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Recast Capital is a fund of funds, with a focus on increasing diversity within the venture industry
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed! While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Sara Zulkosky is co-founder and managing partner at Recast Capital.
Before Recast, Zulkosky previously served as a Venture Partner at Greenspring Associates, a venture capital firm with over $12 billion under management. She was responsible for sourcing and due diligence efforts on fund, direct, and secondary opportunities, managing and supporting evaluation committees and existing investments, and leading Greenspring's impact investing initiative.
Prior to joining Greenspring, she served as a Principal with CNF Investments, a private investment firm affiliated with Clark Enterprises, Inc. CNF focuses on venture capital and private equity opportunities (fund and direct) in technology, life sciences and energy. Prior to that, Sara participated in Foundation Capital's Young Entrepreneurs Program, where she helped identify promising investment opportunities in the Washington, DC area. Zulkosky was also the Director of Product Management for SkyBuilt Power, Inc., a venture-backed clean-tech company that provided rapidly-deployable renewable energy solutions to the U.S. Department of Defense, U.S. Intelligence Community, and telecommunications industry (domestic and international markets). She was with the business from its inception, also supporting it as a Project Engineer, Project Manager, and its Director of Engineering.
Zulkosky received a M.B.A from Georgetown University, and a M.S. in Engineering Management and B.S. in Mechanical Engineering from The George Washington University. Sara is also a Kauffman Fellow.
VatorNews: What is your investment philosophy or methodology?
Sara Zulkosky: Recast’s fund investment strategy focuses on US-based emerging managers in venture, as defined as those raising institutional funds one, two or three with a diversity preference.
The firm was started based on wanting to provide an institutional grade intermediary so that investors could access the returns that are being generated by emerging managers in venture today, while also supporting increased diversity within the venture industry. Emerging managers tend to be more diverse in their demographics as compared to the broader venture ecosystem, so by focusing there, you’re backing more diverse GPs who are in turn typically backing more diverse founders. So, it's very much a returns-focused strategy but, in doing so, helping to increase diversity within the venture ecosystem, which is something that's also very important to the team at Recast.
VN: I would guess it trickles down, in a certain sense, to those founders who are not white men so it's harder for them to raise funding.
SZ: Today, the emerging manager field is large and growing, so it's really hard to stand out. But, frankly, we just believe the data that shows that diverse partnerships outperform. It's that diversity of thought, diversity of lived experience, and diversity of perspective that makes for better decision making and, ultimately, better returns. And so, as a result, we're really happy to support that space exclusively.
VN: Are you putting money into generalist funds, or are there specific areas of focus where you like to deploy your capital?
SZ: We are actually sector agnostic. We look to provide our investors diversified sector exposure via our fund investments. So, most underlying funds that we invest in are focused on pre-seed and seed, occasionally Series A; we think that's a very attractive sector of the venture industry in which to be investing, but we are sector agnostic.
VN: Even though you are sector agnostic, are there certain spaces that you find to be more exciting, where it’s more likely you’ll deploy capital to that fund if they’re investing in those categories?
SZ: There's certainly some emerging trends and sectors that we're excited about. After considering our own portfolio construction, we really look first to the GPs themselves and their expertise. We believe that the best emerging managers have a unique perspective on the sector in which they know very well. So, we're not going to be prescriptive; we actually prefer a top down and bottoms up approach to our selection of managers.
We do want to be thoughtful about covering a wide range of areas because our investors are using a fund of funds like ours for that diversified sector exposure. If we're overweight in an area, we want to be doing it intentionally.
VN: You said you have a “top down, bottoms up” approach to selecting managers. Can you tell me what exactly you meant by that?
SZ: From a “top down” perspective, our portfolio construction drives where we will spend time. We look to provide diversification by fund iteration, vintage year, sub-sector exposure, and geographic exposure within the US. We're looking at the field of emerging managers that’s large and growing; you're seeing trends emerge, both from sector focused funds, as well as generalist funds, solo GPs - all of which we're paying attention to. Then “bottoms up” we want to be thoughtful about how we choose managers within those various categories. We look to the emerging managers themselves and their expertise and their understanding of the cutting edge technologies that they want to bet on, and we do our own work to see if we agree that that's a fruitful place to be spending time.
VN: What is the difference between a fund of funds and an LP?
SZ: A fund of funds is essentially both an LP and a GP. A fund of funds is raising institutional capital to then invest as an LP in other venture capital funds. People think of traditional limited partners as institutions, so foundations, endowments, pensions, family offices and so forth. A fund of funds would stand up as an intermediary to help perform some function or help provide access to something that perhaps those institutions are having difficulty accessing themselves in some way.
VN: What's the big macro trend you're betting on?
SZ: There are really two data points that are driving our investment thesis. First, that new and developing fund managers are consistently ranking as some of the best performing venture funds, and that's been confirmed by third party research done by Cambridge Associates and others. Second, we know that diverse partnerships are outperforming homogeneous ones and that's also been confirmed by respected entities like Harvard. So, it's really those two key data points. So, while not trends, these facts are certainly driving our investment thesis.
VN: How many investments do you typically make in a year?
SZ: Recast is a new platform, so we're still early in our journey, but we intend to make five to 10 commitments per year.
VN: How much are you deploying into those funds?
SZ: We're investing in first, second or third institutional funds, and we look for their fund sizes to be consistent with the number of partners they have, the stage in which they're investing, and their portfolio construction intention. But, that being said, most of the funds that we are looking to commit to are $60 million or less.
VN: What traction does a fund need for you to invest? Do you have any specific numbers?
SZ: The best way to answer that question is to say that we’ll invest in first time funds, but not with first time investors; we need to believe that the managers have good investment judgment and are good stewards of other people's capital. It also doesn't hurt if they have third party validation of their decision-making ability, so markups, exits, quality co-investors and/or follow-on investors. But we're happy to roll up our sleeves and analyze a non-traditional or nascent, unrealized track record.
VN: What kinds of return on investments from their previous investments do you want to see?
SZ: Honestly, it's not a specific number and, oftentimes, for emerging managers, if you're relatively early in your career, or you're an operator/angel, the track records themselves are so early that it's difficult to just leverage that, and where they are in a point in time, as the only benchmark. That's why we really spend a lot of time thinking about the track record of every manager that we work with and, if it is relatively nascent, spending the time to look at each of the investments ourselves and come up with what we believe end of day outcomes would look like for that portfolio.
At the end of the day, what we're really looking for is evidence that the manager can, and will, identify the best companies in their area of focus. We want them to be able to win those deals based on who they are and what they can do for the company, but then provide post investment value add in some way, where they're bringing their skills and network to help their underlying portfolio companies. That's typically industry expertise, access to customers, employees and capital, some unique insight into go-to-market strategies or may include other specialty areas as well. The best early stage venture capitalists bring a lot of value to their portfolio, which creates a flywheel of entrepreneur referrals that we believe feeds that manager's success. So, we're trying to assess all of that, not just the track record.
VN: What do you look for in the team that makes you want to invest?
SZ: There's a wide a wide range of personalities that work well in this business. More interestingly, the question is, “does that GP’s personality and expertise map well to the sector in which they're investing and how they intend to invest?” And by that I mean, if you're a pre-seed investor that is not typically leading rounds and you provide a lot of post investment value add, that requires perhaps less sharp elbows to get into the deal, as compared to an investor that's trying to lead seed rounds. That can be a little bit more of a competitive situation and requires a different perspective and, perhaps, a different personality or approach to how they invest. So, for us, it's very much about how do we map the person's personality to what we believe to be their demonstrated ability to get into the deals and to invest in the way that they intend to?
VN: What kind of experience do you want them to have? Let's say they’re investing in the real estate space, for example, would you want them to have some maybe operational experience in that space or something like that?
SZ: We would look for either investment or operational experience in that particular sector. Oftentimes, entrepreneurs in the earliest stages of their company's development need very specific expertise around the table and without being able to provide that point of view, I would imagine it's difficult to access those opportunities. That being said, obviously there are generalist strategies that can also be successful but I would argue that within those generalist strategies, there's a common thread amongst the deals where their post investment value add is similar in each instance. For example, it's a go-to-market strategy, it's a talent strategy, it's something where your differentiation is the same in each situation, albeit in different sectors.
VN: When COVID first hit, there was some fear that everything would slow down, which didn’t happen; in fact, I think VC hit a record high last year. How has that affected valuations and how has it affected the way you deploy your capital?
SZ: Certainly, given the influx of capital and strong public markets, valuations are high or have increased notably. In the earliest stages of investing, though, where we're supporting managers, you're more insulated. For example, investing at a $12 million pre instead of an $8 million pre matters, but at that stage, though, I would argue it matters more if you invest in the right company. Drastic increases in entry valuation at the later stages may leave you with a hole in your pocket when the market corrects. So, we're excited about the opportunity at the earliest stage and we do believe that there's some coverage from some of the irrational shifts that are taking place later on. Even modest exit outcomes can create very significant fund level returns at the early stage as well.
VN: The last few investors I've spoken to have actually talked about the influx of capital in the early stages, partially because some of the funds have more money to deploy now, so you have been some of the later seed funds actually going early stage. What effect does that have on you deploying capital into funds as well, if they are starting to write larger early stage checks?
SZ: It's certainly an interesting phenomenon. At the earliest stages, we find that the GP - the individual that’s coming to the table with the expertise, time and willingness to roll up their sleeves - matters more than the brand. These are more modest funds, investing more modest amounts, they're not always trying to compete on price and they'll lose the deal if someone comes in with a very high valuation and a much bigger check. But, in many cases, sophisticated entrepreneurs understand that taking too much dilution too early is a problem and that if your valuation is too high too early, you can really harm your fundraising capabilities in the future. So, we are comfortable with the strong pre-seed and seed players still winning their share at the earliest stages.
VN: There are many venture funds out there today, how should they differentiate themselves to fund-of-funds like Recast?
SZ: There is a lot of sameness in the venture fund universe so at Recast we’re essentially on a mission to find contrarian funds, those that stand out as having a highly differentiated investment strategy or background area, value add, network of attractive entrepreneurs. It really hits you over the head when you see it. Then you spend your time and due diligence trying to figure out if the fund is contrarian good or contrarian bad, but the main thing we look for is a unique perspective on the world that gives a particular fund a unique advantage in the market.
VN: How do you differentiate your firm to underlying fund managers to prove to them that you’d be a good partner for them to deploy your capital?
SZ: My partner Courtney and I are both seasoned, institutionally trained, venture fund investors with a long history of investing with and supporting emerging managers. Courtney has been doing this long before many others were. Our singular founding partner level focus on this sector of the industry is a strong point of differentiation and emerging managers really want us around the table as a result. In addition, the work that we're doing, both through our investment vehicle, but also through our tuition free educational program to increase diversity and make more emerging managers successful, has really resonated with the emerging manager community.
VN: Could you talk to me a little bit more about that? You're giving educational opportunities to those fund managers?
SZ: There's actually two pillars of our business: our fund investment strategy and an educational program.
We created a tuition free program called the Enablement Program, which complements the fund investment strategy. The goal of the program was to empower more managers than we could invest in and create a supportive, collaborative community for the participants, including hands-on guidance from leadership, experienced LPs and GP, who can share their perspective on best practices, and help build out their peer network. Although we do believe there are too many funds out there today, and the numbers will be culled eventually, we also believe that there are emerging fund managers out there with immense potential, and we want to help accelerate their success.
VN: How many funds have you put money into so far, and how many have actually taken advantage of that opportunity?
SZ: The Enablement Program and the fund investment strategy are two separate entities. So, the Enablement Program, we launched a beta of that in Q4 of last year, and only a few months ago did we launch our first publicly advertised cohort where we actually accepted applications. Applications were announced and made available via our website. We wanted to make that process as inclusive as possible, so no warm introduction or referral necessary to apply. We ended up working with 16 different fund managers for the current cohort. We're overwhelmed by the reception in the market and really, really excited by the exceptional managers that raised their hand to want to participate. It's been a great experience thus far. We're partway through that second cohort now and we'll launch cohort number three, or the second publicly facing cohort, in the fall.
VN: For a lot of the VCs, their value add a lot of the time is their network. That seems to be what you're helping these emerging fund managers build out so they could be successful venture capitalists.
SZ: When we were building Recast, we thought, “We're going to be investing in a handful of managers a year out of the fund of funds, but we want to do more with our institutional backgrounds, we want to contribute more to the industry. For the emerging managers that we’re backing out of the fund of funds, we're offering very specific, individualized support. Is there a way we could productize that support in some way and actually offer it to a greater set of managers to really help drive more success in the market?” We came up with the concept of creating a cohort-based model where we work with 12 to 15 managers at a time for roughly 12 weeks, twice a year, where we bring in our friends from the GP and LP community to provide their perspective on the issues that emerging managers face when fundraising. By supporting more diverse partnerships, we hope that we're also helping to enable a path to greater diversity because those partnerships, as they're successful, will back more diverse founders.
Obviously, the two entities are very complementary to one another, and while we won't be investing in everyone that goes through the Enablement Program, it's certainly a wonderful way for us to build relationships with more managers, and potentially invest in them from future vehicles that we have.
VN: The people who were coming into that program, are they already fund managers or are these people who want to be fund managers going forward?
SZ: The way we articulate it on our website, is that it's typically those that are either pre launch or working on fund one, or working fund two. We wanted folks to be able to opt in; we didn't want to be prescriptive to who would benefit from this type of programming. If you're a little bit further along, and you feel like you'd benefit from an increased peer network, broader LP relationships, and the perspective of two institutional LPs on hot button issues for emerging managers, then who are we to say that it's not for you? If you want to opt in, then we're happy to have you. So, I'd say for the cohort we have today, roughly half are focused on their fund one and the other half are focused on their fund two.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those funds?
SZ: As I mentioned, we're early in our journey, but we have made three commitments and we're very excited about them and the portfolio that we're creating.
We've invested with, one, a seasoned operator turned investor with deep recruiting expertise; two, with an experienced seed stage investor spinning out of a brand name venture fund; and, three, an established enterprise tech fund with deep Fortune 500 relationships. Each is extremely well positioned for outperformance given their network and their areas of expertise, and each also meets our diversity criteria, which we're excited about. We believe these funds really exemplify the high quality opportunities to which we have access, commitment to our thesis, and thoughtful diversification out of the gate. We have a robust pipeline of additional opportunities that we're tracking and have soft circled allocation in another six funds that we're equally excited about.
VN: Tell me a bit about your career and how you came to venture. What are some lessons you learned?
SZ: One could say that I'm an unlikely LP given where I started: I'm actually an engineer by background and spent the first almost eight years of my career working as an engineer at a venture-backed startup. I didn't really pivot into the investor side of the house until I was part way through my MBA and was awarded a fellowship with Foundation Capital, and was “bitten by the bug.” I just fell in love with the idea of a career in venture as a way to support multiple companies, as opposed to just one as an operator.
I joined a family office shortly thereafter, where I was one of a four person investment team focused exclusively on venture and private equity opportunities. The firm was sector and stage agnostic, investing both in funds and companies, so an extremely fun and fulfilling place to be investing. Unfortunately, while I was there, the patriarch of the family passed, which set off a strategic shift within the organization, as it often does when that occurs, but, in our case, it was towards philanthropy. And, given the long tail of venture and private equity, we stopped making new investments. Given where I was in my career, I certainly wanted to stay active in the community and my colleagues knew that and were happy to support me looking at new opportunities.
My most recent role before launching Recast was with Greenspring Associates. The family office I supported previously was a LP of Greenspring, a longtime friend of the firm. Given Greenspring’s breadth of coverage in venture, doing both fund and company investing on a primary and secondary basis, it was an exciting opportunity.
Across my time spent in venture on all sides of the table, I saw first-hand the diversity issues in the industry and decided I wanted to focus my career on addressing it. I also believed deeply that it was earlier fund iterations, smaller fund sizes, and more diverse partnerships that were outperforming in venture and by focusing there you could drive returns and drive change. My now partner had equal conviction on that point and in-depth experience and track record of supporting emerging managers, and we both felt very strongly that investors need access to a diversified portfolio of emerging managers in order to get the returns that people are looking for from their venture portfolio. By focusing there, it also helps as a way to gain an information advantage in the next generation of investors and access to the flywheel of potential blue chip names of tomorrow. And by focusing on emerging managers, you’re really enabling a path to greater diversity, as I mentioned, because these more diverse GPs are backing more diverse founders. It's not only a returns-first strategy, but also allows me to help move the needle on the issue of diversity. It's something I've been passionate about for a very long time and so thrilled to commit my career to.
If I could impart anything it would be that the list of top performers in venture is no longer a stagnant list of 10 names; it's changing all the time and many of the top performers today are emerging managers, and they should get more focus in the space. Then taking it one step further, focuses on diversity are not concessionary. This isn't a space for only impact-oriented dollars that are catalytic. Diversity of your team really drives better outcomes, better returns and so we believe deeply in supporting diverse teams. It's very much baked into a returns-first point of view.
VN: What excites you the most about your position as an investor in VC funds?
SZ: Because of where we're focusing, I get to support exceptional managers both with dollars and with time and energy. Also, I've mentioned it a number of times, and I don't mean it to feel hokey, but also really moving the needle in our industry by helping to address the diversity challenges that we've had. So, it's a job that I am excited to wake up and do every day. I'm thrilled to be in a position to be focusing 100% of my time on it.
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