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With Scott Orn

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Scott Orn

Scott Orn, CFA

Courtney McCrea, co-founder and managing partner of Recast Capital, discusses how Recast Capital helps link investors to emerging managers in venture

Posted on: 06/07/2022

Courtney McCrea

Courtney McCrea

Co-founder and Managing Partner - Recast Capital

Courtney McCrea of Recast Capital - Podcast Summary

Courtney McCrea, co-founder and managing partner of Recast Capital, discusses how Recast Capital helps link investors to emerging managers in venture, and describes Recast’s tuition-free educational program that provides guidance and insight to new venture capitalists.

Courtney McCrea of Recast Capital - Podcast Transcript

Scott: Hey, it’s Scott Warner, Kruze Consulting. And thanks for joining us on Founders and Friends for another awesome podcast. Let’s give a quick shout out to the Kruze Consulting accounting team. We’re very fortunate. We have a ton of people at Kruze who work on the monthly books for our clients and get them all set up, due diligence ready, rock in every month, answering all the clients’ questions, making all those adjustments, and there’s no better moment for a founder, and for us really, when a founder says, “Hey, I think I’m going to get a term sheet. Are my books ready for diligence?”
Scott: And we get to say, “Yes, they are. fire away. Send them over, give them access.” That is a great feeling. It’s the feeling that lets us know we’ve done a job very well done, and nothing is better than watching that cash hit the bank account. So, if you are a venture-back startup, you’re going out to fundraise, maybe check us out, check us out at kruzeconsulting.com. We love what we do. At [inaudible 00:00:50] here, I think we have 575 clients. Clients raised over a billion dollars this year, so we know what we’re doing and hopefully we can help you be successful in your fundraise. All right, let’s get to the podcast. Thanks.
Singer: (singing) It’s Kruze Consulting, Founders and Friends with your host, Scotty Orn.
Scott: Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting. And today my very special guest is Courtney McCrae of Recast capital. Welcome, Courtney.
Courtney: Well, thank you, Scott.
Scott: Great to be here. We were just, before I turned the mics on, reminiscing about San Francisco and your real estate investment track record, but we’re here to talk about venture capital and fund of funds, and a super cool nonprofit organization that you run side by side with the fund of funds. But maybe you can start off just by talking about your background and how you had the idea for Recast.
Courtney: Sure. So, I have spent my entire career in and around the private equity industry. Most relevantly after business school at, at Kellogg Northwestern, I became a Kauffman Fellow and joined a growth equity fund called Weston Presidio. I was Weston for seven years across three funds. When I left, I was a general partner and then I moved over to the limited partner side, which is where I’ve been ever since. So, for 10 years, I was one of three investment managing directors at a boutique venture capital fund of funds called Weathergage. And I joined Weathergage in the back half of Weathergage fund one, and then with my partners helped to deploy the rest of fund one and then helped again with my partners, to raise and invest funds two, three, and four. And we also had a separate account with city and county of San Francisco that paralleled each of those vehicles.
Courtney: So, when it came time, when I left Weathergage, I left and we had invested with brand name venture funds that were proven and established. And then we also invested with new names pretty shortly after I had started. And, certainly, many of the brand name venture funds have consistently put up great performance, but at the same time, there were some brand name venture funds that the returns were getting a bit more muted as the fund sizes got larger and the general partners got wealthier. And so, in our fund two, we made some really tough decisions to make room for emerging managers, and those emerging managers that we made room for actually knocked the ball out of the park. Not all of them, but most of them. And-
Scott: That was the time… I was just talking to a friend of mine last night and that was the time to hit the emerge… Because also it coincided with the development of the seed stage market, right?
Courtney: Yes.
Scott: And how seed Series A changed a little bit. So that was really good timing and insight on your part. That’s fantastic.
Courtney: It was really early and when you’re early to any sector, that’s when you can actually generate attractive returns. And we were seeing that… And that was the inflection. It’s been a while now, but at that inflection point, you were seeing that companies that were being started were being started on a lot less capital than they were back in the day. You didn’t need a server, you didn’t need an office. Two guys and a laptop, you could do a lot of work. AWS changed a lot of this as well.
Scott: Totally. The other thing I, because I had worked at Lighthouse ‘02 to ‘05, went to Business School, came back ‘07. And then that ‘02 to ‘05 and even ‘07 range, especially ‘02 to ‘05. It was like, you still had to be a little bit of the Harvard MBA or Stanford or just know someone, because the series A’s were a big chunk of capital and you would just get a Series A check with a PowerPoint.
Scott: And then the time that you pivoted into this seed stage market, investing in those funds was when everyone could start building prototypes and you didn’t have to look a certain way or act a certain way. You could just be a really smart entrepreneur and say, “Look what I built. Do you want to fund me?” And I think that just changed the market forever. I still… I relay those stories back to the Kruze team of, “Yeah, it was a white male world.” We were fortunate at Lighthouse. We had two female founders, or female partners, including the founder, Gwill York. We were diverse, but it was very white male world until that [inaudible 00:05:23] that you talked about.
Courtney: Well, so yeah, basically is what was happening, also entrepreneurs were saying, “I don’t need a big [inaudible 00:05:29] firm. I need somebody who actually has been in the trenches and started a business before.”
Scott: Yes, yes.
Courtney: And so, they were looking to this next generation of folks who had actually come from operating backgrounds and had somewhat of an angel track record. And now, fast forwarding till today, the emerging manager community is so much more diverse than the incumbents, even today, which is incredible.
Scott: And they have the same… Like you said, they’re operators. They built something, they have some war stories. They can also probably empathize a little bit more. Because it used to be… I also remember… This was more of a East Coast thing, because we had an office in Cambridge, an office in [inaudible 00:06:09], but the East Coast terms were bad. There’d be multiple liquidation preferences and [inaudible 00:06:18] were terrible. And the VC community at the time, in the ‘02 ‘05 zone, A was probably hurting from the .com thing, so they were licking their wounds, but also was not very founder friendly. And I think you’re talking about these folks who started funds after successful exits or successfully building companies. They were a little nicer frankly, to the founders.
Courtney: Yeah. They were. Well, also times change. It has been a very entrepreneur friendly decade. We maybe are starting to see that changing with ratchets and various other structures that are being put in to protect investors, but-
Scott: I’ll do like tutorials or almost like a teaching webinar for some of the incubators. And I did one on Wednesday I think. And I was explaining uncapped notes and I was like, “Don’t ask for these right now. Do not ask for an uncapped note.” And one of the entrepreneurs on the call got not upset with me, but really chall…
Scott: I was like, “Look, the times are tough right now. Don’t be going around asking for the most aggressive terms you could poss…” Folks don’t know that. They’ve just lived in this last five years of up, the market going up every year and venture capital funds growing and capital swirling around everywhere.
Courtney: It changed on a dime. It changed on a dime, and I could see entrepreneurs getting whiplash, especially those that have never seen a down market.
Scott: It’s crazy. Why don’t we do this? Why don’t you explain the [inaudible 00:07:49] partner and also a fund to funds and how it works? Because I also want to focus on Recast. I do want to cover some of the market right now, but I think it’s helpful for everyone to understand the verbiage and the specific function that you fill in the market.
Courtney: Yes. Okay. So, as I’ve told relatives that know nothing about the business and you say, “I raise capital from third parties, endowments and foundations and family offices and public pensions, and then I turn around and I invest it in venture capital funds.” And they say, “Venture capital funds raise outside money?” And you say, “Oh, yes, venture capitalists for the most part are a very bright group of folks. They don’t use their own money, or they leverage their own money.” So, there are lots of investors in venture capital funds, as I’ve just listed, endowments, foundations, family offices, public pensions, high net worth individuals.
Courtney: And then there’s this group of folks called fund of funds, which takes another layer of fees and economics. But you’re raising capital from the same groups. But normally is what you’re doing is you’re raising capital from institutions that either A, have not built out their team to be able to do that effectively. There might be risk in investing in names oo one’s ever heard of. It’s so much easier to invest in a brand name that everyone’s heard of for reputationally. And then third is, there are some really large institutions that are really savvy about venture and their minimum check size is 40 million or 25 million or 50 or a hundred. And so, if you look at the emerging manager space, which is where I’m focused today, you find that institutional, smart, savvy investors understand that you can get outsized returns if you properly select which of those managers you invest in. The problem is they can’t be writing a 40 million check into a $30 million fund or a $50 million fund.
Scott: That is such a great point. And I’ve been on the fundraising side and had… I didn’t really realize that when we were raising and I was starting to get involved in it. And it’s heartbreaking to do this presentation to an LP, a giant pension fund, them to be pounding the table, so excited, and then be like, “Okay, can you take a hundred-million-dollar check?”
Scott: And you can’t do it unless you’re a really big fund. So, the service you’re providing is super valuable, just from that perspective. For you to be able to absorb that and then distribute it to a bunch of smaller funds. I also think the fund selection one or the manager selection one is a really amazing point too, because there’s so many really amazing up and coming managers who don’t even know, maybe… They certainly don’t know who at the pension funds or endowments or foundations, but they don’t even really know… There’s a sales cycle there, right? Can you maybe explain that a little bit?
Courtney: Yes. So, we’ve got two parts of our business at Recast. We have our fund investment vehicle that invests in emerging managers and venture with a diversity lens and diversity preference. And then we have an educational platform and so on the educational platform, we spend a lot of time on this exact topic. And so, the big public pensions and even the big foundations and endowments, they have incredibly long sales cycles, very long processes.
Courtney: And most of them have third party consultants that also have to do their due diligence. So, the whole process, and they’re very unlikely to be in the first close. Some will, but mostly they’re not. Those processes are very long and very drawn out and you need to look institutional in order to get, for the most part, to be able to get access to that capital. On the flip side, if you’re raising a $20 million fund or a $10 million fund, you can raise that all from high net worth individuals and small family offices, and you can often do it with one or two phone calls per family office. It’s a much quicker process than trying to go with the institutional investors.
Scott: Hey, it’s Scott Orn. And we’re going to take a quick break from the podcast to give a shout out to the Kruze tax team. Gosh, it’s so nice to have an in-house tax team. I can’t even tell you. We have some really amazing professionals on the team. It’s over, I think it’s 13 people now and we do everything from your federal state income tax return, state franchise tax filings, R&D tax credits. Those are pretty popular these days.
Scott: And guess what? They’re there for you when you go through diligence. A lot of people don’t know this, but you actually go through tax diligence, not just operational, financial diligence, but you do go through tax diligence. So, it’s nice to have Vanessa Kruze on the phone with your VCs and with the accounting firm they hire to diligence all your stuff. And the law firm they hire to diligence all your stuff. Vanessa knows what she’s doing. She’s done this a million times.
Scott: It’s not just Vanessa. We have a really great team of [inaudible 00:12:50] professionals that will do those calls too. It’s sometimes the difference between getting [inaudible 00:12:55] or having it take another two weeks because something was disorganized and the tax compliance wasn’t done correctly. We hear those horror stories from clients that come to us. So, hey, if you want Kruze’s tax team on your side, we’re here for you. Check us out at kruzeconsulting.com. Thanks.
Scott: Where are you seeing Recast playing? Is it the first fund? I’ll say the first 5 million fund or something like that, because what I’ve also seen some from some of my friends who you may have even invested in because some of them are folks with a diversity [inaudible 00:13:25], they’ll do 5 million and then the market has been pretty hot. So, they’re able to get to 10 or 15 for the second fund and then 20, 30. So I’m seeing some of these seed funds really [inaudible 00:13:36] up into… Are you in the first one, the 5 million fund or are you in the following ones? Where’s Recast playing?
Courtney: So, we do need to have some evidence that you’re a good picker, you’ve got good investment judgment. It does not have to be [inaudible 00:13:48] track record, but there needs to be something we can sink our teeth into. We usually see that that $5 million fund is a proof of concept fund and they don’t really have a proven track record. So, we don’t even call that a first institutional fund if it’s friends and family and 2 million dollars just to prove it out. We would more likely come into the next fund.
Courtney: For portfolio construction. Most of our funds are sub $80 million. But we do reserve up to 15% of our vehicle to invest in funds that are solo GP raising sub $30 million dollars. It’s a fund within a fund strategy for us. And so there we’ve invested in one fund that was 17 million. So, we certainly see a lot of interesting things happening in that space. It’ll be interesting to see what percentage of those individuals that have raised a $20 million fund in this market can then go on to raise a $50 million fund. It might actually get the wheels going, get it going, and maybe it’s same again,
Scott: It’s the flat is the new up thing, but that’s a term that people use for startup valuations, but it might be the same thing for seed stage or Series A stage fund sizes too. A, if you’re breaking even-
Courtney: That’s pretty good.
Scott: And your next fund is the same size, you did well, basically.
Courtney: That’s pretty good. But there are some folks that are emerging managers that have put up exceptional numbers and we’ll see if some of those don’t get monetized and actually realized, but if some of them do, then they’ll be able to raise, I would think, maybe more capital, to the extent there’s more capital in the market. One of the issues right now is anybody who is a venture fund investor and also in the public markets, they’ve seen their whole portfolio go down, way down.
Scott: Yeah. It’s the numerator denominator problem. Do you mind explaining that for folks too, how that works?
Courtney: So, one of the things that, especially large public pensions, but also some more institutional foundations and endowments, they think of their public allocation of being a certain percentage of their whole portfolio. And more interestingly, they’ll think of their private portfolio. Let’s say that they’ve decided that they want to have their private portfolio be 25%. And then they say they want their venture part of that, of their whole portfolio to be 8%. Now is what happens is if venture gets 8% of the entire pie and your public stock value goes down and your bonds go down, then you end up with what you thought was an 8% exposure to venture, and because venture takes longer to decrease their valuations, instead of being 8%, now you could be up at 12% or 15% and then they go, “I cannot add any more venture exposure because I’m already massively overweight.”
Courtney: And there is some education, because certainly the venture valuations could come down. The other argument you can make is, to the extent you have a mature venture portfolio, one could argue that the public stocks that are in your private venture portfolio and the billion dollars plus valuations that are in your venture capital portfolio really look a little bit more like your public stock portfolio. And so, you could start thinking about that in a different way and that’s the argument that we give to emerging managers when they’re trying to raise capital in this situation.
Scott: Yeah. Also, your fund commitments are usually drawn over a couple years. That may elongate too. It might be… Because at Lighthouse, it was a three- or four-year term, usually. Things got compressed because the market was so hot, but the market should bounce back or things will hit equilibrium.
Courtney: I actually think that net, it’s going to be positive for the industry. It’s painful. It’s really painful. But I do think that the returns from this year and next year are, I think are going to be sporty.
Scott: I totally agree. Having worked in this world for a long time, it just needs it. It’s like pruning trees. I also say sometimes, it’s really the late stage funds that drive a lot of the excess. But those folks know what they’re doing. They’re very smart. They are playing more of a momentum game and they have made so much money over the last two or three years because they’ve played that game very well, that they know their time comes every cycle and they’re going to retrench a little bit. But the underlying fundamentals with seed Series A are still really, really good.
Courtney: I agree.
Scott: And I’m seeing the companies get the revenue really quickly, and so I just think it’s a correction that, I agree with you, a correction that needs to happen. Let’s talk about the nonprofit educational aspect of Recast here, because I got to sit in these partnership meetings with Will and Rick and all of the Lighthouse, and I got to absorb everything in their brain for many, many years. But a lot of people don’t get to do that. Like you said, they’re building a company. They’re building a startup. How does the educational aspect of Recast work?
Courtney: So, my partner and I have both been institutionally trained investors in venture funds. And because we’ve been at this for so long, one of the things you realize, as a fund to funds, you’re saying no, as any kind of investor in venture, you’re saying no a lot more than you’re saying yes. And yet you want to be helpful to the ecosystem. You want to give back. And so that’s why we started the educational program. So, the educational program is tuition free for emerging managers in venture. Usually it’s folks that are raising their institutional fund one or they’ve raised their first fund, but they want to, now raising their second. It’s normally in that area.
Courtney: And we do it cohort based, twice a year on zoom. It’ll always be on zoom because we want to make sure that we can get people from across the country, not only as participants, but also as guest speakers. So, we bring in our friends from the GP and the LP community to talk about hot button issues. And it’s broadly around fundraising. And what you find is these are not the folks that have spun out of [inaudible 00:19:50] existing venture funds. These are folks that have… They’re networked with the entrepreneurs who matter. They come from a very relevant part of the ecosystem. They have some type of an angel track record, but they’re doing this full time.
Courtney: First of all, it’s a lonely business, especially as a solo GP. And so, one of the real value adds of this is they value the community. They value getting to know one another. And the other thing is they value our candor. And so, we spend a lot of time… You talked earlier about you’re spending time talking to public pensions and they go, “I need to put 50 million in,” is what often happens is you talk to 100 LPs and you’ll get 50 different directions that you’re being pulled.
Courtney: And so, you need to have a smaller fund. You need to have a bigger fund. You need to do a follow-on strategy. You shouldn’t do a follow-on strategy. You should have a large portfolio. You should have a small portfolio. And so, one of the pieces of advice we give is just figure out who you are. Figure out who you are. Do you want to bring on another partner or do you just want to be a solo GP forever? Do you want to raise a larger fund or do you just want to rinse and repeat and do the same thing again and again, because you’re good at it? Figure out who you are and then find your people on the LP side. Find your people. And if somebody says, “I don’t like that you’re a solo GP.” “I don’t like that you are two people that have just come together,” say, “Thank you very much,” and make the next phone call. It’s just…
Scott: Totally agree.
Courtney: One of the things that I really value in the educational, for me, personally, is we bring in GPS, general partners, who not that long ago were emerging managers. And today they’re much more proven. They’re reflective on what they did well and where they could have improved and they share their experience. I think that’s incredibly valuable.
Scott: There’s probably an inspirational aspect to that too, right? “Hey, I was just like you four years ago and sitting in a room like this and learning all these things and look at me now. Things worked out for me.” Because everybody needs role models. They have you as a role model, but also people who are doing whatever their little… Who they are, whatever their focus is or whatever the size they want to be, things like that. Having multiple role models is actually really valuable.
Courtney: No, I agree. So, we’ve actually been at this for a while. We’ve had 52 funds go through the program.
Scott: Wow. That’s amazing. Good for you.
Courtney: Yes. When you look up and you go, “Wow, how did that happen?” And we are also proud to say that 81% of those funds have had at least one member of the senior investment team that identified as female.
Scott: That’s great.
Courtney: And 56% have had at least one member of the senior investment team that was a person of color. So very, very proud of those statistics. And we are-
Scott: Yeah. You’re one of the people breaking down those barriers that I talked about from 15, 20 years ago. That’s really fantastic. Like I told you before we turned on the mics, but my wife and I like to invest in startups every once in a while, too. And there is this… Education is needed for people who are just learning the business, because so much of also venture capital is a little bit of the lingo or pattern recognition or things like that. And you only get that either through experience or just being around people who have done it before.
Courtney: So, one of the big things we do is we do have everybody present, because the event, the 12-week course ends in an LP day where they actually are presenting briefly what they’re up to and they get feedback. And if everybody wants to follow up afterwards, that’s great. But the process of pitching an LP, it’s a known thing. And so, one of the things we talk through is how that story arc should work. And the other thing we spend a lot of time on is track record. If you actually have a standard track record, that’s an easy thing to explain. Most folks have a somewhat more convoluted track record. And so, there are still many ways to show that and illustrate it. And so, we do a whole session on track record on how to show it. And usually that’s a bespoke conversation about what is your situation?
Scott: That’s super cool. Well, Recast is open for business. So, we want to be respectful for all the rules around fundraising and things like that. But if people are listening to this and are really liking what they hear and… You and I even talked before about [inaudible 00:24:18] Weston Presidio. You’re legit. You know what you’re doing. You’ve done this. It’s really amazing you put 52 funds through the process too. That’s really amazing. So how should they get in touch if they want to learn more about the Recast story?
Courtney: Yeah. So happy to reach out to us on our website or to me directly. Our website is recastcapital.com. And my email is Courtney, C, the old-fashioned Courtney, C-O-U-R-T-N-E-Y, @recastcapital.com and I’m happy to talk to anyone, emerging manager or investor that is interested in learning more.
Scott: I love it. And you have basically the experience as a direct investor. You have the, was it Weathergage? Weathergage-
Courtney: Weathergage, yep.
Scott: … Where you had all these relationships and now you and your partner are out on your own and you… The thing I think is super amazing is you made that pivot to the emerging managers right on the good timing in the, what? Late two thousand, early 2010s, right when that market was opening up.
Courtney: No, it’s been a great journey and having a partner that you love working with and you can build what you want to build from a ground up has been so inspiring. And I also have to say, helping these 52 funds, we also do give them executive coaching with the help of pivotal ventures, Melinda French Gates’ investment and incubation company. And so, the feedback that we get from that community and giving it forward, it fills the bucket.
Scott: That’s super cool. You’re leaving an impact way above and beyond the financial impact of your returns and things like that. I really, really respect that. Well, Courtney, thank you so much. Really appreciate your time and please check out Recast Capital. Thank you so much.
Courtney: Thank you, Scott.
Scott: Bye, Courtney.
Singer: (Singing). Hey, it’s Kruze Consulting. Founders and Friends with your host, Scotty Orn.

Kruze Cares More - We take our clients’ success - and happiness - seriously. Kruze has worked with hundreds of early-stage companies, many of which have gone on to raise tens to hundreds of millions in venture financing - and a number of which have been successfully acquired by major public companies.

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