Earnest Sweat 00:02
On this week’s episode of swimming with alligators Alexa and I had the honor to speak with The Equity Alliance team, which is led by Claude Grunitzky and Adrienne Rees. It was such a great conversation, right, Alexa?

Alexa Binns 00:25
Talk about getting to ask some of those burning questions you’ve always wondered. Like, they told us what KPIs actually matter, and which totally don’t give a really good defense of fun to fund the math around that if you can afford some play with somebody like Adrienne, or you can’t?

Earnest Sweat 00:43
They probably can’t.

Alexa Binns 00:45
And I also really appreciated their points on how you identify emerging managers with our church, traditional track record.

Earnest Sweat 00:54
So with that, let’s jump in. So today on Swimming with Allocators, we have the pleasure to speak with Claude Grunitzky, the CEO, and Adrienne Rees, the CIO of the Equity Alliance. We’re really honored to have them because it’s a great organization. And that has an operation with a goal that I think everybody will be excited to hear about. The Equity Alliance is a hybrid fund that invests in VC funds, and startups founded by people of color, and women. They have set out to deliver superior returns by investing in diverse managers and founders that the rest of the venture market has traditionally overlooked. And so with that, we’re really excited to have both Claude and Adrienne here. Thanks, guys.

Claude Grunitzky 01:44
It’s wonderful to be on those podcasts swimming with the alligators.

Earnest Sweat 01:51
I’m glad I’m glad you’re a fan of the name. The perfect name I’ve always felt even when talking to founders is one that is polarizing, right? Either people like it or hate it. And so I think we’re right in that. So we have one vote, Alexa and we like it. Before we kind of get into the nitty gritty of like what you guys are doing. I first wanted to ask just like, what’s the story behind the Equity Alliance? How did it come together? And yeah, just want to kind of hear the origin story.

Claude Grunitzky 02:22
Yeah, it’s it’s a pretty interesting and I would say quite unusual story, because the Equity Alliance is really the brainchild of Dick Parsons, our chairman and founder was having a conversation with his friend Kenny, who is the founding managing partner at Lera hippo, which is now New York’s most active early stage VC fund. They were thinking, what could they do to bring Equity to the space of VC. And they had this idea to start a fund more on a funnel funds model to back diverse underrepresented managers, and artisans I had known for close to 20 years, I had started building a relationship with him. Since he was the CEO and chairman of Time Warner. At that time, I was a founder, I had been running my media company trace. And after I sold that media company, Trey’s in 2010, a joke that I retired early in my late 30s. And decK is somebody that I always, always, always wanted to work with. And I was always hoping that the call would come one day to work with Dick. And so he called me and he said, Well, what if we started a fund to invest in women and people of color, because I just don’t like these inequities that I’m seeing in the VC space, and in the broader kind of asset management industry. And so that’s how we get started with just an idea. And this was in 2021. How

Earnest Sweat 04:02
Did you know? That? And 2021, obviously, you know, after a number of events, like, you know, George Floyd, BLM, and movement, there was a movement towards this. But how did that idea come from? Like, go from an idea to actually like, okay, there’s a strategy here. And a strategy that’s not crowded by other things. We can bring a differentiated perspective, like, how did you guys get to that point? What did you see in the market at the time that just gave you guys the confidence to say, Okay, we have an idea, and we need to create something new.

Claude Grunitzky 04:41
Well, initially, I was attracted to Dick’s whole model of welcome before we ran, and he intentionally wanted to start with a smaller proof of concept funnel one. And a lot of people who were kind of big name financiers in New York were like, oh, you know, your fun one should be $100 million. Given your track record and given Club’s track record, you should start a little bit bigger given also the enthusiasm in the market at that time for bringing equity in this kind of post BLM post, George Floyd moment, that kind of started after George Ford was born in May 2020. But Dick has one of the reasons he did so well in corporate America and rose to the top is because he is always under promise and over delivers. And so we set up to raise $25 million for our fun one, from a mix of institutional investors, and high net worth individuals and family offices and foundations. And we were quite happy with the mix of investors that we were able to woo for our fun one. But I have to say that it could tell when we were raising that first one, that a lot of people were investing because they felt that they had to do something about the state of the market. And now that we are raising funds I find it to be a very difficult conversation from that 2021 moment.

Alexa Binns 6:08
That’s a very helpful segue to understand that this is, this is a strategy based on our best practices. Can you give us an outline? Maybe Adrienne, this is where you shine on what this looks like in practice. Who are you looking to invest in as a fund of funds? And you know, what stands out with the managers you have selected?

Adrienne Rees 6:31
Great, yeah, they, you know, at the Equity Alliance, we invest in diverse emerging managers, you know, we believe that that is where the greatest value still remains to be unlocked in venture capital. But if we took the traditional approach to diligence on managers, we were just focused on MBAs from well known business schools track records, we would end up with a portfolio that looks very much like a traditional venture capital portfolio, which is disproportionately male, and disproportionately white. And so while we, of course, diligently do things like portfolio construction, we spend a lot of time really, really getting to know our managers. Our most recent investment took us over a year. And we thank them for their patience with us. But we really find that, you know, this is a business people are investing in people, and we really want to get to know them, and make sure that we make the right decisions and who we partner with, because we love to partner with managers for today’s refund cycles, which, which is a long relationship and a long partnership. So really, I think there’s three things that we look for that are most important in our decision process. And I think the first one is just really there, why everyone in their decision process asked the question of why does the world need another venture capital firm, but we took lots going on social capital. Take that to a little bit more of a personal level, because this is hard. And over the next couple of years, it’s gonna get harder. And the opportunity costs for almost anyone starting a firm and venture capital is really high. And so we really want to understand what drove you to decide to do that? So why spend the next 1520 years of your life building a venture capital firm? And it’s somewhere it’s going to take a long time before you surely see the fruits of your labor? You know, 1010 years at least. So I think really spending time with the manager understanding why they decided to do this is huge for us. And then really that is the first question we asked, you know, and then secondly, what we would call manager strategy fit, you know, similar to what we talked about often in venture capital investing or product market fit, but really, why did they choose the investment thesis that they’re pursuing? Is there something in their background, something in their past that leads them to be the best person in this industry? And why have they chosen a specific industry? You know, say for at the moment, you know, everyone says that they’re investing in AI, what in their background actually says that they know something about AI? How can they pick investments in space? So I think that’s key for us. There’s been an explosion in the number of venture capital firms in the last couple of years. And not everyone’s an expert in everything. So that’s really the number two thing we look for. And then, you know, as I mentioned, we inverse invest in emerging diverse managers. And this is a fun one, fun to sometimes offend three. And a lot of the diverse managers that we’re looking at don’t come from the traditional backgrounds of finance, they didn’t spend 20 years at one of the major VC firms and then spin out to just start their own firm. So some of the traditional indicators that LPS look at as two indicators of future success. It doesn’t really exist for a lot of our managers. So we have to take a different approach into understanding why they are going to be successful here, and if they don’t have a traditional track record, which most of them don’t, they typically have demonstrated success somewhere else in their careers somewhere else in their life. And Mrs. I think that’s really important. When you were faced with the challenge, how did you react? Where did you achieve success elsewhere in your career, and we use that as a sign for what we think they’ll be able to do here your adventure. So make those a bit, the key three things are really just understanding if this manager is going to be successful in what they do.

Alexa Binns 10:16
Like, like a couple of grand slams, for instance. Serena Williams, you know, she’s got an okay track record.

Adrienne Rees 10:26
Yeah, exactly. She’s been successful in one or two things outside of venture capital.

Earnest Sweat 10:33
Okay, okay, note to self win a Grand Slam. So you got you both brought up a couple of things of threads that I kind of want to pull on. And so I think one is this idea of differentiation from different emerging managers, and how they’re able to present that how they’re able to present their like, outlier potential of finding great companies. And then the other thing that was interesting was that you first brought it up, and then AJ, you spoke about as well as the social capital platform. And I want you to know, kind of like, how did those both work together? And making sure that Equity Alliance not only finds the best emerging managers, but also helps support them? It’s kind of like when I’m investing in a company. It’s not only about me, yeah, me finding a great company that has potential to scale is great. But the extra pieces if I’m able to contribute even a little bit to their success, and getting that and so how do you guys think about the two of those together that sourcing, but then also essentially, like, platform management of your emerging managers and using the networks that your LPs and founders have?

Claude Grunitzky 11:49
Maybe I’ll get started. And Adrienne could add to it, because the first thing I’ll say, in answering the first part of your question, Earnest, is that I’m glad we’re having this conversation now versus a year ago. Because Adrienne brings a crispness and rigor to these answers that I never had. And the sense, you know, things are a lot more process driven now than he used to be when I was kind of in the driver’s seat for investments, because a lot of the decision was still very much driven by instinct. And what the Nobel Prize winning economist Daniel Kahneman would call fast thinking. And so Adrienne is a lot more attuned to the new way of doing diligence. And that really complements some of my skill sets in that respect, because I knew instinctively that I felt that FinTech and health tech would be two very important sectors for us, given the importance of, of new kind of financial outcomes and new kind of health outcomes for people who live in underserved communities in general. And so we leaned into that, again, driving just this boat with just pure instinct. And with respect to what I mentioned earlier about the social capital platform, we really call that our special sauce. Because we’re an alliance, we’re not the Equity Alliance Ventures, we are an alliance because we aspire to be much more than just a venture fund that just writes checks, we have been able to bring to the alliance, some of the people who are leading investors, financiers, CEOs run major multinational companies. But we also have people who are strategic partners who are educators who are in industries that are just adjacent to the VC world as we know it. And because I spent years and years building this network, and I’m relying on the Nexus five decades of building this network, plus Adrienne’s networks plus everybody’s aggregated networks, we say to our partners, as an, the fund managers of the founders that we invest in that if you engage with us, not only will you get financial resources, but you will also have this incredible resource in the form of a wide ranging network of people who are engaged with us and can provide advice can provide exposure to media and potential additional funding. And we can look these partners in the face and with a straight face and say, Well, no one else has such a broad and deep network. And I believe that that’s how we can become an authority in the venture capital space because we do much more than just write a check. Adrienne, I think you can add so much throughout.

Adrienne Rees 14:49
Yeah, I think I think your point and got interesting people. He is spot on as far as where we start, right, I think this is early stage at the people business really having that social capital and being able to build that trust is key. But we joke internally, often that I started my career in investment banking, and the analyst who loves spreadsheets and I will never die. So we’ve really started to build processes around our diligence around our portfolio analysis and really understanding within the 23 funds we have in our portfolio to date, we have 525 underlying companies. So that’s 525 underlying founders seeking to build companies seeking funding, the majority of whom are diverse. And what we’ve really started to build is a system to track all of that. So we can see where there might be interest in another fund manager that we’ve backed in a portfolio company at one of our other fund managers, and really started to track the data at the underlying portfolio company level, so that we can really use the social capital, we have the networks, we have to help every one of those founders, and each one of our fund managers be successful. And I think really in the new age of, as I joked about AI previously, but in this stage, we’re really having our hands on the data and having our understanding of what’s going on in our portfolio, what’s going on in the portfolio’s of the managers we’ve backed and who’s being successful, is really going to help us to connect the dots among our networks in a meaningful way, in a way that drives capital to the hands of diverse founders and diverse fund managers. And so that we all succeed, right? And that this tide that we’re building raises all ships.

Earnest Sweat 16:31
Now, we’re gonna take a quick break to speak with our sponsor. I’m just curious, where do you think the venture is going to be in the next 10 years? Like, what do you see happening? Is there more distribution within certain regions, just curious what you think is going to end up?

Tim Flannery 16:54
Well, there’s always going to be contract contraction and expansion. But overall, I think we’re going to see an expansion, Aum, because the one driving force behind this is that products that have been primarily available to institutional investors have found their way to retail. It’s true public markets, whether it’s ETF or derivatives, that you can now trade on your phone when you stepped out of a stockbroker in the 1980s, as it is for alts. And so the ultimate goal was pioneered by David Swensen back in the 80s. For Yale, he took a billion dollar endowment fund to something that’s close to about $50 billion today. And the returns from that time have been fantastic. So something that was the endowment model, all the endowments adopted, then it became what all long term allocators have started to do, which is find a space in my portfolio for adults. And venture is a major part of that portfolio construction. And so if you just take a look at the space from then till now, back in 99, the entire venture market was about $50 billion. We have venture firms that manage more than $50 billion today. And I think this is still with, we still have this throttle, too, because we have all these different, there’s all these different managers who want to find ways to go build a retail strategy. But regulation doesn’t allow them to do it, technology doesn’t allow them to do it. The demand is there. For the managers, the demand is there on the ultra high net worth or high net worth, or anybody in between, they’d like to be able to participate. Right now. They’re just prevented from doing so. And so my expectation is that the venture market will continue to grow. But now it’s going to actually be able to grow in a way that’s more consistent with underlying supply and demand. And so as we see regulations change, we’ve seen multiple things go up around changing accreditation status around increasing the number of investors that are allowed into funds etc. Well, then you also have tools like this US that are going out to enable these kinds of things to occur. And so my expectation is that the venture overall, will continue to grow and continue to grow dramatically. If you’re looking over a 10 year time horizon. I do suspect we might have a bump or two in the road between here and there, though. With

Earnest Sweat 18:57
Do you think the number of venture firms will dramatically change going up or down and that expansion? Or do you have a view on that?

Tim Flannery 19:09
I would anticipate that firms contract and then expand and then contract then expand? It feels cyclical to me. Yeah. Overall, I think the trend is expanding when you’re taking a look at all the different geographies that people are going to, all the different investment theses that people have, and the ability to then go out and market these products to retail. Yeah, I do think that it’s going to overall turn to expansion but we’re gonna have some ups and downs between them in terms of number of funds and fund managers.

Earnest Sweat 19:37
Yeah, I definitely agree from the LP dollars as you mentioned, people having to expand where they reach right, maybe they’ve been in more family offices. Now. They’re going to institutional or institutional and looking at you know, more. If that is a fund of funds looking at endowments and pension funds thanks to Tim and the past 13 To find out how to give your LPS a better onboarding experience with Pastor go to pass through.com backslash swimming. And now back to our LP interview agent I wanted to, I was really excited to know, have you on the podcast caught you as well, obviously, as a renaissance man. But I wanted to talk to Adrienne because of her experience of bringing kind of the investment banking P E. LP working at family offices like one of the Walton family members. So just really appreciate kind of like your experience to date. And then where you’re where you see things are going. So one of the underlying questions I just kind of have is, why are you still interested in venture capital as an asset class with such a flood of capital, and noise? And then with that, where do you see the changes are going to come? Because it’s my view that we’re going to have some consolidation on all ends. And so kind of where do you see things going? And how is that really influencing the kind of algorithm that you’re playing in your head, and as far as the engine of Equity Alliances to be able to find the real Alpha?

Adrienne Rees 21:17
Yeah, I think that’s a great question. And I think specifically, in my background of having spent a lot of my career in private equity and an m&a I think it’s a move you don’t see very often into venture capital, because they are very different. And the diligence you do that the trends, we have seen, at least over the last couple of years have been very different. I always came to venture capital with my private equity investor hat, which I remember, I know the first VC deal I did, I showed up with my diligence question list. It’s like a page and a half of questions. To answer these questions, I thought, that’s what you’re supposed to do.

Earnest Sweat 21:58
You’re like, what is this? What is this new language? What is this profit? What is that? Yeah,

Adrienne Rees 22:03
What do you mean, like org docs, and have a board of directors, so we can’t give you the minutes? So I really tried to keep my focus on that type of diligence and on that rigor. And I think over the last couple of years, as everyone saw that the market just lost a bit of that, you know, we last discussed cash, right? We’ve always said in the private equity world, cash is king, right? That’s basic to any sort of accounting. And I think we lost that perspective a bit. And so now we’re starting to see a little bit of a reversion to a focus on cash, you see, cash burn, and runway showing up in pitch decks, again, we see our managers focusing on that, which is something that’s always been really important to me. You know, unit economics is a very basic principle, right, of any sort of company. How is this company profitable from the unit economics perspective? And, and how does it scale? And how do we achieve operational leverage as the company grows? So I think we’re starting to see a lot more of a focus again, on those sorts of basics of, of companies and on finance. And that’s something that’s a language I’ve always spoken. And it’s a language I’ve always focused on. And I think we’re seeing a reversion to that in the market. Now, diligence processes are slowing down. I think we’re seeing people starting to focus again, on what really is going to drive these companies to be successful. And that doesn’t mean that we don’t focus on big ideas, ideas that can change the world. But we also focus on ideas that we think are practically feasible from a unit economics and basics perspective. So for me, I’m really happy to see that in this market. And I think we’re seeing really a reversion to sanity. I think, to your point, I do think we’re gonna see consolidation in the market. I think that there were some tourist investors over the last few years, I think that there were some people that were able to get into this because they thought it was easy. And we’re going to see that when companies start to fail in their portfolios. And when founders truly need that hands-on experience that everyone says that they have, and the interactions that they say that they have with their companies, do they actually have that, you know, are they really willing to step up to the plate and work hard with their founders? Are they willing to look their LPs in the face and have a hard discussion when things aren’t going? Well? Because that’s going to happen over the next couple of years. And, you know, I think we’ve done a great job of picking managers in our portfolio that are willing to do that, that are in it for the long haul. But that’s hard. And I think we will see in this market some people that decide, hey, you know what, this isn’t as fun as I thought it was going to be. And I don’t want to do this. And I think that we will see some consolidation among those managers that decide, I think I’d rather go do something else. And I think that creates a significant opportunity. You know, I think we have great managers in our portfolio. We’re building a significant And platform, I think we really see the opportunity here in the future. I’m really just focusing on driving forward, what are quality investments, and then women and people of color,

Claude Grunitzky 25:05
Alexa and Earnest. I wanted to maybe just add one thing, more of a personal anecdote to what Adrienne has said, you know, one of the LPS who have been giving me what I’ve been calling an accelerated MBA in fund management told me really early on. And this gentleman is a co-founder of the Carlyle Group, right? So you can’t get much more successful in the fund management business, he says. You will be surprised because in three or four years, you’ll see some of your fund managers walking away from their own funds. And that really reminded me of what you just said, Earnest, about the cream rising to the top. And we’ve kind of fact that I didn’t, we just know that not everyone’s going to be successful. That’s the nature of venture. But that’s a very difficult business. So not everybody can deal with these tough times.

Earnest Sweat 25:55
Yeah, it’s real quick. It’s, it’s really critical at this inflection point, in my view in this industry, because as you mentioned, Adrienne, we had a lot of tourists, tourists, LPs, tourist, investors, and capital was, you know, it’s still always hard to fundraise, but it was it was relatively easy to get. And now things are coming up where it’s like a track record, and it’s not markups that matter, people want to realize gains. And so that’s going to make it even harder for people like as far as a barrier to get in. But if you have conviction, whether you have that track record or not Mobley, and the persistence, I’m a believer that that cream will rise to the top, but we will see in the next. You know, by the time we get to New Year’s 2030. I think we’re going to see a lot of different names, even those with new fun names. But then also, you know, with these top tier names, I think even the names inside, like the names on the back of their jerseys will have to change.

Adrienne Rees 27:04
Yeah, I agree with you. You know, I think in a way, that’s a good thing, though, right? I think it’s one of the reasons we believe that the managers we back and some of the diverse founders that they back often are stronger is that they’ve had to face greater diversity and getting to where they are. And I think to your point, what who is left with the names and the jerseys and the year 2030 won’t matter as much as the fact that like, the ones that are still here are the ones that put in the work, the ones that really thought hard for where they are, and I think we’re gonna see a significant increase in overall quality within the venture capital industry in the next several years as well. Yeah,

Alexa Binns 27:43
it’s interesting, it really puts the pressure on that if you already are facing bias, as somebody out there fundraising, it’s really going to come down to two results. Do you have any advice for LPS who are listening, who are sort of nodding their head saying, Oh, this thesis makes a lot of sense. diverse managers are going to be investing in things that I don’t necessarily see that are really big opportunities. Any advice for these LPS who maybe aren’t taking a lot of meetings with female or black or brown or emerging managers?

Claude Grunitzky 28:26
I would have advice I’m sure Adrienne does as well. Somebody who talks to LPS every single day, I would say that they should avoid it again. I have to go back to Daniel Kahneman because I have a bit of an obsession with him. Avoid the availability bias. What is that? It means that they will lead with whatever is the last thing they read in The Wall Street Journal, or whatever is the last thing they saw on CNBC, with respect to venture, and I meet with them. And these days, everyone wants to ask me about AI. And how do we feel about AI? What is our investment in AI and I want to invest in AI. And as somebody who I mean, I went to MIT so a lot of my friends are in that space. My cousin, who’s like my brother, has been working in AI for 10 years. He’s on the leadership team for Alexa for Amazon. So every time I talk to him, we talk about AI for a while. And I know that there’s a lot of people who don’t know what they’re doing. And a lot of people are going to lose their shirts by just jumping on the AI bandwagon. And as a result, I just would like some of these LPs to not be victims to the herd mentality. And the same way that a couple years ago those same people by the way, were asking me about what theory and crypto and what’s your position on that? You know, it’s like, please just give us time to identify the very, very best practitioners, people who really know what they’re doing, you’re really suited to be winners in this game, as opposed to all these fly by nights wind up changing their pitch decks and adding eight eyes to the first page thinking that that’s what’s going to actually get them more capital. Yeah,

Adrienne Rees 30:23
I think what I would add to that is that, you know, amazingly, some of the LPs we talked to still have yet to make an investment in a fund led by a person of color. And these tend to be large institutional LPs. And the challenge that we really see for them, one is primarily that their check sizes are quite large. And just given where the market is for women and people of color and venture capital right now is that the amount of capital they’re able to raise is generally on the smaller side. And given the portfolio construction that you’re able to build with a smaller fund size is typically very early stage venture capital, so that you can build the diversification in the portfolio that you need. And, and so emerging managers, early stage tends to result in, you know, a greater dispersion of returns. And if you’re an institutional investor, therefore, you need to also build a diverse portfolio. So you need to make investments in several of these managers, and build really a diverse quality portfolio of diverse emerging managers. And that is hard. And it’s resource intensive. And if you don’t have the networks, and you’re not willing to deploy the resources internally to build these diverse portfolios, then I think you’re better off with a strategy, like the Equity Alliance, like a fund of funds, because we have those networks. And we have built the connections, we have the diligence processes in place to truly evaluate and build a diversified portfolio. And I think that is where a lot of institutional LPS struggle with writing a first check into a diverse emerging manager is that you need to do several of them, and really build this portfolio and really, and truly be focused on it. And so I think if you’re not willing to do that, internally, picking a strategy, like a fund of funds is a better move for an institutional LP. But there tends to be still a bit of an aversion to the federal funds model. You know, I think there was an article in the Wall Street Journal in 2009, right, where the head of the Yale endowment said something about like funds, funds are terrible investments or something, and, and I think that’s really just a focus on the fees on fees. And we always get that, we always get the response of fees on fees. And the reality is, if you really look at the numbers of what this would cost you to do internally, it is significantly higher than the fees, you would pay a fund manager that’s investing in other funds. So you know, I also give LPs, the advice to really run the math, you know, I’m, again a numbers person and run the math of what this truly costs you to do internally to build a quality portfolio of diverse emerging managers, versus, you know, a management fee for a fund defense strategy like ours, because it’s higher than they think.

Alexa Binns 33:15
Yeah, you can afford Adrienne. Give me on your team. Claude already swooped her I

Earnest Sweat 33:26
i also wanted to ask you all, from our kind of other audience from the DC both those that are emerging managers, as well as given we’re going to have a lot of general generational change over the next 10 years. Those GPS that are going to be stepping up and doing more fundraising. Just curious, what are the easy don’ts that you can avoid when you’re talking to LPs? Like what advice do you have for those managers?

Adrienne Rees 33:57
I think for us, the biggest thing is just one of our core values here at the Equity Alliance. Right is authenticity. So I think people that come in, pretending to be something else, something that they’re not and putting on a face, it’s easy to see through. I think really showing up with authenticity, and showing up with bringing what you really have to the table is the best way to approach LPS right there people too, so people talking to people, I think showing up with a lack of authenticity is probably the key don’t I think it’s much more transparent than then people think, you know, Claude always gives the example that they often referenced, I know these people in this purse, this person and that person and that we we do too and we’ll call them and we will know quickly if you really have that relationship. So I think just being authentic and you know, and transparent is really the key.

Earnest Sweat 34:54
Just wanted to say Thank you all for taking time out of your busy day. Really appreciate Adrienne and Claude for answering honestly. This was fun.

Alexa Binns 35:00
See you later, Allocator!