of $1 billion dollars to expand women’s power and influence through philanthropic grants, private investments, partnerships, and advocacy. Renata sits on the investment team at Pivotal, where they back both startups and fund managers that have products and strategies respectfully, that improve the lives of women and all they care for. So with that, we’re excited to bring on Renata today. Thanks for joining us.

Renata Aráuz-DeStefano 01:17
Thanks for having me. And thanks for the beautiful introduction.

Earnest Sweat 01:20
So I wanted to start. We always like to start off kind of like with the person and you have such a global and colorful career path to Vinter. Can you tell us how you got into this position? Sure.

Renata Aráuz-DeStefano 01:35
I appreciate that description as well. I usually just say it’s non traditional. I think this path started back when I was a kid. I grew up in Philadelphia, but spent my summers in Ecuador, where my family is from and followed a ton of inequities in Philadelphia. But really, it was more visceral to me when it was in my own family. So going back and forth seeing the opportunities that I had versus what my cousins were facing, just nearly because I was born in Philadelphia. So that got me thinking about like, why is it this way? Why do we have different opportunities? Why do we have access to different things, especially when it comes to money? So I remember in high school, my senior project, I ran a fundraiser for the school and the village, my dad from Ecuador. Because as a teenager, you’re like, how do I get money like fundraiser you saw brownies or whatever. So that started me on this path. really asking myself constantly, like, who’s making these decisions? How was capital allocated? And why are people deciding to allocate it in this way? So I went to school. I was really interested in the Latin American region. Just given my upbringing, I started my career in microfinance. So supporting small business owners, again, they’re excluded from the traditional financial system. So how do we get that capital into their hands? That took me back to business school to make the pivot into venture capital. Ultimately, I was in Nairobi for a couple of years, investing in climate tech. And then here at Pivotal, you know, we are using capital to advance social progress, we pull on different levers across policy for philanthropy and venture. And my team, in particular, as you said, works to really expand the number of check writers, women, tech writers in the US, we all know the stats, you know, 16% of decision makers in BC are women. So for us, it’s really about moving the needle by backing women led funds, and I feel a lot of alignment, just personally, to be at an organization that’s using capital to challenge the status quo and over the long term, hopefully change the face of venture capital here. That’s

Earnest Sweat 03:45
awesome. And you just touched on a lot of different things. You’ve definitely been involved in certain things, especially when you think about impact within the lens of venture going from microfinance to climate abroad. From those two experiences, are there any anecdotes or experiences that really shaped your now role in helping you become a better, you know, both venture investor and you know, help with finding great fund investment fund managers as well?

Renata Aráuz-DeStefano 04:22
Definitely, I’d point to two things. In microfinance, I was out literally in the field in the markets doing a lot of market research talking to our end user, and we really believed in a process that was co designing solutions to these entrepreneurs. They were folks who didn’t have credit scores, they oftentimes didn’t even have a bank account. Right? So we had to listen, we had to have empathy. And I think those are things I mean, BC you know, they talk about product market fit. I think a lot of that translates and even as an LP you want a GP who understands their end user who understands the founder has empathy for the founder. So I think some of these soft skills really translate. And in terms of my experience in Kenya and Nairobi, I think the importance of having diverse founders at the table, the importance of having a diverse pipeline sourcing in places that are beyond, you know, certain schools or certain countries, I was really surprised being in the Nairobi ecosystem, just the number of founders that we’re getting back to that were maybe from Europe or from the US. And, in turn, a lot of local founders would be overlooked. And I think we see the same trends here in the US, different communities, women founders, black Latino founders being overlooked. But I think it’s pushed me to be more proactive and more critical about things like how we’re sourcing at the top of the funnel.

Alexa Binns 05:51
I really appreciate hearing, you know, how both the industry has been growing and sort of becoming more effective at using investing for change. And also, it sounds like you’ve potentially had some exam examples where you’ve changed your mind about where your thinking has changed. Can you share any of those examples of maybe something that you initially thought, and then through these various organizations, you’ve, you’ve come to have a different approach.

Renata Aráuz-DeStefano 06:25
I think I have bounced around like the change I’ve been hoping to effect has been the same. It’s about access to capital, it’s about equity. And I know that there’s various tools, right? Going back to my college days, I could have maybe gone the pre med route and been a doctor and like, there’s all sorts of ways when you’re thinking about what equity looks like? So I think for me, it’s having that flexibility and that curiosity. Microfinance was one channel and the organization as with Finca is still running, it’s based here in DC. I get coffee occasionally with the President. So I think, as a younger person, I was very much, you know, solution oriented, there has to be one right answer. And I think as I’ve grown, as I’ve sat on different sides, I even did a stint in investment banking, and really, thinking at a high level, like the ways we can use capital to affect change, and there not being a right or wrong. Here at Pivotal. We talked about having different tools in our toolkit. We work on policy, we work on philanthropy, and also on venture. So I think it’s really about looking holistically at the solutions needed to advance social progress. And then kind of looking at our toolkit to say, Okay, what’s appropriate for this opportunity? So I think that a flexible mindset is something that I’ve learned over the years.

Alexa Binns 07:47
No, I’d love to hear more about that toolkit compared to your standard allocators. How your approach is a little different,

Renata Aráuz-DeStefano 07:55
of course. So as I mentioned, we have a team that works on the philanthropic side, as well as policy. And across all three kinds of verticals at Pivotal, our Northstar is expanding women’s power and influence, that $1 billion commitment, the Earnest mentioned in the beginning. On the VC side, the way we interpret that or the way we act on it is by allocating capital to women led and co-led funds. Because for us in venture capital for women to have a seat at a table to have power and to exert influence, they need to be the check writers. So we are engaging as an institutional LP, to your question about maybe how we think a little differently about the tools in our toolkit. We are still seeking top returns. And I think that’s a key aspect of our strategy. There is this persistent misconception that by backing women led funds or funds led by a black or Latino GP, that that’s concessionary in some way or that it’s an Impact Fund. But we really want to demonstrate through returns that our portfolio will outperform and that diversity wins. And I think in terms of the diligence process, and how that shows that maybe more concretely, is that we take a very holistic approach. We don’t have a minimum number of years of VC experience, we don’t require X number of angel investments in terms of a track record. For us, lived experiences are really important. Your networks have access to a diversified pipeline, and like really unique sourcing strategies, all that really is something that we evaluate at the same level as we would a traditional track record. We don’t believe that there’s a right way to be a VC. I mean, just look at my background. And there’s no blueprint and we aren’t going to ding someone for not having sat you know, a top tier VC firm for the last 10 years.

Earnest Sweat 09:54
I want to just hold your kind of train that you’re headed to on that because I have some questions around your selection criteria and where you see opportunity. But at first, I wanted to kind of double click on pivotal. And, you know, in the research seeing that it was established in 2015. That’s a very interesting point of like all the things that were going on within the market to now. What’s the case for an organization like pivotal still today? And why do you believe it’s critical given all of the different macro trends happening in the asset class and the potential for more contraction,

Renata Aráuz-DeStefano 10:34
I may be biased about things as high as sitting at Pivotal today. But I think our work is more important now than ever. The stats for women led companies getting funded is that for black women founders and Latino women founders, they’re not budging. So I think this thesis remains relevant and remains important. And in this macro environment, where a lot of LPs are pulling back, were fun, fundraising timelines for VC funds, especially emerging managers are taking longer, where folks even on 123 are having trouble getting to their target, Aum, the fact that we’re able to still be active in the market, I think is a game changer for the funds were able to commit to.

Earnest Sweat 11:23
Makes total sense. Now we’re gonna take a quick break to speak with our sponsor. On the show today, we have an industry expert and sponsor, Rachel Waddell, Vice President of Investor coverage at Silicon Valley Bank, a division of First Citizens Bank. Thank you, Rachel, for partnering with us on the show and being on the show today.

Rachel Waddell 11:42
Yeah, hi, Earnest. So excited to be here and appreciate you having me excited to kind of dig into some of the market data and venture trends that our analytics team produced this year.

Earnest Sweat 11:54
Absolutely. I want to jump right into it. So as you mentioned, SBB publishes reports and one is a biannual report on the state of the markets for the innovation economy as a whole. My question to start off is, have we hit the bottom of this cycle yet?

Rachel Waddell 12:13
Yeah, so I mean, it does appear that we’re reaching a floor USBC investment has been relatively stable since July of this year, holding at about $180 billion, trailing 12 months. What you know, is a significant drop from the $450 billion and USBC investment in 2022. But we are still above 2018 levels and historic norms. And then it’s also important to note that we’re sitting on a record amount of dry powder that’s waiting to be deployed with over $280 billion and undeployed. Yes, VC funds, so that can really fuel the next VC boom. And we’ll likely see an uptick in deal activity in the latter half of 2024, as companies run out of runway, and potentially public markets open back up.

Earnest Sweat 13:06
Okay, can’t wait until that time, we’ve been kind of kicking, kicking it down the can of optimism, but I feel like it’s coming. And so your research breaks down how GPS general partners are using net asset value loans far more, we’d love to hear about that and what it could signal for LP distributions. Yeah,

Rachel Waddell 13:32
definitely. So yeah, nav loans are alternative liquidity solutions, primarily used by private equity and growth equity funds, when they need additional capital to invest in their portfolio, whether that be a follow-on investment, a new deal, or to help finance an acquisition. And they’ve really grown in popularity the past couple of years. And what we’re seeing with the muted exit environment is that GPs are really experiencing kind of more paper gains and actual returns to their fund and distributions to the LPs and LPs are really in need of these distributions to manage their own cash flow, and operating budgets. And so we’re actually kind of seeing a shift in the purpose of NAB loans and likely see an uptick in them. Where previously they were historically they’ve been used more for portfolio enhancement and IR enhancement, but we may see a shift and now they’re used more for LP distributions and liquidity management.

Earnest Sweat 14:33
Rachel, you’re such a good partner here in the venture ecosystem for folks who are interested in getting in touch with Rachel and SVB. Feel free to email her at rwaddell@svb.com. And now back to our LP interview. Now, so with all that a lot of people are still, you know, committed to raising new funds. Just curious what you all are seeing in the market? Are you seeing any strategies being overused? You know, I won’t use the two letters that are being used in every VC pitch decK today? Or are you seeing any interesting blue ocean approaches?

Renata Aráuz-DeStefano 15:16
Sure. So to the two letter word that you’re referring to, I think for us, we have an AI fund in our portfolio, but we committed years ago, right. So if this is something that you’ve been doing, if you’re an engineer, if you’re a PhD, if you have that background, we’re all for it. Where we hesitate is where it’s a fine, that was a generalist six months ago, and now they’re adding AI into their decK. So I think just being thoughtful about that, it goes back to something that’s really important for us in the diligence process, which is, you know, as there’s founder market fit, we also want GP market fit. So if you have the experience within the profile to have an advantage and a certain sector, we think that’s great, and a huge value add in terms of things that we’re seeing or approaches that we really appreciate. We do have a large concentration in the bay and New York, of course, but we are really excited about folks that are approaching sourcing differently, especially from a geographic perspective, a fund we committed to I was just with them yesterday in San Francisco, beta boom can be pollution. So their tagline is everywhere, but the bay. They’re based in Salt Lake City, they’re appreciated and have a seed fund. And they’re really capitalizing on these overlooked founders who just aren’t getting the same access to GPS and to funding as folks who are in the Bay Area, for example. So I think that’s a great example of something that we get excited about, into our earlier conversation about this gap for women founders for black and Latino founders. Especially at their early growth stage. So series A B, there’s this cliff that we all talk about and persist to this day. And that’s the space that we’re hoping to address. We’ve invested in one fund called rethink impact which backs women lead founder women led companies, and they go up to series A and B, I’m sorry, let me rephrase. So rethink impact investing from late seed to Series C, so they’re with women led companies through that crucial juncture. And then another fund that we just committed to this year, and their first close was charity, rock capital. And they are focused exclusively on the series A and B, for black and Latin founders. So I think folks that are taking a step back, evaluating the market and seeing where their gap is. And, of course, have the team in place to be able to address that. I think those are really exciting opportunities. That’s great advice

Alexa Binns 17:59
that some of these emerging managers should be looking a little higher upstream. I certainly have experienced that. Firsthand, I’ve worked for two amazing female GPS. And when you’re investing at the pre seed and seed stage, there’s a lot of girls to share deals with. And the rethink team is only one that can come to mind for me, who I would share those later stages with. And

Renata Aráuz-DeStefano 18:26
It’s tough, right? Because the stage that you invested in is very much influenced by how much money you’re able to raise. So as an emerging manager, as a woman manager. Unfortunately, it’s a bit harder to raise, it’s a bit harder to raise a big fund. So we see that with women led women that funds, diverse led funds, unfortunately, kind of pigeon holed into earlier stages as a result of the fund size that they’re able to raise. Yeah,

Alexa Binns 18:56
absolutely. Do you have any advice for gals who are in the market raising right now on strategies, you’ve seen work to close that fund or to to get that second close?

Renata Aráuz-DeStefano 19:14
I would say just top across the board. You all know probably the LP or VC fundraising is on track to be on a decade low this year. So it’s not just women led funds. I think women led funds bear the brunt of it. So an emerging manager more generally, because inherently as an emerging manager, you have less of a track record. As far as advice. We talked a lot about having a minimum viable fund size in mind. I hate to say it goes against what I was saying about, you know, raising for later stage early growth funds. But I think given the market GPS we’re able to level set and understand that closing is a smaller amount. Getting a track record will just make it easier to come to market in, you know, 18 months when hopefully, the markets are picking up a bit. So for us, we’d rather you close at a smaller AUM and start investing, then be investing or be fundraising for two years, and then have less time to dedicate to the investing side. So thinking about minimum viable fund size. If you do have investments, it is really important to focus on the runway, that is what everyone’s talking about now. We want to see you prioritizing the health of your companies and have a strategy around how to support them. And I think we are here to help take calls with any woman lead or CO lead fundraising in the US. And even if it’s not a fit for us currently, because for example, right now, we’ve hit our allocation targets for the year. But we’re always making introductions, we’re sharing our diligence memos with CO investors, we really want to support folks and getting over to the finish line

Earnest Sweat 21:12
makes total sense. Kind of a flip side of that question, once you’ve already supported a manager, what’s your advice? Now when the market they’re looking to raise a fund to or fund three or even I’ve heard dependent, especially if it’s an earlier stage, strategy, even a fund for what advice? Are you giving those managers or any managers that are out there?

Renata Aráuz-DeStefano 21:36
Sure, I would say we let our GPS take the lead, we’re not saying you should raise x number of millions of dollars. But we are seeing GPS proactively respond and some of the ways that I’ve shared and lowering their target AUM in, you know, maybe they had aspired to change a few things and their fund model and a portfolio construction. But I think the name of the game today is keeping it as simple and as consistent as possible. No bells and whistles, no new strategies, because of the shift in risk tolerance and appetite from LPs. So yeah, lower AUM target, lots of consistency. When it comes to fees when it comes to sectors. Folks just want to see, did you do what you said you would do? Are you going to keep doing the same thing? I would say Now’s not the time to have a lot of changes to your strategy.

Earnest Sweat 22:36
When let’s say I’m a new manager, and if the time is that right, but we were staying in touch, can you give us like a glimpse from an LP perspective on what actual data points you’re tracking, and to stack rank against existing managers versus new managers, we’re looking to make new allocation.

Renata Aráuz-DeStefano 22:58
Definitely. And I would say there are a few funds in our portfolio where we met them for a fund one and then committed a fund to so with us, it truly is a wait and see. In terms of what we’re tracking, we always like to get on a distribution list. So hopefully you’re sending updates at least quarterly, we want to see how your fundraiser is progressing who’s coming in as an LP pipeline, if you don’t have investments, even a pipeline, and it can be anonymous, but we want to see what is exciting to you where they’re based what the founders are like. So as much Intel as you can share there, I think it’s great. As we mentioned before, starting to record, we travel a lot. And we’re pretty open about that on places like LinkedIn. So if you see that we’ll be in your city, reach out, let’s grab coffee. Hopefully you can make it to an event we’re at. Keeping us up to date in that way is great. It’s a little less informal, but more about building the relationship. And we review the pipeline internally on a quarterly basis. So if you’re able to update us in a similar cadence, I think that’s great, because then you’ll stay top of mind, we’ll have some updated data to review. And then we can have conversations as needed.

Alexa Binns 24:15
No, that’s, that’s great to hear that you are expecting a long term relationship. So just we’re in November, it makes sense that you have already committed for the year but these relationships take time, a sort of open ended question for you. Is there anything that you see folks, whether that’s other allocators or GPS or VC Twitter that get wrong when it comes to venture today where you have a more nuanced or counter opinion?

Renata Aráuz-DeStefano 24:45
I am now on VC Twitter for better or worse.

Earnest Sweat 24:50
That’s for a better that’s better, okay.

Renata Aráuz-DeStefano 24:54
What do folks get wrong? I mean, immediately given our platform, I go back to This misconception about what it means to have impact and what it means to invest with an eye toward social progress. Given my background, you know, even in microfinance, it’s a loan, there’s a relatively high interest rate just because of the cost of getting that loan, you know, we have to go to rural communities, etc. So I think a through line through my career has been, yes, equity, yes, access, but also market driven solutions. So unfortunately, you know, I started in microfinance in 2012, like over a decade ago, and we’re still at a place where I think that companies whether it’s a microfinance organization, whether it’s a Impact Fund, there’s still a portion of the VC sector that considers that to be catalytic investment to be concessionary. And, again, I think that’s what we’re about to debunk with our portfolio. We have, you know, we wanted our funds all to be above median, hopefully, a lot of first quartile funds. So I think that’s something that persists and that we’re actively trying to disprove.

Alexa Binns 26:13
No, and we believe it, we believe,

Renata Aráuz-DeStefano 26:18
I believe, beyond

Alexa Binns 26:20
what we’ve discussed, any words of wisdom to share with our audience, or this community includes allocators and investors? I

Renata Aráuz-DeStefano 26:30
I think the reality is, it’s a tough time for everyone involved. What I keep going back to and what our team always pushes on is this idea of remaining curious and open minded. And really having this growth mindset. We reevaluate our diligence process on a yearly basis at least, we’re always challenging our assumptions, what biases do we have, we recently conducted a project with an organization called the racial equity asset lab, to really evaluate our process from start to finish. Because while we do consider our process to be extremely accessible and equitable, from a demographic perspective, we always know that we can be better. So we wanted some fresh eyes on our diligence process, they even had reference calls with funds that we passed on. So I think that’s just an example of how I think LPS in particular, just given the check sizes that we write the influence we can have, it’s important for us to continue to challenge ourselves. Because at the end of the day, we need to be evolving in the same way as the rest of the sector as the GPS as the founders, you know, we want founders who are curious and have a growth mindset. And I think as LPS we can adopt that mindset as well.

Earnest Sweat 27:50
That’s great. I don’t think I don’t think we need to add anything else to that. It was awesome. Renata, we just want to thank you for joining us on swimming with alligators. We love pivotal moments. We do have everything you do.

Renata Aráuz-DeStefano 28:06
Thank you. Thanks so much for this opportunity and Congrats on getting the podcast kicked off.

Alexa Binns 28:18
See you later, Allocator.