CAPITAL ALLOCATORS: VENTURE MARKET UPDATE
Ed Grefenstette & Sean Warrington (EP.488) | February 23, 2026

Episode Overview

In this episode, host Ted Seides is joined by Ed Grefenstette (CEO & CIO, Dietrich Foundation) and Sean Warrington (Partner, Gresham Partners) to discuss the current landscape of venture capital (VC) from the perspective of limited partners (LPs). The conversation dives deep into today’s most pressing issues in VC: pricing distortions, capital deployment discipline, the effects of increased institutionalization, liquidity challenges, global opportunities (with a focus on China and India), and strategies for underwriting and manager selection. Both guests share candid takes on risk management, fund structuring, team construction, and their evolution as allocators in a rapidly shifting market dominated by AI and mega-funds.

Key Discussion Points & Insights

1. Venture Capital’s Shifting Landscape

Are Current VC Market Dynamics Broken?

• Ed notes recent vintages (2020-21) attracted many new LPs—"tourists"—drawn by high returns who may now abandon the sector (‘that would be very healthy for the ecosystem’) [00:00].
• The silver lining: Challenging markets produce robust data on GP behavior that LPs can now use for better underwriting:
  • “When everything is up and to the right, it's hard to distinguish luck from skill. But now...you can look back and say, okay, what did you do in 20 and 21 and 22?” (Ed, [00:44])

The Institutionalization of Venture

• Rapid inflow of institutional capital is altering VC dynamics, reminiscent of buyouts’ earlier maturation ([26:26]–[27:46]).
• Uncertainty remains if these changes will dilute returns, particularly at scale.

2. Portfolio Construction: Core & Satellite Approach

Gresham Partners (Sean, [06:04])

• Manages $13B for entrepreneurial families, focusing on tax-advantaged, risk-forward portfolios.
• VC is expected to be the highest-performing component.
• Approach:
  • Multi-stage funds as “ballast”—providing broad exposure, stability, and confidence to lean into higher-risk bets.
  • Preference for early-stage, small/specialist funds (e.g., solo GPs, first-check investments).

Dietrich Foundation (Ed, [07:28])

• 1.6B AUM, with 90% in privates—extraordinarily high at 52% in VC.
• Also uses a core/satellite approach: core managers plus a sleeve of higher-risk, differentiated satellites.

3. Where’s the Excitement? Sectors, Themes, and Geographies

AI: Hype & Discipline

• “AI is going to be really big…everyone is trying to figure out how dramatic this fundamental shift…will be.” (Ed, [09:32])
• Biggest pricing distortions are in early-stage AI—out-of-the-money option bets; risk of speculative excess ([11:14]).
• Ed: Compensate by picking GPs who exhibit capital deployment discipline amid hype.

Other Themes

• Health care, consumer (accessed via generalists).
• Generalist vs. specialist funds: Sean emphasizes need for both, with a tilt toward generalists to not miss outsized, category-breaking opportunities ([58:19]).

Geographies

• China: “Least crowded trade in the world is China venture,” but geopolitical risks and smaller fund ecosystem limit scale ([45:09], [49:53]).
• India: Liquidity concerns easing; “will probably follow [China’s] path in the next 10 years…” ([46:56]).
• Rest of world: Some fintech (e.g., Brazil’s Nubank) but most breakthrough opportunities still migrate to the US.

4. Navigating Liquidity and Allocation Pressures

• Winners staying private longer has led to “overallocated” positions (e.g., SpaceX, Stripe), forcing allocators to rethink allocation buckets, consider secondary sales, or revise policy targets ([16:26]).
• “The reality is those are not venture risk. We think of them as a different asset class…almost equity risk” (Sean, [20:01]).
• Biggest concern: If the IPO window remains shut, the next 20-30 less iconic companies face an uncertain path to liquidity ([22:34]–[24:13]).

5. The GP-LP Relationship & Underwriting in a Data-Rich Environment

GP Behavior Under Stress

• Ed: “Now you have things to look at…How disciplined were you…How did [GPs] react to down rounds?...That helps us make better decisions about who we want to back.” ([00:44], [27:47])

Range of GP Responses

• Authenticity and willingness to admit past mistakes endear some GPs to Ed’s team.
• Others “stick their head in the sand…probably not going to raise another fund.” (Ed, [30:02])
• Sean: Quick deployment of capital (“money out the door in months”) is a real red flag ([30:58]).

Math of Venture: Power Law, Ownership, and Manager “Right to Win”

• Sean: “If someone’s trying to own 20% of a company at seed, they’d better have a good argument why that founder wants their money…does their gravitas justify that check size?” ([34:01])
• Ed: Rigor in walking through a GP’s underlying assumptions is as important as spreadsheet results ([35:15]).

Competitive Dynamics: Mega-Funds vs. Solo GPs

• Large platforms have “weaponized the balance sheet” but may lack authentic founder relationships that small, early-stage GPs have ([36:17]).
• Solo GPs: Winners are those whose relationships/networks remain fresh; but, key risks are “hit-by-bus” risk and lack of internal challenge.
  • “The higher probability problem…is they don’t always have another adult to challenge them…But they recognize that and turn to networks” (Ed, [41:57]).

Value to GPs

• Both Sean and Ed position themselves as “thought partners”—responsive, candid, communicative, and invested in building off-cycle relationships to become preferred LPs ([42:52]–[44:40]).

6. Co-Investments

• Both approach VC co-investments with skepticism, mainly due to adverse selection and the power law math ([52:59]).
• Ed: “Maybe we should say yes to every single co-investment opportunity…once we get over the adverse selection issue.”
• Sean: More enthusiastic about co-invest in buyout/PE than VC; focus for now remains on fund investments.

7. Evolving Approaches & Risks

Evolution in Due Diligence & Strategy

• Sean: Increased humility about what can/can’t be evaluated, focusing more on sourcing/network and less on picking prowess ([55:22]).
• Ed: Less dogmatic on ownership/fund parameters, more focused on GP frameworks and willingness to evolve as markets change ([56:04]).

Biggest Risks & Opportunities

• Sean: Cautious about capital intensive areas; biased toward generalists, wary of trendy sector specialization ([58:19]).
• Ed: Watchful for signs of overcrowding (e.g. too many pitch decks in a sector is a red flag) ([59:10]).

Memorable Quotes & Moments

• “Venture capital is both dead and alive at the same time. Until you open the box…you’ll know where the cat’s alive or dead. And until some of these companies go out and try to raise more, it’s going to be hard to know which ones are really viable.”
  — Ed, channeling Schrödinger's Cat metaphor for private unicorns ([24:13]).

• “We try often to remind ourselves career risk aversion is a real thing…So believe it or not, with a very bold portfolio, I’m often asking, are we doing enough? Are we being too consensus here?”
  — Ed on institutional contrarianism ([61:28]).

• “Straight shooters and in-person touch points—the relationship’s built in person…if you have a relationship, you tend to be early on that list of calls.”
  — Sean on adding consistent value to GPs ([42:52]).

• “If someone puts all the money to work in months—there’s a real issue…that’s not the deal we wanted and we’re not going to be part of the next fund.”
  — Sean on discipline in fund deployment ([30:58]).

Timestamps: Important Segments

• [00:00] – Ed: Is Venture Broken? Silver linings amid tough vintages
• [06:04] – Sean: Gresham’s approach to venture and portfolio construction
• [07:28] – Ed: Dietrich’s highly concentrated private and VC allocation
• [09:32] – Where are the most exciting opportunities: AI and geography themes
• [16:26] – Liquidity problems & innovative allocation solutions
• [26:26] – Institutionalization of VC and changing GP/LP dynamics
• [29:55] – Underwriting with new data: Filtering for authentic managers
• [34:01] – Power law math & ownership—penciling out fund returns
• [36:17] – Competition: Mega-funds vs. small/solo GPs
• [45:09] – Non-US VC opportunities: China and India update
• [52:59] – Evaluating co-investments—power law and adverse selection
• [55:22] – Evolution in investment process and diligence focus
• [58:19] – Looking ahead: Sector focus, capital intensity, risks

Notable Closing Q&A (Rapid Fire)

• Favorite hobbies:

  • Sean: “I’m learning Spanish for no particular reason…it feels like magic.” ([63:20])
  • Ed: “More time cooking, especially pasta with my wife.” ([63:36])

• Biggest investment pet peeve:

  • Ed: Poor GP-LP communication—especially on bad news ([64:09])
  • Sean: “Hard caps” on fund size that aren’t actually hard ([65:29])

• Next five years:

  • Sean: Transitioning to “player-coach”—developing team, not just doing deals ([66:54])
  • Ed: Preparing for eventual leadership transition at Dietrich Foundation ([67:17])

Final Takeaways

• The VC landscape is in flux, with increased institutionalization, prolonged illiquidity, and intense competition in early-stage AI.
• LPs see opportunity in being steady, disciplined, and data-driven—drawing clear lines between GP luck and skill, and remaining vigilant for behavioral signals.
• Despite sector cycles and macro volatility, long-term, relationship-based underwriting, vintage diversification, and a balanced generalist/specialist approach are key.
• Global opportunities exist outside the US, but require nuanced approaches and recognition of very different market structures.
• Both guests express optimism in their edge as persistent, thoughtful allocators—grounded in relationships, humility, and relentless curiosity.

Recommended Listening:
For those interested in deep dives on institutional VC strategy and real-world allocation challenges, this episode is a masterclass in pragmatic optimism, risk management, and continuous learning in venture capital.