Chris Douvos – A Value Investor Lost in the Valley - [Invest Like the Best, EP.85]

My guest this week is Chris Douvos, a managing partner at Venture Investment Associates, which allocates 1.6B in behalf of investors. Chris is the first professional allocator I’ve spoken with who focuses specifically on venture capital funds, so I had a ton of questions for him on how to build a portfolio in an asset class known for uncertain, but often enormous, outcomes. We discuss the major recent changes in the asset class and where things might be going. I sought Chris out because while this is an investment style that is full of creativity and hope, I’ve always felt it could use a healthy dose of skepticism and a value investor’s mindset. He delivers in spades as we try to separate the real from the ideal. We didn’t record it, but Chris’s tour of Palo Alto was one of the most interesting and entertaining hours I’ve spent. He is a student of history and markets, and I look forward to learning more from him in the future. Please enjoy our conversation For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Books Referenced Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment Links Referenced Domino Rally Business Models All About the Benjamins Speak Like the Locals David Salem podcast episode Curveball Show Notes 2:18 – (First question) – Four factors that Chris thinks are important for future success of venture firms; portfolio concentration; repeatability; being early; size discipline 7:40 – What the venture landscape looks like today from Chris’s viewpoint 8:32 – Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment 14:07 – Is there a glut of startups making it difficult for investors 17:33 – How does Chris think about the investments that are a bit different from what everyone else is investing in in Silicon Valley 19:17 – Why he focuses on college campuses for innovation 20:54 – The role that geography plays in venture 25:06 – The Four M’s; money, momentum, mentorship, entrepreneurial management 27:13 – Chris’s perspective on crypto currency as a threat to venture capital 31:44 – The idea of venture capitalists as service providers to the companies they are investing in 35:15 - Views on investing in hyper focused VC’s vs those that are generalists and just go after the best opportunities in any sector 39:00 – What hot button areas are of most interest to Chris and why, from an investment standpoint 39:38 – Domino Rally Business Models 42:22 - What can a public market investor learn from a value venture investor who mostly has to rely on qualitative metrics 43:08 – All About the Benjamins 44:38 – Portfolio construction in the world of venture 46:40 – Speak Like the Locals 48:00 - What are the characteristics that Chris looks for in managers, as an allocator 53:52 – What type of investors should and should not be in venture 59:15 – What type of allocator would Chris give all of his money to 59:47 – David Salem podcast episode 1:01:06 – Curveball 1:01:40 – Kindest thing anyone has done for Chris Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:32Patrick O'Shaughnessy?

  This podcast is sponsored by CFA Institute, the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals, working to build an investment industry where investors' interests come first, financial markets function at their best and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome everyone. I'm Patrick O'Neal and this is Invest Like the Best.

• 1:15Patrick O'Shaughnessy?

  This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 1:31Speaker 02

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:56Patrick O'Shaughnessy?

  My guest this week is Chris DuVos, a managing partner at Venture Investment Associates, which allocates $1.6 billion on behalf of investors. Chris is the first professional allocator I've spoken with who focuses specifically on venture capital funds. So I had a ton of questions for him on how to build a portfolio in an asset class known for uncertain, but often enormous outcomes. We discussed the major recent changes in the asset class and where things might be going. I saw Chris out because while this is an investment style that is full of creativity and hope, I've always felt it could use a healthy dose of skepticism and a value investor's mindset. He delivers in spades as we try to separate the real from the ideal. We didn't record it, but Chris's tour of Palo Alto was one of the most interesting and entertaining hours I've spent. He's a student of markets

• 2:41Patrick O'Shaughnessy?

  and of history, and I look forward to learning more from him in the future. Please enjoy our conversation on venture capital investing.

• 2:50Patrick O'Shaughnessy?

  So Chris, I'm going to start with a question that is antithetical to most venture investing by forcing you to play a little game, which is if you had to build a quant model where all you got to select venture firms was four factors that have to be objectively measurable.

• 3:05Speaker 03

  Objectively measurable.

• 3:06Patrick O'Shaughnessy?

  So for example, assets under management could be one factor that you could use in your way of screening, or track record, or something like this. What four factors, knowing fully that this is a silly place to start, do you think are most positively related to future success for venture firms?

• 3:24Speaker 03

  Well, I didn't go to law school, but all my friends who went to law school said, professors always say, "Don't fight the hypo." But I'm going to fight the hypothesis here a little bit because I almost think that if you found four factors, I'm not sure they would necessarily correlate with success, although they might, but they would certainly correlate with volatility. And I think you can positively skew volatility. And so one thing I would actually say, and this is my bias, and there are a lot of people on the opposite side of this trade, my bias is portfolio concentration is number one. On the margin, I believe that people who are more concentrated will have more success because each win has much more impact. Now, the reality Of it is then you have to step back and say like, are they choosing well enough?

• 4:09Speaker 03

  This isn't monkeys throwing darts at a dartboard because in that scenario, actually, portfolio diversification would 50, 60, 70 companies of fund would probably give you a better chance of hitting the winner. But if you can apply, you know, kind of thoughtfulness to the problem and have a portfolio of 12 to 20, you could really make a structural alpha, I believe. So that's one. Another, and this is actually an interesting question, how can you quantify this? And I'll say maybe it's a qualifier thing, not a quantifier. But one thing that I focus a lot on, and I know you talk a lot about is repeatability. And I believe that process drives repeatability. People who have thoughtful processes around building hypotheses and testing

• 4:53Speaker 03

  those hypotheses and executing against those hypotheses, that's a really powerful, and I'll say the poster child for that is Union Square. They spend a lot of time talking about process driving repeatability. And I think that, you know, you look at the first round guys and they've built a big infrastructure, the true guys, a bunch of folks who've built process for driving deal flow and driving decision making, building that investment. And I think that's another one. A third factor, I think, quite frankly, if done well, just being early, this is completely exposing my bias. Early stage investors, I think, are kind of structurally advantaged versus late stage investors, just because they have a better cost basis. And so, all right, so we've got three, we've got concentration. What's the hammer?

• 5:37Speaker 03

  And then, it's funny, because I think a lot of people in my seat would say track record. But I actually think track record is a lagging indicator, not a leading indicator. And there's this, I call it the financial law of levitation. Stepping back a moment, in venture, the horizon is so long. It takes eight to 11 years for companies to get public from first investment. On average, it takes, I think, six years on average to get to an M and A exit. And so the evaluation horizon, you've got telltale's along the way, but the evaluation horizon is actually

• 6:09Speaker 03

  Sometimes a multiple of the fundraising horizon. You'll raise four funds conceivably before Fund One starts really showing results. And that's longer than most people's attention spans. And in fact, it's longer than a lot of people's career tenures. So you've got all these principal agent problems, which we'll talk a ton about in due course. But one of the things that's really challenging is then here we go to the financial law of levitation. People have success, or at least perceived success with their early funds, and then basically have money thrown at them. So somebody once told me, it's harder than you ever dreamed it would be to raise a Fund One, but far easier than you ever thought it might be to raise Fund Two, and so on and so forth. And so by the time you really know if a fund is good,

• 6:53Speaker 03

  it's usually a lot larger. And I think, I do think that size is a contra indicator to success. I think size disciplined funds that can continue to kind of repeat on this process.

• 7:04Patrick O'Shaughnessy?

  Like a benchmark is an example.

• 7:06Speaker 03

  Benchmark is the poster child. They've done a great job. First Round has done a great job of staying in their fund range. And there are plenty of arguments against that. But I think those two are really the poster children for being able to drive kind of repeatability at size. And look, at the end of the day, back to this principal agent problem, and then I'll stop jibber jabbering. But you've got me on my soapbox of which I have many.

• 7:26Patrick O'Shaughnessy?

  It's the whole idea.

• 7:27Speaker 03

  Yeah, right? The principal agent problem is, I don't understand why people don't value cap gains, although they may be uncertain, over more certain W2. I mean, I guess that makes sense. I ask it as a question, but intuitively it makes sense. But cap gains is so much more powerful. But yet, I think people kind of get intoxicated by the ability to spin funds, raise money, become mini asset managers. So I think size discipline would be kind of the fourth. If you could, so there we go. Size, discipline, portfolio concentration.

• 8:01Patrick O'Shaughnessy?

  Repeatability.

• 8:02Speaker 03

  Repeatability and...

• 8:04Patrick O'Shaughnessy?

  Whatever that last one was.

• 8:04Speaker 03

  Whatever that last one was, it's all good. But we've basically described benchmark, Union Square, first round, a bunch of these, a bunch of these kind of ideal firms.

• 8:12Patrick O'Shaughnessy?

  So maybe we could step back a couple of steps to draw a map of the entire venture landscape from your perspective. So this would be rates of change is what always interests me. So I've heard you talk about the kind of rise of all of these micro cap venture firms. And in one of your letters, there was a great little phrase where it was like, "snowblinded by opportunity." There's just such a glut of capital and interest in this world. And we also joked when we were on the phone last time that we might call this episode something like "A Value Investor Lost in the Valley," and that you have this in your DNA contrarian type mindset. So with the contrarian hat on, looking at the landscape today, maybe describe what it looks like relative to history, and then we'll get into kind of where we might be going.

• 8:50Speaker 03

  Sure. And you think about it, venture was almost this cottage industry up until the mid, late 90s. You know, kind of sub, in a lot of cases, $5 billion a year, then, you know, maybe $10 billion, and then David Swensen wrote first the HBS case, then which eventually turned into the book. And Swensen talks about being long equities, being illiquid, all these things that when you put them in a jar and shake them up and spill it out, it says venture capital. And Yale had a great run with venture capital and continues to do really well. I teach the Yale case every now and again at business schools. And, you know, I ask people like, "What's the lesson of the case?" And people say, "Oh, you know, be illiquid, be long, you know, whatever." I say, I said, "No, the lesson of the case is actually, don't try this at home." Right?

• 9:33Speaker 03

  Because so many people then piled into venture capital in the late 90s. We saw 2000 was $100 billion fundraising year, and returns really suffered. And then that created this six, seven, eight-year period where venture was somewhat depressed. And then what happened is by 2008, we started seeing this fundamental change in entrepreneurial finance that started becoming obvious. It really started happening in kind of '03, '04, but it's what collectively we call today lean startup. So basically, you know, you can, instead of buying servers, you can now rent them. Instead of hiring all these developers, you can find open source stuff and integrate it. All these things happened first in the consumer web, but then migrated into other areas, into enterprise, and then I've often said, "Chris Anderson."

• 10:16Speaker 03

  And from 3D Robotics and Wired always said the peace dividend of the cellphone wars was creating this cheap library of things that used to be unobtainium. So we've seen lean startup in the hardware space, et cetera. And so there's been this explosion in entrepreneurship. And it used to cost Josh Koppelman at First Round always says his first startup took $7 million to get to first revenue. His second startup took 700K to get to first revenue, and then his third startup took 70K before he was at first revenue. And today, the cost of getting to first revenue can be the opportunity cost of unemployment. And you can scale in response to growth rather than in advance of it. And all these things led to a kind

• 10:58Speaker 03

  of a flowering of entrepreneurship. Meanwhile, the venture industry was still kind of chugging away where the archetypal fund was like a $400 million fund, and people were used to doing these large rounds. But companies suddenly didn't need that kind of money. So this created what people started talking about in '08, '09, 2010. Sophisticated people started talking about the capital gap. Because if you're a $400 million fund, you can't write a 500K check. So that led to the rise of these funds. First Round, IA out of New York, True, Floodgate, some of the pioneers, SoftBank, Felisa, some of the pioneers in that space. And those guys right away got in a bunch of great companies. So every one of those companies I just named has a signature deal or two. And what's the Buffett line? The innovators are followed by

• 11:43Speaker 03

  the imitators who are followed by the idiots. And I sometimes feel like we're in the idiot We're the idiots. Right? Because now there are 550 micro VC firms. It's unbelievable. It's unbelievable. Now, you've got crazy competitive intensity for every single, in every single space. And what that does is it's really driving up price. And the return on any asset is a function of the price you pay to get in, plus the capital it consumes. It's like almost simple math. I spent a lot of time talking to new people coming into the space. I'm like, look, Maybe this makes me sound like a fuddy dudd, but I believe in Buffett's equation. And I don't know if Buffett actually said this. I just throw that out. I call it Buffett's

• 12:25Speaker 03

  equation to make it sound smart, but opportunity equals value minus perception. It's simple. It's basic. Hard to do. Hard to do, easy to say, right? Exactly. But what's interesting is in this zip code, or the, you know, these three area codes, 415650408, basically what people sometimes think is if you can drive perception, that can drive value. So there's almost this mental recursiveness. Some people call it the Tech Crunch effect. When a company gets hot, all of a sudden it's more valuable. And that's actually interesting to me. And you know what? There may be like some truth to that. You know, there's, there might be some reality to the recursion, because if a company can get quote unquote hot, it can rise above its competitors. But the reality is that

• 13:09Speaker 03

  there is some sense of fundamental value ultimately, you know, revenue and. It always matters in the end. It always matters in the end. And in the end, this is what the challenge, I think, that we run up against as a business. In the end, there has to be a last buyer. There has to be a last buyer for your shares, or next buyer for your shares. And that's either an acquirer or the public markets, both of which tend to be sets, pretty smart folks and really actually care about value of the capital V, not how many mentions you have on TechCrunch. And so, so it's been really interesting to me because we've seen a bunch of these IPOs go out where the opening, or I guess the range and the, the ultimate like IPO price is below the last round. Oh, right.

• 13:55Speaker 03

  Private market price. Right. So it's a public down round. It's a public down round. And that's actually really interesting because that's where now we see perception has gotten so big, value is what it's perceived to be. So opportunity has shrunk. So it's almost this, it's like a seesaw around the pivot of value. And I think a lot of people in this zip code think about sexiness as a proxy for opportunity, but really they've got to create. It's the exact opposite, probably. Exactly. Now, I don't mean to be a total cynic because there's amazing value that's. Being created, we're reshaping the way people live and work. But there has to be a sense for what the value creation actually is in a way that's articulable to the ultimate buyer.

• 14:39Patrick O'Shaughnessy?

  Do you think that maybe part of the problem might be there's so much funding, the 550 micro cap VC firms, so much experimentation happening, the lean startup, you can do any idea on the cheap, that this all ends up as consumer surplus. It's fantastic for society because we get to use the products and services. But the investors that win are maybe just lucky. And the prospective returns that venture has delivered for so long just won't happen, that it'll be captured by consumers.

• 15:05Speaker 03

  So I'm not going to answer that question first, but I'm going to answer it eventually. One thing that actually keeps me optimistic, because I don't want to sound like a radical pessimist. But one thing that keeps me optimistic is what Nicholas Nassim Taleb said about the US economy. He said, there was this thing in 2008 when everything was going haywire. A magazine, I think, wrote an article or asked a bunch of leading thinkers, what are they optimistic about? And he wrote this great piece that said, what I'm most optimistic about is the American economy. And it was almost like a contrarian thing to say because things were looking kind of grim in 08, less so here, but elsewhere for sure. And what he said is, he said, America's economy is the most open to optionality of any economy in the world. He said, and I really believe that the essence of that is distilled here.

• 15:50Speaker 03

  And a thousand flowers are blooming and the vast majority of those will die off. But the few that really survive will flourish and thrive and really be transformative and continue to be transformative. And I think be great investments for those who are well positioned with respect to some of the things I talked about around right sized funds, concentration, conviction, process, all that stuff. There will be money to be made, but I think as we've always seen in venture, if you were to index venture. You would have wasted your time. This goes back to the Yale case, which is, don't try this at home. It's amazing to me, living out here, I was attracted to California because it's a sunny and magical land. You know, Walt Whitman has this great poem called Song of the Redwood Tree, and he talks about populous cities and the latest inventions.

• 16:35Speaker 03

  This is in 1850, he's talking about this. He goes, "In California, I see the genius of the modern." He talks about the child of the real and the ideal. And that's what's here. And being on the ground here, it's amazing to see the kind of richness and the texture and the flow. And yet, one of the challenges is we see people kind of fly in here from Dubuque and Dubai and spend three days each quarter, or a week every six months, and then think they've got it all figured out. But, you know, as an ecosystem, there's so much more richness and texture, and it's a lot of that outside money that's generally less, I won't say less sophisticated, because it's very sophisticated money, but less attuned to the true opacity of the place that is funding

• 17:19Speaker 03

  a lot of these marginal investors. And then, as a result, you've got chaos capital, especially in the early stage. I think we've had a barbelling of the venture industry. We've got 550 microfunds who really have created this kind of cauldron of both innovation, but funding that, you know, where things are, I'm shocked at sometimes evaluations that things get as seed investments. And then, on the high end, you've got these, like, you know, mega funds now. And so, this barbelling has really created some funky dynamics, but the large funds will continue to, you know, raise money because some of these large pools of capital that want innovation exposure have no place else to go. They can't invest in some of the early stuff. So, it's an interesting time because the barbelling has gotten so much more profound.

• 18:02Speaker 03

  And I guess that's the long answer to the, you know, kind of historic art question.

• 18:05Patrick O'Shaughnessy?

  It's fascinating, and I'll pull on that real versus ideal. It's a nice little dichotomy, and it rhymes. As a means to talk about a little more optimistic question, which is, okay, if we buy that, this sort of creative, nascent style of investing is going to be around for a long time, and that the US has a structural advantage in terms of optionality and all these things, where to kind of look next? So, part of the contrarian idea isn't so much as doing the opposite of what other people do. It's more just doing stuff from first principles that's just new and interesting. So maybe microfond or however you want to approach the question. How do you as an allocator to as an LP in venture funds? Think about finding things that's a little bit different, maybe where the prices aren't as crazy high as they are in the, you know, five square blocks around where we're sitting.

• 18:50Speaker 03

  It's an interesting question because no matter where you shine your flashlight right now, there are, I was gonna say 50 cockroaches scurrying, but I don't want to make it sound like I'm super negative because there's, there's a lot going on. But that said, there are so many people seemingly in every corner and it's amazing. One way in which this kind of articulates itself in the market is how quickly things get, get overheated. So crypto is a new, new thing. Now we've got crypto funds. We've got space, you know, there's space funds. It's amazing how dynamic the market is and it's interesting because then you get this, build of anticipation, then you like that crashes into whatever they call the trough of disappointment. And you know, maybe that's an interesting place to invest.

• 19:33Speaker 03

  But me personally, a couple of things, actually, one is I like investing kind of post hype. Cause I feel like there are a lot of technologies out there that are overhyped in the short term and underhyped in the long term to borrow, John Doerr's phrase, and there's some things that are either like that I think are interesting. But where I'm spending a lot of my energy lately is on college campuses. And I have found that historically people have looked to colleges and research institutions, for kind of IP to pull out. And that's a kind of a tricky thorny road. Because you've got thick institutional universes and licensing offices and this and that and, and you know, there's some success stories, but also a lot of broken plows.

• 20:18Speaker 03

  However, I've got a thesis that what we're seeing now is real, authentic entrepreneurship among college students. And in very sophisticated ways, this isn't just like two guys in a room with an app. But you know, I've spent a lot of time at Berkeley, we just invested in this thing called the house fund. That sits on top of some of the entrepreneurship and is trying to create almost like a clearinghouse. Got a great space on campus and they have, you know, I talked to these students, some of these PhD students who have novel pieces of software that are kind of disrupting kind of a interesting, you know, I probably shouldn't get too far into it, lest the incumbents hear footsteps. But, but like amazing, like computational physics or kind of computational biology or some of these things.

• 21:02Speaker 03

  They're really student driven, they rely on some stuff that's going on in these, on these campuses. But really more so rely on the energy, the entrepreneurial energy and the invention energy that turns into innovation energy. So we're looking at something at MIT that's similar. We've got, boy, I'd love to put somebody in business to sit on top of Carnegie Mellon or some of these other, other places. That's really interesting to me.

• 21:24Patrick O'Shaughnessy?

  So closer to the sources, what about geography? I had a really interesting conversation with an angel investor turned small venture capitalist in Jerusalem. And what I loved about the conversation was, his investing thesis was basically, there's a lot of smart, talented technologists in Jerusalem and literally zero people investing in them. All the money's in Tel Aviv. And even though it's a short drive, culturally, it was just an odd discrepancy. And so he got preferential pricing and all these other kind of interesting deal flow access as just being the only person there. And so I've been thinking a lot about geography as it pertains to venture and I'd love to get your take on that, sitting, sitting where we sit.

• 21:59Speaker 03

  You know, it's so interesting to me because I've often thought about how spiky the world is. This is Richard Florida's analogy, like the world isn't getting flatter, it's getting spikier. So there are these centers of innovation, but one of the mega trends that's going on in venture is what used to be an opaque, and this is, you know, driving a lot of the fund formation activity and especially in other geographies. We used to be like an opaque field, like nobody really knew how to do venture, right? It was this dark art practiced by a few people in Boston and a handful of folks in San Francisco Peninsula. And now we've got blog posts for days. Brad Feld has done incredible service to the, it's, it's amazing how widely disseminated the knowledge is, yet.

• 22:44Speaker 03

  Venture keeps concentrating in a few key ecosystems. New York, Boston, Los Angeles, San Francisco, Seattle. And Steve Case obviously is trying to do some really interesting stuff on the rise of the rest front. And I think that's really, really important stuff for the country. But what I've seen is that the talent continues to congeal in these magnetic spots. And to your point, one thing that's interesting, and I don't know as well the geography of Israel and Tel Aviv versus Jerusalem, but I look at here in the Bay Area, and I think Berkeley is structurally underfunded. Cal is an incredible innovation engine. And if you throw on Lawrence Berkeley Lab, just right up the road, which has a lot of,

• 23:25Speaker 03

  there's $850 million in Department of Energy funding there. Add on another billion one, I think, in sciences funding at Cal. And yet, all the venture capitalists spend their time at Stanford. And there's something to be said for culture, but boy, I think at Berkeley, you go over and the folks are so much more hungry and dynamic. And boy, if I could make a pair's trade, I would go long Berkeley and short Stanford. And that's not a lack of excitement about Stanford. I think it's a fantastic and important place, but I think the fecundity, I think that's a $10 word for my $5 brain, of ideas at Berkeley is incredible and completely underbanked. And why? It's a 30-minute drive with no traffic from Sand Hill Road, actually probably 45 minutes an hour. The reality is there's a lot of traffic, but so what?

• 24:10Speaker 03

  What a great place. So this is a really important question. And I think, I forget what the question was, even though it's really important.

• 24:18Patrick O'Shaughnessy?

  Just geography, whether that's within a city, like you're mentioning Berkeley versus Stanford, or internationally, or that seems to be one way of finding differentiation as an allocator to venture funds.

• 24:29Speaker 03

  And one of the challenges is, I think there was this thought for a while, everybody wanted to create Silicon Blank. Everybody wanted to recreate Silicon. Reality is Silicon Valley is unique in the history of the world as a place that's magnetic, because there are certain things that are in play here. That said, there are other places that'll create their own dynamism and their own template. I don't want anybody else to be the next Silicon Valley. I want somebody to be the New BioCoast or whatever, you know, whatever it'll end up being. But this ecosystem question is a really important one. And I actually often think of it in the following way. You know, I live in Palo Alto and I don't think most people within several block radius of me. I don't think anybody gets W2 income. They're all equity or consulting kind of 1099 based.

• 25:14Speaker 03

  And, you know, the founder of this company lives whatever blocks away from me, the founder of that company. And they're magnetized here and they create this great mentorship loop. And that's one thing I've talked to, you know, I talked to somebody in London once. I said, well, what happens when a company goes public in London? What happens to the founders? He says, oh, well, they moved to the south of France. But the magnetism of the Bay Area, money is an important, you know, I always talk about the four Ms. You know, money is a really important thing. I'm glad this isn't the four Ps. I'm so sick of hearing that. Oh, I'm over it, right? Totally over it. But, you know, money is crazy important, but it's Tom Friedman talks about the electronic herd. Money goes here, money goes there. It's, it's, it's just a blink of, of an eye away from appearing. But then momentum, you have to have an ecosystem that has traction. And we see that in, you know, kind of New York, LA.

• 26:00Speaker 03

  And that's very attractive and magnetizes capital and people. But then the two things that I think the Bay Area has in spades relative to other ecosystems are mentorship. This persistence of people who know how it's done. And then the last one, this isn't quite an M, but I cheat a little bit. It's entrepreneurial management. Taking a company from $10 million to 100 million in revenue is an amazing challenge. John Lilly and Reid Hoffman talk about blitz scaling. Blitz scaling is really hard. I see companies, portfolio companies who are in the midst of this and it's. Such a different skill set from the, than the zero to 10. Exactly, right? Zero to 10 is amazingly hard. And there are, you know, things that go into that that are unique to that skill set. But then building that business in a way, you know, with alacrity.

• 26:44Speaker 03

  It's like riding a tiger whose fur is on fire, running through an oil field. And those are the, I will tell you one thing that worries me about the Bay Area prospectively. Is a lot of the people who used to be those great entrepreneurial managers, like CFOs, VP Sales, Head of Product, etc. They would continue to recycle into new companies. A lot of those folks are becoming venture capitalists now.

• 27:11Patrick O'Shaughnessy?

  Oh, no.

• 27:12Speaker 03

  And I'm just like, oh, my gosh. Or in some cases, the scale of the outcomes is so large that some of those folks can call in rich. And so this is the thing that worries me most. And, you know, look, we invest nationwide and we just did a fund in Toronto. And I have not invested as much in China historically. We've done all dribs and drabs. But, you know, so just think of North America. But as I think about where to vector my capital, I'm looking at those four Ms. And understanding that kind of the intellectual capital in a place is critical.

• 27:45Patrick O'Shaughnessy?

  This is a unique opportunity for me because you're the first super allocator to venture funds that I've talked to. So your perspective is quite a bit different than the entrepreneurial layer and even the venture GP layer that I'm used to asking these similar questions to. And my guess is that your take is slightly different. So I'm hoping to go through a couple of the hot button issues in this world, both investing trends or ideas, memes, if you will, but also specifics like hard sciences or something like this. And sort of get your perspective from your seat as to whether or not it matters or what your take is. So the first of these is the rise of cryptocurrency as a, forget most of what people talk about with cryptocurrency, but as a threat to traditional venture capital.

• 28:26Speaker 03

  It's interesting because one of the trends that was talked a lot about with respect to crowdfunding was that we'd start seeing the separation of capital and influence. And you've got these guys out there, because if you think about it, it was this unbundling. Because venture capitalists used to have capital and mentorship.

• 28:48Patrick O'Shaughnessy?

  Control the pipe and everything.

• 28:49Speaker 03

  Right. And but they also very much could plug companies into somebody at Cisco who could buy their product or some, you know, find a hire, the perfect VP of Engineering hire, etc. That was kind of part of the promise of the kind of the catalytic equity of venture capital. This is a catalytic value add asset class. And by I think Swenson sold us all that.

• 29:11Patrick O'Shaughnessy?

  Bill of goods.

• 29:12Speaker 03

  Bill of goods, because I think it's, I do think it's somewhat of a myth. There are firms that do it really well, but a lot that, you know, the vast, vast majority are just passive capital. And I think with crowdfunding, we started to see the unbundling and you look at people that are guys like Peter Curry, CFO of Netscape and is just a valley guy and he's been on the board of Twitter. You know, and I don't think he invests out of a fund. I think he's just a guy. And other people are investing and he's like the brain. And I think crypto is that trend, perhaps taken to, you know, the next level. Because we see folks going, you know, can go out and they can raise, you know, with coins considerable capital, right? It's, it's amazing. So it's almost like crowd, you've created a more effective vehicle for crowdfunding in a sense.

• 29:58Speaker 03

  But you still need help, right? There's so much goes into, so much has to go right in building a company. That you want more people kind of in your squad than you ever dreamed possible. And so I think it's going to still be important to interface with people who have expertise. Whether we call those people venture capitalists, or whether we call them people like Peter Curry, these high impact outside brains will take on different, it'll vary what, you know, what we call these people. But ultimately venture capital firms will have to recast themselves as service providers. They provide a suite of services to entrepreneurs and keep talking about first round. And, you know, and true and some others who have done a great job of packaging and offering in a sense

• 30:41Speaker 03

  for entrepreneurs. There's a suite of services that's, that's available. And, you know, this, this kind of reorientation from venture capital fund as capital source to venture capital fund as service provider who actually just provides. I think that's the trend. I mean, Andreessen Horowitz has kind of cast itself as, you know, they describe themselves as a talent agency. There's so much, I think, that's innovating in that regard that'll stave off some of the crypto stuff. But crypto is going to change the nature of VC as well.

• 31:09Patrick O'Shaughnessy?

  I'm going to come back to the Andreessen Horowitz idea in just a second, but first just the point, like back to our earlier conversation. There's nothing that would terrify me more than being the venture. Investing that's happening at places that raise money through an ICO and they've got so much cash that they don't know what to do with and it's just going to fund all these experiments and I just can't like I couldn't draw up something that seems to have worse prospective investment results.

• 31:32Speaker 03

  Well, it's amazing to me because one of the things that I look for in entrepreneurs and encourage my VCs to look for is accountability. And I think the whole ICO thing kind of changes some of the accountability dynamics and that's really unsettling to me. And I'm going to keep watching this closely. We had this wave of last half of 2017 and then obviously in 2018, we've had Telegram raise however many hundreds of millions of dollars. I mean, it's amazing. I hope it slows down. I think the market will kind of find its equilibrium. But over that time, you know, I think the pressure will be on venture capital firms to step up their game as as service providers.

• 32:16Patrick O'Shaughnessy?

  I want to come back to the service provider idea and spend a little time here, not just as it pertains to venture, but all asset managers. This is something that started to really pop up as Andreessen Horowitz as the CAA of the venture world is like a popular meme. But I wonder how much this is actually true versus something that sounds nice. Seems to me like it has to be hyper-specific if it's actually real. Like, so there's a firm in New York that does software for equities where they literally program your like your MVP or, you know, examples like that that are really, really specific. Not like we're going to help you with everything and be a service provider, which just sounds nice, but probably doesn't mean anything. So I'm curious how much real versus ideal back at that idea again. So how much reality there is to this kind of service provider model? Because as someone that runs an asset management business, I'm interested in this idea.

• 32:58Speaker 03

  Yeah, it's a really interesting question because you have to, as between being a service provider and providing a service, there's nuances there. And I look at First Round, for instance, and they're the firm I know best, especially in this regard. They've invested a ton of money in building a suite of services that are available to entrepreneurs. Yet I look at their signature investment in some ways as And I've talked to Rob Hayes about it and he was just in the right place at the right time. I think he was buddy buddy with Garrett Camp and what have you. And you know, I don't

• 33:38Speaker 03

  think Travis ever asked a question of FRC's venture concierge. I can't get into any specifics because I just don't know. But Travis was a kind of a particular guy. I don't think Travis would call up first round and say, hey, what do you think I should do here? I'd like some help with this. That's just not his footprint. And so there is this question of kind of real versus ideal. I've seen the value of the first round kind of suite of services firsthand. And I think there is a nice recursiveness to drive deal flow in that case. And I do think that entrepreneurs get a lot of value out of those services. Now, I've seen some of these service offerings that some venture firms are suggesting that they offer, and they're in some cases

• 34:20Speaker 03

  ludicrous. I don't want to get into specifics because I don't want to embarrass anybody. But I think we're continually refining this model and kind of to your point, it's actually interesting. Actually, the double clicking on this, we had a big debate at Princeton. What are we going to call our hedge fund portfolio? This was at Princeton's endowment back in the early 0s. What are we going to call our hedge fund portfolio? A lot of these funds don't hedge. Ultimately, we settled on idiosyncratic return, which I thought was actually pretty clever, which I thought was great. I would actually hope that that would propagate throughout the universe. But there were a bunch of others. We had this brainstorming session. We were like looking up in some of the literature and some people were calling hedge funds skill-based investors. Are you kidding me? Our bond fund managers not skilled? That's the most ludicrous

• 35:02Speaker 03

  thing I've ever heard, but it was out in the literature. And I think as we look forward in investing, because you know, I mean, you've talked about this a ton, passive investing is it's so cheap to buy beta. And I think, how does active management continue to look and evolve? And one of my views is across markets, public, private, et cetera, I think that active management will look more like catalytic management. How can those active managers bring some resources to bear? Actually do something. Actually do something or offer some information or insight. So this starts to feel more like a deep, I think, public markets started looking more like a deep value play where you have maybe some catalytic investment going on. There'll be many, many other strategies that a lot of people, including you, are far smarter to figure out than I am. But as I see the world, it'll be more kind of catalytic in nature.

• 35:47Patrick O'Shaughnessy?

  What do you think about the focused mindset versus the generalist mindset for venture investors? So I was going to ask originally about, you know, what you think about topics like machine learning and AI, or CRISPR technology, or some of these really kind of buzzy, hyped up areas of investing. But maybe a more interesting way to think about it, since you're an allocator, to venture funds, is whether it's, in your experience, better for someone to be, say, like, laser focused on finding the best AI companies, or someone that just sort of sits and views the world broadly and pounces on opportunity when they see it?

• 36:19Speaker 03

  This is a question I wrestle with a lot, and I'm an investor in a group called Data Collective, and I actually co-office with those guys. And they're super smart guys. And it was interesting to me that when they raised their first fund that I committed to, I was, I think, the first institutional investor in that fund in 2011, they were talking about big data. Today, the vast majority of what they do is AI, which is kind of, you know, a cousin of big data. But the footprint that they built in those early years really has kind of put them in the catbird seat as so many people are now flocking into big data. Now, it's kind of a little self-serving and uninteresting story, but the reason I bring it up is because it kind of challenges my own view of something. And, you know,

• 37:03Speaker 03

  so much of what we learn about venture is anecdotal and kind of passed down from the greats. And, you know, I remember Mr. McCants putting his arm around me and saying at a, you know, Greylock meeting in 2001 DuVos, "When venture's working well, time is cheap and capital's expensive. And when that relationship is reversed, watch out," right? You know, and he kind of, these things stick with you. And one of the things I read a long time ago, we're talking like 2002, which is almost in the primordial ooze days of venture, because it was written in kind of 97, 98, was written by this guy, Bill Davidow, who started More Davidow Ventures, and was one of the kind of early titans of VC. And he did some analysis of venture up until 2010. And he found that as spaces emerged, the first movers, the

• 37:44Speaker 03

  specialist funds, would capture, eventually over the fullness of that idea playing out, those people People captured all the early returns, but only 20% of the total returns. And 80% of the returns accrued to generalist firms who were nimble and could get up to speed. And his hypothesis was that those generalist firms would bring business building resources, not just insight and domain knowledge, but business building resources. Now, what has changed from that point to the story I tell about Data Collective? I think that venture as the entire economy is, I think this is true, is getting more and more esoteric. I think understanding something about AI and the nuances and intricacies is much different than

• 38:27Speaker 03

  understanding computer hardware, which was itself difficult, challenging, but you had to, you just had to find the right, you had to find Steven Woz in a garage. I think the barrier to entry is much higher. In the stuff that's durable, I think anybody can fund some clown with an app. And I don't mean to be dismissive of that, but it's funny because, and now a little bit of a soapbox. The New York Times for a while was on this riff that there's no real innovation going on in Silicon Valley. And Farhad Manjoo was saying things like, how many dating apps can we have? And I'm like, wow, I wish for 10 minutes, I think I tweeted this at him once, I'm like, for 10 minutes, I come hang out in my portfolio and you will see really smart, domain focused people

• 39:09Speaker 03

  doing amazingly deep, world changing stuff, whether it's synthetic bio or AI or robotics as human augmentation. There's such amazing stuff that's going to change our world so radically. And I think that is what makes this kind of specialist theme much more important than I historically have given it credit for.

• 39:33Patrick O'Shaughnessy?

  Fascinating stuff. What of the hot button areas are most interesting to you? And the more interesting question is why? So from an investing standpoint, I mean, obviously the technology behind all this stuff, again, is fascinating. We could talk all day about how AI and robotics are going to affect our lives, which is great. But my interest is always more, okay, is there a mispriced opportunity here? So how do you think about the overlap of interesting and opportunity?

• 39:58Speaker 03

  Yeah, that's an interesting question because there's so many things that are interesting, but you need to believe so many things for those things to happen. In fact, Josh Koplin wrote-

• 40:07Patrick O'Shaughnessy?

  Right, right.

• 40:08Speaker 03

  Right, Josh Koplin wrote this great blog post called Domino Rally Business Models. And he talked about this, there's this game- Where in the seventies, where like you'd set up all these dominoes and blah blah and like, and then you'd hit them. And if they went all around, you know, you'd get the win. But everything had to work just right. And in so many of these startups, you have to believe not only that they'll be able to execute, but then this other set of things will happen. And then another set of things will happen. And the probability, you know, what some people don't realize is the joint probability of all these things happening is actually pretty small. And so that's something that stresses me out. But what I would say is really exciting to me in terms of inspirational is, and this is not without controversy. I think robotics as human replacement.

• 40:51Speaker 03

  And, you know, everybody's like worried about, you know, the robot future and, and, uh, you know, everybody losing their jobs. But there are a lot of, especially as the economy continues to evolve and mature, there are a lot of jobs that people just don't want to do. Either they're dirty, they're dangerous, they're disgusting, what have you. It's amazing. We actually have an investment in a company that does, it's a robotic drywalling company. And it's actually, you'd be amazed, like, once you learn about demographics of drywallers, it's amazing. They're like, on average, seven years older than the average tradesperson. They're, they're really, and it's hard work and you're in dust. And there's like all these new OSHA regulations around silica dust.

• 41:30Speaker 03

  And so to have now a robotic arm, basically, that finishes and sands and can even paint at extremely high precision is amazing. And nobody's really getting thrown out of work. It's just augmenting. In fact, you need people to supervise. This has been since the beginning of the industrial revolution, you know, technology has actually created more jobs. But in certain places, it's getting hard to find people to do these jobs. So farm work is hard, tedious, laborious. So we have a portfolio company that's an automated picker. And we see all the stuff around precision farming and that it can integrate with robotics. So this kind of human augmentation, then augmenting humans at work. And then another robotics thing that I get excited about is augmenting ourselves.

• 42:15Speaker 03

  So we have another portfolio company that's doing some interesting stuff around soft exoskeletons that can now help you run faster, have better metabolic You know, jump higher, ski for the whole day without getting tired. So this human augmentation, I think, is real now. I'll tell you what stresses me out is the old phrase, the future's already here. It's just not evenly distributed. There's certain people that are going to be affected by this more than others. There are certain people that are going to have more opportunity than others to be augmented humans. And that's a really interesting and challenging societal question. That's probably above my pay grade, but getting us there, I think there'll be a lot of net benefit to society.

• 42:55Patrick O'Shaughnessy?

  Back to this, this concept of being a value venture investor, which I just, I love, I love that idea. Because there's, there's not much against, especially early stage, there's not much against which to compare the price. The fundamentals, if you will, are mostly qualitative and hard to judge across a set of firms. In that analogy, that value investing idea, what other ideas can we pull out that you think are useful? As someone that allocates to venture funds that might comport with how a public value investor thinks about the world?

• 43:22Speaker 03

  Yeah, so it's, it's interesting because I think portfolio construction is huge. And I think really sophisticated venture investors, as really sophisticated public market investors do, can differentiate themselves on portfolio construction. In venture, the way I articulate that is, you know, I wrote a blog post a long time ago called All About The Benjamins. And it was, I introduced this concept called RTFE, Return The Fund Equivalent. Although I think when I first thought about it was the RTFF, Return The Frickin' Fund. And you know, the way, venture is such a power law market that the top 10 deals in any year are all that matters. You know, of the 3,000 deals that were done. And so what you need to do is you need to make sure as you construct your portfolio,

• 44:05Speaker 03

  that both in terms of your own sizing and the valuation, any one of those companies can return the whole fund. And it's an interesting exercise. It's almost like a Rorschach to go through with some of these investors. And this goes back to what I said earlier about portfolio concentration. You look at some people and, and you know, they own so little of these companies that even if the company is a $60 billion outcome, it returns a third of their fund. Wow, you need three of those then. And you can actually then look at the weighted average thump value, right, that you need. And it starts, you know, you start realizing that people are making implicit assumptions that are expressing themselves through portfolio construction. And that's really dangerous because.

• 44:47Speaker 03

  Strategy is not just what you do, it's what you don't do and what you ignore. And I think you'd be far better versed to talk about it on the public side than I would. But even when I was doing public market stuff at Princeton or before business school, where I worked briefly with a hedge fund, it was amazing to me how little thought the average manager gave to making sure that their portfolio was constructed in such a way as to give them an advantage.

• 45:10Patrick O'Shaughnessy?

  Yeah, it's changing rapidly, I would say. Portfolio construction as a topic, people have, I think, realized how powerful a tool that is, that even with the best insights, if you don't know how to piece a portfolio together. And the other interesting thing, and my guess is this doesn't happen a ton in the venture world, but in the public markets, more and more people think about covariances. And if they've got 100 portfolio companies, how many bets do they really have on? Do five of those companies sort of give you the same exposure? And in venture, especially if it's a focus on AI or something like there's going to be a ton of covariance. Actually, maybe not, probably not much covariance, because most of them will go out of business and one will succeed. But it's a really interesting thing that portfolio construction in the context of venture is so interesting.

• 45:48Speaker 03

  Well, and it's interesting too, because then abstracting it up to the meta level of the allocator, we used to sit there, I used to be the model jockey at Princeton who put together the mean variance analysis. And you have your expected return and your volatility and your covariance matrix. And you plug all these things in and I was like such a prankster. Like I would always put, you know, this matrix would come out and you would have, you know, kind of domestic equity. Here's international equity, here's real assets, blah, blah, here's venture capital. And then as a gag, I'd put on the bottom rare coins, right? Really high volatility, very low return, you know, baseball cards. I'd plot all these lottery tickets, I'd plot all these goofy asset classes that didn't exist and I'd try to sneak them by, you know, to see if I could get them in the final board book, but you know, they were.

• 46:30Patrick O'Shaughnessy?

  A lot of tickets never made it?

• 46:31Speaker 03

  Yeah, and lottery tickets never did make it. Probably not, you know, that's one that gets, you know, kind of selected out in the process. But that said, I'd sit there and I'd be like, oh my God, how do we assign risk? You use standard deviation as a proxy for risk?

• 46:43Patrick O'Shaughnessy?

  Doesn't even make sense.

• 46:44Speaker 03

  Makes no sense. What is it in venture capital or private equity that we think of as risk? We think of things like technology risk, market risk, team risk. In how many businesses do you have to worry about the VP of Sales? Went to Ibiza and didn't come back the same person. That could wreck a company. That's, that's risk. Don't give me the standard deviation BS. And so, so how do you even begin to integrate this? And then, so from the allocator, I wrote this blog post a long time ago called Speak Like The Locals. And you sit down, and this is what people in venture don't get sometimes, oftentimes. You walk into like a Monday meeting in an endowment and you've got, you know, I called it Speak Like The Locals because I was like, and then you've got the, you know, Germanic hedge fund person who speaks,

• 47:28Speaker 03

  ah, the sortino ratio is, you know, like it's very specific. It's very, you know, kind of quantifiable. You know, you've got the, the bond guys, you know? And then you get to the venture guy and it's like, it's like Italian, like, hey, it's like, hey, it's everything fantastic. Anyhow, so it's a different mentality because you sit there and people say like, oh, why did you hedge fund manager, hedge fund asset allocator invest in this hedge fund? Oh, well, you know, their sortino ratio is this and your trainer ratio is that. And you know, all this stuff, their omega was whatever, right?

• 47:59Patrick O'Shaughnessy?

  First, first omega reference on the podcast.

• 48:01Speaker 03

  I was gonna say, there you go. Will Getzner was trying to get that in our heads in 2001, whatever. And then you get to literally the venture guy and you're like, why did you invest in that? Oh, the team.

• 48:10Patrick O'Shaughnessy?

  Liked the guy.

• 48:11Speaker 03

  I like the team. The team has a franchise. So this is what led me to the, how do we find people who are leveraging ecosystems? And that led me to these platform managers, which eventually then led me to universities. Like, how do you punch above your weight? And that's something that's tough to quantify, but important to recognize. And I think that as a whole, the venture industry doesn't recognize that disconnect very well.

• 48:33Patrick O'Shaughnessy?

  A ton of people that listen to the podcast are allocators of some type. And that could be individual, they could be a financial advisor, they could be a professional allocator like you are. If you had to distill down some of the key things that you look for in managers, and ideally some of these would be transferable out of venture, but ones that are particular to venture are fine as well. That you and I read in one of your quarterly letters that I can't remember the guy's name, but a friend of yours who you viewed as a really effective evaluator of talent, of manager talent. What the dimensions of that are, things that you think are important to look for in allocators? Because so many people out there are hiring managers of some type.

• 49:07Speaker 03

  Yeah, so I'll start with kind of my own manager selection process, which has four parts. And then I'll double click on each of these. So the first is the people. Do the people have some edge? And that's hard to quantify, but we'll spend some time on that in a sec. The second is the strategy, understanding, I don't have a monopoly on wisdom of strategy. In fact, I'm almost diversifying my strategies. What's important with respect to strategy is, is there a resonance between the strategy and the people? It's amazing to me how often there's a slippage between cup and lip there. Out of the people and the strategy falls the portfolio. The portfolio is the proof of the pudding. And you can touch and taste and see the portfolio, visit with companies, see what they're doing,

• 49:46Speaker 03

  understand how the team has helped that company grow and kinked upward the trajectory of its growth, et cetera. That's where I spend the bulk of my time. And then out of that falls performance. But again, performance is a lagging indicator, not a leading indicator, and very, quite frankly, size dependent, in my opinion. And so back to this law of financial levitation, as funds grow bigger, they almost can't resist.

• 50:08Patrick O'Shaughnessy?

  I call this assets versus alpha.

• 50:10Speaker 03

  Right, exactly, right? But back to the people, you know, so I think that's where it's most important as an allocator, to really understand the people that you're getting in bed with. Because the average venture fund lasts twice as long as the average American marriage. So you're really making a bet on people and you're probably betting on, you know, at least two funds, if not more, because you're not going to turn over enough cards in the periodicity of the fundraising to really, as long as people are making good deals and staying on strategy, you're going to probably invest in that second fund. So you're really getting on board for 20 to ride and you need to make sure that the people are not only excellent, distinctive in their space, have particular domain expertise, have a philosophy. It's amazing how many people are like, one of the questions I ask is, what's your strongest held opinion? Or what's the biggest hypothesis that you're testing?

• 50:55Speaker 03

  So people who are reflective, but also opinionated, but also have the humility to make sure that they're learning, right? That's critical stuff for me. But then, understanding their behavioral footprint. So this is where I spend a lot of my time, is understanding what they're afraid of, what they're excited about, what gets them eager to do something, what are the red flags that they seek, where are they? Off market, but then understanding people as people is something that is more necessary in venture and private equity than it probably is anywhere. I mean, you know, you want to understand alignment, but across asset classes, but the illiquid nature of venture means that if you get in the mix with the wrong people, you're stuck. So really understanding them as

• 51:38Speaker 03

  human beings. And so I have meetings sometimes where people come out and they're like, wow, that felt like therapy, right? I want to understand what they're afraid of. I want to understand like the bad choices they've made. I want to understand their disappointments. In the last year, I've had a couple of people cry after I asked a question and I retired the question, but I'm not sure I should.

• 51:54Patrick O'Shaughnessy?

  What was the question?

• 51:55Speaker 03

  Well, the question is, tell me about the worst career thing that's happened to you. And I had a woman who talked about her early career at a big tech company in the late 90s, and the harassment that she, you know, and I'm not, it's not like question porn. The reality of it is, I want to see how they learn from it. And this woman had an amazing answer about how hard she, she had a mentor who, you know, basically kind of helped guide her through some of the, quite literally harassment that she got. That was appalling to me. And then she was able to then take lessons from that about how to vector her energies and how to, how to interact with people and how to work, you know, kind of, she was like, and part of the challenges, I had to work twice as hard as the men. And I did because I was driven. And it was the lessons

• 52:39Speaker 03

  that she took out of that. But in describing it, she got very emotional. It was like really kind of it threw me. I ask sometimes people what their biggest disappointment was because a disappointment is a time when your hypotheses are, you know, kind of misproven. And people always ask me, they're like, personal or professional? And I always say, every question's a Rorschach. And people have gotten very emotional talking about that. So that's a question I've retired a little bit, but maybe I'll say, what's your most biggest professional disappointment? But that's, you know, you get some really interesting.

• 53:06Patrick O'Shaughnessy?

  Those can be emotional too, yeah.

• 53:07Speaker 03

  Those can be emotional too. I once talked to Jeremy Grantham about almost losing his business in the late 90s, but it was because he was, he had such great conviction. What an interesting illuminating question that becomes. It then becomes almost a referendum on his

• 53:22Speaker 03

  And that's, that's really amazing. So, you know, I don't know if that's helpful or interesting, but that's just some of my own tradecrafts. So many people that start with performance, because it's easy and it's quantifiable, right? How can you not? But the reality is, I will tell you, our best performing manager at Princeton, when I got there, our best performing manager on the venture side, or one of our best, was a fund that had had a killer 75 million dollar fund. Their 150 million dollar fund crushed it. The 300 million dollar fund was okay. The 600 million dollar fund that they were raising, we said no to. I don't know how that one worked out, but then they had a billion two and a 2.4 billion fund. And I later, later read in II, which did a report about these guys, II had their results because of course at that size, you go on estate plans and everything, people have to report,

• 54:07Speaker 03

  they just shat the bed. Excuse my French. And it's, it's like, but boy, like if you were going, if you're looking at that 600 million dollar fund and looking at the performances, 75 and the 150 fund, it's a total like, go for it. But you've really got to unpack that. And would you say assets versus alpha? It's a real thing.

• 54:25Patrick O'Shaughnessy?

  So who should and should not make any type of venture investment? There are a lot of types of investors out there. This is a interesting and sexy asset class. We know what that usually means for returns. And there's a lot of, there's a lot of zeros. So usually the, when I ask this question of people that are in this world, they say, nobody should be an angel investor, right? Unless you're, unless you're just like, have some super special set of circumstances. So a different way of asking it is, who of the, of the broad general categories from individual investors to ultra high net worth investors to whomever else you want to categorize should and shouldn't invest in venture, just in general?

• 54:58Speaker 03

  So I'd say the biggest driver of venture success is a willingness to have a long horizon. I mean, it is the asset class where you have to take the most on faith for the longest amount of time. You're buying actually quite literally the longest dated, furthest out of the money options that, you know, you can buy in, in all of the firmament of assets, I believe. And so having that high tolerance for risk, illiquidity and horizon is a really rare kind of trio. I used to say that makes it a particularly interesting asset class for endowments. This is the kind of Swenson line. But again, with respect to don't try

• 55:41Speaker 03

  this at home, you look at the team at Yale and the core of that team has been together since, in some cases, Tim Sullivan, the private equity guy, has been there since the mid 80s. Dean Takahashi has been there since 81. So you have this amazing kind of persistence and institutional memory. And then I look at there are other endowments who I've, there's this one school that we'd all be happy to and proud to send our kids to, it's gone through like seven generations of private equity guys. And every time there's a new sheriff in town, you know, all the managers are anxious and it starts to, I think, erode franchise. So the right endowments are important. And then high net worths who have an entrepreneurial

• 56:22Speaker 03

  outlook. So who think more like principals and agents. That's where you get some of the problems in institutional investments is if people think too much like agents and they want short-term results. And, you know, that's a challenge. And then, you know, it's interesting because my jury's still out on sovereign wealth funds because they should have a long horizon and high tolerance. They're pushing around big dollars. They're playing in a different stratum of the venture space. But what I would say is that that I've also seen sovereign wealth funds kind of in 2001, 2002 retreated pretty aggressively. So I think some will be, you know, good long-term investors, but others won't. It's funny because you do have to look at venture through its own prism or private assets through their

• 57:06Speaker 03

  own prism because you can't, you almost can't integrate them in a portfolio-wide A model of it. A model, right? Because the stale prices are amazing. So one of the dirty secrets is venture and private equity almost have a pacifying effect on volatility in large institutions, if for no other reason than for They're not marked all that They're not marked, right? It's interesting because I think Lerner and Gompers at Harvard took the S and P 500 and marked it daily. And then they would market, you know, so just a daily series. And then they took the Jan 2 mark, rolled it forward to the end of the quarter, then rolled it forward. And they got like a point 65 correlation of the S and P versus itself.

• 57:48Speaker 03

  Which by the way, point 65 is like what most people use for private equity correlation. I will say the other thing, so back to this question, the reason I bring this up is you really have to understand kind of holistically. What your aims are and what role that venture plays and private equity play in in your portfolio. And it was funny because one of my favorite stories, and you know, this is more of a story than apropos of nothing. But in the early 2000s, there's this great guy, good friend of mine, a great mentor to me, who was at the Harvard Endowment. And there was a fund that they were in, Harvard was in, where they raised a lot of money. And they were in the in a position where they had a big management fee draw. And one year, 2001 or 2002, it was a really quiet year at ventures, they didn't draw a lot for investments. So basically, you know, just created this huge J curve.

• 58:33Speaker 03

  And this guy had this portfolio that was benchmarked kind of against the Cambridge pooled mean. For the the years in which they'd been investing. And so you've now got this big draw in management fee without kind of corresponding NAV growing. It's it's bringing his whole performance line down against benchmark. And so he's sitting there, he's like, literally, I was in the business like three or four months. And I'm sitting there, it's an advisory board meeting. And the guy is like, you guys are killing me. You guys drew all this money for for for management fee and nothing for investments. And you know what that's doing? That's dragging down my benchmark, me against my benchmark. And Jack Maia, Jack pays me versus my benchmark. So you know what happens? If you guys are bringing me down, then I'm not going to get paid. And you know what happens when I get don't get paid?

• 59:17Speaker 03

  My kids, I can't buy them a bicycle. And what happens when I can't buy them a bicycle? Then they go complain to their mom. And if they complain to their mom, and then I can't buy them a bicycle, then mom, their mom gets mad at me and I don't get any loving. So because of you guys, I'm not getting any loving. So I don't know if this part of the story is true, but apparently that Monday, there were two bicycles, you know, at the offices of Harvard Management Co. I don't know if that part of it is true, though. But this speaks to the kind of long, long horizon.

• 59:46Patrick O'Shaughnessy?

  This is life in our business.

• 59:47Speaker 03

  Life in our business.

• 59:48Patrick O'Shaughnessy?

  If you had to give your money, all your money, to some other allocator, who would it be to?

• 59:53Speaker 03

  You know, it would be to the people who I think have the longest, the highest pain tolerance, and that articulates itself in a bunch of different ways. One of which is taking the longest term bets and having the most contrarian nature. And so I think there are a bunch of people, I've spent some time with David Swensen, the Yale guys are amazing in that way. Andy Golden at Princeton has done a great job. I learned a lot from Andy, working for him for three years. And then David Salem is an amazing, I know you've had him on the, or I think you've had him.

• 1:00:23Patrick O'Shaughnessy?

  Yeah, he's been on, yeah.

• 1:00:24Speaker 03

  Yeah, I've learned a ton from David, and he really taught me about optimizing discomfort. And isn't that a great phrase? I've often thought about optimizing discomfort, and he told me when I joined Tiff, he kind of plucked me out of Princeton, and he said, "I want you to invest courageously. I want you to invest without the fear of being wrong and alone. Because if you're afraid of being wrong and alone, you'll never be right and alone." And I was like, wow, that's, he's like, "I don't want career risk to enter your mind for one moment." And that really gave me the courage and the, you know, the kind of institutional backing to go and fund some of the first wave of great, you know, microVCs like First Round. And that's paid great dividends for Tiff and its investors, and I put that all on David. So maybe it would be David.

• 1:01:05Patrick O'Shaughnessy?

  Awesome, love it. He's a magnetic guy.

• 1:01:07Speaker 03

  Oh, I got you.

• 1:01:08Patrick O'Shaughnessy?

  One of the most interesting people to be around at a table with, because you feel like such the focus of his attention. I think that's such a nice quality in people.

• 1:01:15Speaker 03

  And I worked with David for seven years, and it's really interesting how, when you talk to him, you feel like there's nobody else in the world. And it's only, I've never spent any time with Bill Clinton, but I hear that Bill Clinton is exactly the same way. And I just remember David and I were talking about baseball, and we were talking about entropo-magenity, which is actually a really interesting, whole other topic. Stephen J. Gould wrote. An article a long time ago about the limits of human performance and how.

• 1:01:43Patrick O'Shaughnessy?

  Sure, yeah, I've heard of it.

• 1:01:44Speaker 03

  Yeah, it's really a great, great piece. And David was like looking and I could, I felt like there was nothing else in the world and he kept saying, "Yes, Chris, yes, oh, absolutely, yes." Sometimes when my kids are talking to me, like, I'll be like, "Oh, yeah, uh huh." And meanwhile, I have no idea what they're saying. I'm just like, they're just jibber jabbering about like, whatever happened. I'm like, I've like channeled that Salem-esque clarity of focus, although I've used it for, you know, kind of nefarious means.

• 1:02:13Patrick O'Shaughnessy?

  So I'll borrow from your dichotomy earlier and ask my normal closing question a little bit differently. So personally or professionally, what is the kindest thing that anyone's ever done for you?

• 1:02:23Speaker 03

  You know, so this is actually a really awesome thing and I can't, I can't really like thank anybody. I grew up really poor. My dad was a cab driver. My mom worked in a hotel. And I was in Brooklyn back before Brooklyn was cool. And actually, there's a little story here. There's a guy named Jim Ventry, who came, he was a young admissions officer at a school called Phillips Academy, Andover. And Jim's job was to go out and find students from inner cities to kind of pluck out. And if your scores were above a certain thing and your family income was kind of below a certain threshold, your application would be subsidized and you'd go to school for free. And Jim stood up there and like, there was a near riot, food fight and spitball in the auditorium, like the all-school auditorium, while he put up these slides.

• 1:03:06Speaker 03

  And I was like, "Oh, my gosh, this is the most amazing place, like amazing pictures." And I got home and I told my dad about it. My dad said, "My son, in America, there is a system. And this place sounds like your entree to the system. I want you to apply. I will miss you, but go and become part of America." And I was like, "Oh, my gosh." And so I applied and got in as a 14-year-old and went up to Andover as a freshman and went looking for Jim Ventry and he was gone. And he'd gone to law school. And I was like, I never got to say thank you to Jim Ventry. And by the way, the program's called the Rockwell Scholars Program. It was funded by Mr. Rockwell of Rockwell Aerospace. And so I never got to say thank you.

• 1:03:47Speaker 03

  And fast forward 25 years, and there was a, an event for admitted students at the Olympic Club. And I get a call from the major gifts office. They're like, look, we're not calling, you know, we know you live in a good zip code, but we're not calling for a gift just yet, but we want you. Patience. Yeah, they're patient folks. They're like, look, you know, we want to put you on the masthead of sponsors. And all we're asking is that you show up and talk about your experience for some of these admitted students. And so it's like me and Peter Curry and like these people. I'm like, holy smokes, like I'm such an imposter here. And I show up and the guy handing out name tags, I look at his name tag. It says James Ventry, Assistant Director of Admissions. Like, what? And like Jim Ventry goes, I'm like, were you here? He goes, yeah, you know, I had a 20 year career in the law,

• 1:04:31Speaker 03

  but decided that my true love was admissions. I go, oh, why is that? He goes, well, because I love the idea of changing people's lives. I love the idea of like really making an impact. I'm like, well, have I got a story for you? The last time I saw you was 25 years ago at a high school, a middle school in Brooklyn, in the middle of a near riot. And you convinced me to apply. I never saw you when I went up for my interview. I went looking for you when I arrived to say thank you. And I can now say thank you 25 years later. The last time you saw me, I was a snot-nosed punk ass. And here I am co-sponsoring an event at the Olympic Club of San Francisco with Peter Curry and all these other luminaries. I feel like, as my dad would say, that I'm part of the system and I owe that to you and the academy. So that's my long-winded answer.

• 1:05:12Speaker 03

  I'm sorry for belaboring it, but it was, this is why I'm such a fan of need-blind admissions. And very much the idea of America is the idea of social mobility. And I believe that creating this optionality, and you know, I do believe that even though things are kind of constantly evolving, I do believe that you, through hard work and education and pluck, you can really make a difference, which is why I like to support charities and with both money and time that help kids from disadvantaged backgrounds rise through education.

• 1:05:39Patrick O'Shaughnessy?

  Man, what an amazing, incredible answer to that question. Definitely one of the best. Highlight something that I've been thinking quite a bit about. Because of a prior guest who talked about in this study of happiness, this idea of sacrifice that a lot of the people who he found that were happiest, qualitatively speaking, could very clearly point to sacrifice that they made on behalf of their relationships.

• 1:06:02Speaker 03

  Yep.

• 1:06:03Patrick O'Shaughnessy?

  It's kind of indirectly related to your answer, but it's the same idea of helping others in these really interesting ways that you can't imagine the impact that something like that could have, even though it's not that hard. So just a phenomenal place to close. This has been a wonderful conversation, so thank you for your time.

• 1:06:18Speaker 03

  Thank you. This has been amazing. You're a gentleman and a scholar.

• 1:06:23Speaker 04

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter, @Patrick_OShag, O-S-H-A-G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.