E386: Adams Street ($70B): Venture Capital Has a New Problem

What separates the venture investors who generate extraordinary returns from those who simply participate in the asset class? In this episode, I sit down with Jeff Diehl, Managing Partner and Head of Investments at Adams Street Partners, one of the world's largest private markets investors with more than $70 billion in assets under management. Jeff shares lessons from over four decades of venture investing, including why access to top managers matters more than almost anything else, what 14,000 realized venture exits have taught Adams Street about return generation, and why portfolio construction often matters more than stock picking.

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

• 0:00Speaker 00

  What's really unique about this time is the big next wave of magnificent seven are all well-known and massive value creation has accrued to the private shareholders rather than public shareholders. It's become a little bit more apparent to people, which companies seem to be really breaking out. Clearly, it did decades ago, even back in the dot com bubble.

• 0:29David Weisburd?

  So Jeff, you're managing partner at Adam Street Partners, which has $70 billion AUM.

• 0:37David Weisburd?

  And last time we chatted, you said that you always say one very important thing to anyone looking to invest in venture. What is that?

• 0:43Speaker 00

  The most important thing you can do in venture is access top quartile managers. And then there's a sub point to that, which is make sure you invest over time and get good time diversification. If you do those two things well, you're going to be in really good shape.

• 0:58David Weisburd?

  And we were talking about this right before we pressed record. This is the professor Steve Kaplan, the persistence of venture capital, which is if you invest in top quartile funds over the last 40, 50 years, highest amount of persistence in venture capital than any other asset class in the world.

• 1:12Speaker 00

  Both dispersion of returns and persistence of returns are higher than any other asset class in the world. Very, very, very unique asset.

• 1:22David Weisburd?

  Give me some numbers on that.

• 1:24Speaker 00

  The statistics would show in venture capital that if you've produced a top quartile return, the chances that you're going to produce another top quartile fund or a top half fund range in the close to 50% and close to 85% probability. So lots of stickiness to this. And that makes sense. Entrepreneurs who start companies want to work with the best people who could help them build value the most. And many of the entrepreneurs came from prior successful venture-backed companies, worked with a firm and worked with some individual people. So success kind of feeds on itself in terms of the personal relationships.

• 2:00David Weisburd?

  It's kind of a reverse asset class. In most asset classes, the LPs choose the GPs and the GPs pick the portfolio companies. Here, you actually have the founders picking the GPs and the GPs picking the LPs. Why? Because the best managers are access constrained and they have their pick of the litter when it comes to LPs.

• 2:17Speaker 00

  Yeah, I always say, like, we're an investment firm, but we really sell money to people who can choose their financial partners. And the constrained resource in this world is the brilliant entrepreneur and the terrific CEO who understands a problem really well and is a brilliant designer and thinker about product innovation and creates something customers really want in a huge, massive, total addressable market. Great venture capitalists, find those people and sell their money to those people and sell their value. And we try to do the same with fund managers and ultimately CEOs too, as a co-investor.

• 2:53David Weisburd?

  Given that these funds are capacity constrained, how do you go about differentiating yourself from the many prolific LPs out there?

• 3:01Speaker 00

  It's been consistent, good partners over a long period of time. I think we were fortunate to have been investing in venture capital companies since 1972 and funds since 1979. So we're sort of a known commodity as a stable, long-term, good partner through thick and thin, good times and bad, and have very transparent relationships with some of the best actors in the business. So I think we were fortunate on timing, but I also think being present over a long period of time and consistent, good partners even when times don't go well, helps build those relationships and strengthen them.

• 3:33David Weisburd?

  That's the second part of the equation that you mentioned earlier, which is you want to be in top quartile and you want to persist in terms of investing across many different years. And the reason for that is oftentimes, some of the best vintages follow some of the worst vintages. And when there is something like the dot-com bust or 2008, oftentimes that's the one time that top VCs will need their LPs to re-up, and so many other times, these LPs just aren't there.

• 3:58Speaker 00

  Right after the dot com bubble collapse, we held an event in Silicon Valley and invited all of our venture managers and sort of said, hey, we just wanted to thank you for all the hard work that you've produced, the great returns you've produced. And we know there are some lean times right now, but things will come back. I think they were a little worried when we invited them to the session that we were just going to come yell at them.

• 4:16David Weisburd?

  Mass fire them.

• 4:17Speaker 00

  Yeah, mass fire them and yell at them. It turned out it was really a thank you for all the terrific returns. And we understand it's a wildly cyclical business that tends to have 10 or 15 year cycles. And, you know, the best people need to continue to work hard through there. And I think the key is when they make a lot of money, are they still motivated to work hard?

• 4:32David Weisburd?

  One of the key distinctions is the salesmanship versus track record and behavior of LPs. If I lined up 10 of the best LPs in the world, they would have a very similar pitch, which is we're evergreen, we're here through bad and good times. But the proof is in the pudding. You have to look at the track record and how did they act during the last financial crisis? Which, by the way, is what most LPs do for GPs to figure out which GPs they want to invest in.

• 4:59Speaker 00

  When you've been in the business now for as long as we have, people know that we're here through thick and thin and that we're here in good times and bad times. And we'll actually tell people in the venture space, if we think they're doing things that are pretty pro cyclical, you know, maybe raising too much money, maybe trying to extend their product suite a little too far, stretched a little beyond what they're really good at. That happened in the dot com bubble where people were raising funds every single year and investing them every single year. That's a cardinal sin, no time diversification. And so we'll be frank with people. But, you know, being around a long time helps you build that trust and confidence.

• 5:30David Weisburd?

  One of the reasons I wanted to have you on the podcast, in addition to you running one of the top limited partners in the world, is that you've now had 13,000 realizations in your portfolios, DPI. What has that taught you about the nature of returns in venture?

• 5:46Speaker 00

  We're probably up to close to 14,000 companies have been fully exited by managers since our inception. First fund invested in 1979 in the venture space. And our data shows that the top 7% of companies sorted by money multiple on cost have produced 100% of the net gains for our investors. And the other 93% are winners and losers that offset each other. About half the deals that have been realized don't return invested capital. So this is a business of wild outliers. Someone once said, Hit the homerun, watch the ball bounce and continue to roll and roll and roll for a very long period of time. That's where real outcomes come from in venture.

• 6:25David Weisburd?

  It's the Jeff Bezos principle of investing. In baseball, you step up to the bat and in the best case scenario, you hit a 4X. So you have a grand slam. In venture capital, you could step up the bat and you could hit 10,000 home runs in a single swing.

• 6:40Speaker 00

  That's right. In order to make that top 7% club, you have to generate a money multiple of 6.2x or better. But what you do that is you can get in the companies that can compound growth at very high rates over a long period of time. Hopefully, you get in early and get a decent ownership stake in the company. You're going to have a higher loss rate at that stage, but it's harder to generate the 6.2x multiple if you come in pre-IPO, for example. So that's why our strategy focuses on early-stage managers and they take a basket approach. They don't know which companies are going to work, but making good bets along the way will ultimately lead to good outcomes.

• 7:11David Weisburd?

  I have this thesis, which I call strategic ignorance, which is how do you structure your venture capital investments in a way that you're not exposed to single misses? Because venture capital, at its best, if you have enough diversification into top deals, you will do well. As long as you have enough diversification, you're going to do well. Where people get thrown off is they'll obviously be adversely selected, they're not in the top managers, they're not in the top deals. That's the main sin. But the other sin is you don't do enough deals, or you put it into structures where now you're exposed and your IC is exposed to this one or two or three zeros, which are inherent as part of venture capital investing. You need to really be careful about the structure and how you're investing in venture.

• 7:54Speaker 00

  Portfolio construction is super important in venture capital. When times get hot and there's a lot of fear of missing out, you'll see individuals making investments in single companies. And the reality is in venture, you can lose all your money in a single company investment. It's happened to a lot of us. It's probably my most humbling experience is when I've invested in a company and lost all our money. So portfolio construction, time diversification, making sure you're getting quality access to good managers, but then not over diversifying. Really important to do that steadily over time and that's how you can generate good returns in venture.

• 8:26David Weisburd?

  So you mentioned 7% drive all the returns, 93% basically cancel them out. What do you take from this lesson?

• 8:33Speaker 00

  It's a very small percentage of the companies that really matter. Very difficult to predict what those could be. I'd love to cut off the ones that lose money, but the reality is you get the good with the bad. So you just need to put yourself in a position with managers that have access to the best entrepreneurs to make enough bets and be able to participate in those sort of outlier outcomes. And hopefully you're in a position to be able to double down through some co-investments or some secondary activities to get more exposure to those breakout companies once it looks like they're really starting to move the needle.

• 9:01David Weisburd?

  So you're not only investing in funds, you're also investing in companies. Talk to me about the process.

• 9:05Speaker 00

  In the venture space, we invest in early-stage venture funds principally. We'd like to figure out a way to find those companies that are starting to break out and need additional capital and find ways in through co-investment activity as well. So we are active co-investors in the venture space, not usually at the earliest stage of the company's life, but as it starts to demonstrate the sort of traction, you can do some more meaty diligence on the business. We also participate in the venture secondary market where as companies stay private longer, there's more investors, early employees that are looking to try to create some liquidity since they're not public companies and we can serve as a participant in the secondary market to buy either individual company interests or baskets of companies

• 9:47Speaker 00

  that might be in an LP fund or a GP-led situation.

• 9:51David Weisburd?

  How much of this is driven by your GP relationships?

• 9:55Speaker 00

  Literally 100% of it. We rely upon the information that we have about the underlying companies and how they're doing because at the end of the day, it's an asset selection business. If 7% of the companies are going to drive 100% of the gains, you really want to get more exposure to those 7% of the companies and avoid the ones that aren't going to produce those outlier returns. So without a very good LP investing business in venture, it's pretty difficult to do venture secondaries and venture co-investment right.

• 10:20David Weisburd?

  And is venture capital becoming consensus asset class today? In other words, are all the winners known at the early stage?

• 10:26Speaker 00

  It's a good question. I mean, obviously, there's a lot more visibility into the breakout companies in the press than there used to be. If you think about the magnificent seven, they were all venture-backed companies. They probably weren't very well-known when they went public. They were much smaller market caps. And all the value creation has occurred since they've become public companies. What's really unique about this time is the big next wave of magnificent seven are all pretty well-known. And massive value creation has accrued to the private shareholders rather than public shareholders. I think it's become a little bit more apparent to people, which companies seem to be really breaking out than decades ago, even back in the dot-com bubble.

• 11:03David Weisburd?

  I just interviewed Matt Wilt higher from Wellington, and they did analysis on public tech companies, and only four of them had forecasts of more than 30% growth. All the growth is now going into the private markets. And he actually mentioned that he has pension funds that are now investing into the private fund because they see that as the new way to get small-cap public companies.

• 11:25Speaker 00

  I've invested personally in 25 to 30 called venture growth stage companies. A couple of those were fortunate to have gone public. Having sat on public company boards in situations where you're less than $10 billion in market cap, it's pretty miserable. You can't get in next funds, you can't get the attention of anybody. Your company could be doing great, but you lose out on 40% of the buyers. So the best advertisement ever for why you should be private if you're less than $10 billion on market cap. And so really, if you want to capture that sort of company growth profile that doesn't really exist in the public markets anymore, there really isn't much incentive for CEOs to be public at those levels of market cap. So I think absolutely, if you want to capture growth, you've kind of got to be in the private markets.

• 12:08David Weisburd?

  You're effectively running Adam Street, both at the CIO and CEO level. How have you gone about building out your team?

• 12:15Speaker 00

  Look, when I was asked to take over 11 years ago, my resume did not scream CEO or CIO of an asset management firm. Frankly, I had been an investor directly in companies, these kind of venture growth stage companies. So I'd say there was a lot of learning on the job when I first took over. I was fortunate that my predecessor didn't go anywhere quickly and was a really good mentor to me as I kind of built through my career. Team building is a process that takes a very long time. I'd say if you look around the table today at the leadership team, there's some very similar faces, but there's some new faces. So I think it's always important to understand like what level is a business scaling and can the people continue to scale with it? And obviously have really good succession plans in place when people are ready to retire and you know, go down with the next chapter of their life.

• 13:00Speaker 00

  So I think it's a constant journey.

• 13:02David Weisburd?

  Succession plan is really important because you keep people from leaving. You basically de-risk their career path at the firm.

• 13:08Speaker 00

  We always want to have a path for people to retire gracefully. Our firm is 100% employee owned firm. I'm the largest shareholder between 6% and 7%. Since I joined, 90% of our ownership has changed hands without any outside capital coming in. So we've got a built-in way to generationally transition ownership and succession. So succession is really important, not just for opportunities for individuals coming up through the system, but our clients are trusting us with managing private capital for a very long period of time. So they care a lot about how do we manage through succession gracefully and professionally over time.

• 13:41David Weisburd?

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• 15:09David Weisburd?

  news, and more than 240,000 expert call transcripts, turning raw conversations into comparable, auditable insight. Take advantage of AlphaSense AI-led expert calls now. The first to see wins, the rest follow. Learn more at alphasense.com/HowIInvest. Succession in venture capital is so notoriously bad that you could literally count the firms that have been able to do it, not the firms that have not been able to do it. Sequoia and Benchmark, of course, most famous versions. Why do you think succession is so poor in venture capital?

• 15:43Speaker 00

  It's really hard for so many different reasons. One of them is gauging whether someone's going to be a good investor is really tricky.

• 15:51David Weisburd?

  Feedback loops are long.

• 15:52Speaker 00

  The feedback loops are so long. Obviously, there's a partner ethos and a way to think about investments that meet the bar, and you can see what people are bringing in, who they're bringing in. But the feedback loop can be incredibly long, and frankly, there's a lot of luck involved in success in the business, right? I mean, for every wild success story, if you went back in time, they've all had a near-death experience. I've been at Anthropic, Space Tech, OpenAI. Every company has multiple near-death experiences. So there's also some luck involved here, and every venture capitalist will tell you, it's very humbling. One of those challenges is getting some signal there. Everyone who's going to come into the industry is going to be super smart, have great educational pedigree, but it's really difficult to forecast that.

• 16:33David Weisburd?

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• 18:01David Weisburd?

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• 18:45Speaker 00

  Of course, you've got the cultural fit and the way people get along and work collaboratively together and help each other. Those things are just really require a lot of nurturing over time. And you've got to build layer cake of generations because the entrepreneurs aren't getting any, aren't getting any older, they're getting younger. And so you want people who can relate to those entrepreneurs at the same level of age and vintage and stage.

• 19:05David Weisburd?

  You have people age out of their networks. They may have known somebody from business school or from their engineering program at Stanford. And now those people are in their 40s. They're no longer starting the next company.

• 19:16Speaker 00

  I heard a great stat one time. I don't think we've ever done this analysis, but after the age of 45, there's very few home run successes that a venture capitalists will produce. I think some of that's, you know, goes to the counterparties that they're trying to interact with. And how many of those people at their age and stage are starting companies? Maybe a little outsized in the, in the analysis there, but do you think there's some truth? You know, it's a young person's game.

• 19:38David Weisburd?

  I think as a 45 year old or a 50 year old, it's hard to invest into somebody putting air mattresses into their bedroom or somebody driving in random cars. Your, your mental plasticity decreases significantly. You're no longer to able to think like a teenager or somebody in their 20s.

• 19:56Speaker 00

  Yeah, that's right. So this is a lot of tricks to be able to generational succession well. And of course you always run into, you know, are people hanging around the hoop even after they've kind of made the money for the LPs because they're still eager to capture economics? Are they sharing economics, you know, with other younger professionals? How's that working? So you're right. I think there's a fewer list of firms who've done it incredibly well and a lot of firms that have not done it well.

• 20:26David Weisburd?

  I want to double click more on this governance and these incentives because every CIO, especially the ones that have retired, so I had like Larry Kochard, who was at McKenna and also Georgetown UVA. I had Brett Harris, who's become an advisor of us, who was at UTIMCO. And I love to interview these CIOs after they retire because then you could really get the real deal. And they all converge on the same idea that it all comes down to culture, governance and incentives. And everything else is essentially noise.

• 20:50Speaker 00

  I think those are all very true. For us, we have one investment strategy across five different teams. So it makes it pretty easy. And also being in private markets only, there's a really the edge comes from your relationships with, with sponsors and ultimately CEOs of the companies and the information that you have regarding the underlying companies and how they're doing. So there's a massive need to share that. So I would say that culture for us gets cemented by our employee ownership because we all have shared economic interests. And we all think like owners. But then when you get down to the individual investment teams, you do need to think about how you share carry and performance fees. And we generally like to have sort of equal partnership models so that you don't have someone worrying and being jealous about what someone else has got more than them. We want to take all that economic thinking off the table and just focus on doing a great

• 21:35Speaker 00

  job for producing returns for our

• 21:36David Weisburd?

  That's always the default because people want their deal. They want that track record. You know, they could think they may want to spin out. They want to own that individual track record. So that's always the default. You can only exacerbate that by also adding economics to it where they're now incentivized to push their deal versus the best possible deal.

• 21:53Speaker 00

  We go all of our way to talk about when someone's presenting a case for an investment, don't think about the person presenting. Think about the argument that's being presented and the information that you're you have at hand, whether it's you're interacting with the CEO or you're reading documents in diligence. And then we want the debate to be about the merits of the investment. By the way, it doesn't always have to be consensus. Some of the most successful venture-backed deals were split houses in terms of people how voting, saying, we should absolutely not do this and we should absolutely do this.

• 22:23David Weisburd?

  That's oftentimes a signal.

• 22:24Speaker 00

  It's oftentimes a signal. The most controversial deals can be the ones that end up being thinking differently and having it be a wild success. So you got to be careful about how you're you do your voting, your governance and decision making in addition to making sure you got a culture that doesn't think about who's the person presenting this. It's all about the opportunity set.

• 22:43David Weisburd?

  Not to be overly cynical, but is there even culture or behavior that's not downstream of incentives? In other words, can you really create a culture that's disconnected from incentives?

• 22:54Speaker 00

  I think culture starts at the top of an organization. My predecessor had a focus that said, look, our clients' returns are the most important thing that we produce and we hammer on that all the time. That's the most important thing. Stay focused on that. Everything else will take care of itself. So but it has to start at the top and it has to filter its way down through the organization. So I do think the cultural messaging and kind of walk in the talk is super important. But it's been so intertwined at our firm in terms of the employee ownership model broad-based, there's shared incentives and shared success and failure that it's sort of intertwined. It's hard for me to really separate the two. There's no question that incentives and culture are very important when it comes to the investing business.

• 23:38Speaker 00

  You want to make sure entrepreneurs got a lot of skin in the game and can kind of rally the employees with ownership that they they do well if the company does well. But it's still, you can have a bad culture even with good incentives.

• 23:48David Weisburd?

  I've had this, this will be roughly episode 390 and I have hundreds and hundreds and hundreds of episodes that didn't even air or which is pre-interviews. And one of the things that I've found that's subtle, but not subtle at all, is that the best organizations incentivize what they want. Other organizations, they all say similar things. They talk about partnership, they talk about collaboration, all these things, but the incentives are not there. Sometimes those outcomes could be in order magnets are different, 10x, 100x more assets, or 10x, 100x better outcomes across the organization.

• 24:20Speaker 00

  I would agree with that. I mean, obviously, a lot of time as a limited partner is spent understanding culture and the economics and how they're shared. What's interesting is we've seen success stories where economics are pretty concentrated into a single individual or a couple of individuals. We'd obviously much prefer the egalitarian approach with equal partnership and you gotta kind of pay your way because we don't think there's any real tax in terms of people's jealousy or between each other. But there's lots of different models that you can succeed in the investment management business and private equity and venture capital.

• 24:56David Weisburd?

  When it comes to venture capital firms and building team incentives, what are some best practices?

• 25:02Speaker 00

  I mean, I think the best model I've seen is everybody's an equal partner.

• 25:06David Weisburd?

  The benchmark model?

• 25:07Speaker 00

  Yeah, the benchmark model. I mean, I think it's a really terrific model. I think as you scale, it becomes harder. If you create a bunch of different product suites, then it becomes a lot more complex. And if you go to some of the largest multi-strategy, multi-product firms, they've got very complex systems and you have to think about who's really involved in origination and underwriting and winning deals and then working with the company investments after you've made them. And you really gotta think through all that and how do you make sure that's all aligned? Generally at Adam Street, you're an employee at a firm. We have performance fees. We split them with the teams in the house and the house is owned by all the people. So everybody gets to participate in the success of every other investment team, which is critically important

• 25:48Speaker 00

  since there's so much interconnected tissue in origination and underwriting and winning really interesting deals.

• 25:54David Weisburd?

  When it comes to venture capital firms, you mentioned you look at the incentives of the management fee and carry, but there's also an underlying company that has value. How important is that underlying company to be shared with entire team versus just the fund economics?

• 26:09Speaker 00

  Look, when it comes to the value of the GP, if you will, we love when managers don't think about that and are really thinking about how do I get rich off of the carry? I mean, in venture capital, that's really what you want. Now, we have seen an evolution of the space. I mean, you've seen firms become much bigger. You've seen firms start to product diversify. Historically, scale has been the enemy of returns in venture capital and private equity. We'll see how that plays out over the years. I think that's probably one of the biggest challenges in LP allocator is deciding like who can still continue to do great things as they scale and grow. We haven't seen this type of GP stake sales in venture capital is what we've seen in the in the bio space. But that sort of thing is probably going to continue over time.

• 26:52David Weisburd?

  Now you have for the first time venture capital firms selling themselves.

• 26:55Speaker 00

  Selling a portion of themselves.

• 26:56David Weisburd?

  Yeah. So how important is alignment on that level?

• 27:00Speaker 00

  The bigger you become as a multi-product firm and you become more of an institution, you know, Adam Street would be considered institution. If one person retires or leaves, the firm's going to continue on and have success because we've built something that's really institutionalized. The smaller you go, that the less, you know, the less clear that becomes. You have more single person or dual person key risks. So it sort of depends where you are in that ecosystem. But I don't think there's any question for larger multi-product firms. There's probably more institutional value that could be monetized in their general partner economics that oversees all the various vehicles. One of the biggest things that I've observed over the years in the private ecosystem is I've been sort of shocked at now we have very large publicly listed.

• 27:42Speaker 00

  You know, private equity managers or private credit managers and now multi-strategy alts managers. Unfortunately, when you start to have third-party shareholders in your general partnership, they become the most important constituent versus your investors whose returns that you're designed to produce.

• 28:02David Weisburd?

  You have an extra layer of constituents.

• 28:04Speaker 00

  You do, and so it's a very difficult balance because your shareholders want you to grow your assets, they want you to grow your revenue, they want you to grow your fee earnings, and that is probably the exact opposite of what your investors want to do. So you end up having two masters when you have third-party shareholders. So you've got to be a little careful about how you manage that balance. We're shielded from that and we're 100% employee-owned firms, so we don't have any outside shareholders saying, "Look, you need to grow your assets at all costs, you've got to grow your revenue." We can do that in a very disciplined way and kind of protect the firm's reputation and keep the clients first. But I think once you start to sell stakes, there can be more pressure to do that, particularly if you become a public company. As a private, let's say a 5%, 10% stake, it probably doesn't really affect the partnership all that much, but sort of question is, why are you selling a stake?

• 28:48Speaker 00

  At some point, the generational transition will happen and the younger people are going to be like, "Why do we have this outside owner that owns a piece of our GP? Like, why are we giving care to them?" Like, I haven't got any benefit from that. So you always worry that at some point, that's just going to reverse itself. We have seen some GPs buy back their minority stakes from people who bought them previously.

• 29:05David Weisburd?

  It's well-known that size could be the enemy of returns in venture capital. But today, you could also argue the opposite, which is, right now, all the capital is amalgamating in these top 10 firms. I think something like 75% of capital went to something like five firms. Can size also be a moat in venture capital?

• 29:26Speaker 00

  This is a great question, and it's the great unknown right now. It'll be interesting to see where we land in five years. I think there's people on the side of getting to some serious scale, being able to corral the best entrepreneurs. Andreessen Horowitz launched, they basically changed the model and said, "We really want to become a service provider to the underlying entrepreneur and help them with infrastructure to be able to increase the probability of success." I think it was a very successful strategy. But now you're looking at, again, firms that have gotten to be multiproduct. Huge firms. And so the question is, will they be able to continue to replicate those returns? Will that create edge? Will it be more challenging? The venture system is so fluid with people get frustrated with a place getting too big. They leave and they start their own venture fund. They're great people inside of a larger

• 30:11Speaker 00

  place. And, you know, I think we're going to always see a constant innovation of new venture funds getting formed. And it's, you know, our job is to make sure we're staying close to those people when they, if they decide to do that.

• 30:20David Weisburd?

  And do you think that it's going to be barbelled in the future where you have some elite first check investors and these large multi-stage firms?

• 30:27Speaker 00

  Very difficult to predict. I hesitate to make a forecast. There will always be some great early-stage venture funds. They might be the same ones that exist today or 20 years ago. Our job is just to make sure that we're in front of the really special people. Every venture fund is going to have a collection of people that you might, if they decided to spin out a certain group, you might be more excited about that than the whole platform that you're being presented, but you don't have that choice. So I hesitate to sort of predict what will happen, but I do think there'll be some great early-stage venture funds. And there may be some very successful, you know, platform firms that are trying to get into the companies at all stages.

• 31:04David Weisburd?

  A lot of limited partners tell me that there's one or two managers at some of these firms that are driving all the alpha and all the returns. Is there a power law when it comes to people within venture capital firms?

• 31:16Speaker 00

  If you say, well, only 7% of the companies produce all the returns, the question is, how many of those people inside the firm, is everyone getting their share of that 7%? Or does it tend to be concentrated in individuals? And I think the key is to keep the ecosystem in balance. Each partner's got to be able to contribute to that over a long period of time in various funds. But I don't think there's any question that we look at individual track records. And you're going to see outlier track records based on who got into the great companies.

• 31:41David Weisburd?

  We have this tale of two cities where you have SpaceX now going public after being a private company for over 20 years. And you have reportedly Anthropic might be going public four years into its existence. What do you see as the future of companies? Are they going to stay private longer? Or is there going to be this increased timeline to going public?

• 32:04Speaker 00

  The current wave of, I'll call it next generation mag seven companies are really building off the success of previous innovation waves. So you had the PC, mobile devices, mobile apps, App Store. The speed at which you can create a company and get reach to customers and create revenue is so much faster than it used to be. If you think about the speed at which Anthropic got to just a massive number of users and a massive amount of revenue. You couldn't have done that back before the internet had been invented or before mobile devices were available. I think companies will get bigger faster, which then allows them to access the public markets quicker. But it's also true that they've got plenty of capital sources available to them in the private markets. Once you become a public company, the game changes. You've got to think about producing quarterly results.

• 32:49Speaker 00

  You've got analysts covering you. It can be a miserable existence to be a public company CEO. There's a lot of reasons to stay private, but you do need to think about earlier shareholders and employees. So you're seeing more employee tenders. I think there's availability to be private companies for longer. But you can also build companies quicker today. So there's kind of that dual tension happening right now.

• 33:10David Weisburd?

  I think all things being equal, companies want to stay private longer. But ironically, they could become a victim of their own success. So if you take a company like Anthropic reportedly raising at $900 billion, if they continue to just imagine that they compound in three years, they might be $2, $3, $5 trillion in market cap. The entire private markets in a year deploys $2 trillion. The public markets is over $100 trillion. At some point, you become a victim of your own success. And if you're out there raising 50 or 100 or name your number around, you just run out of private capital.

• 33:45Speaker 00

  I don't know. It seems like a lot of public capital prior allocations have migrated their way into private capital. I think it's just been a big shift. If you look at the number of publicly listed companies, that's come down dramatically over the last 20 years. So I say, if you're not a $10 billion on market cap company, it could be a miserable existence because you're not getting index fund buyers of scale into your company. And if you're over $10 billion, 40% of your shareholder base is index buyers that have to buy you based on market cap. And for the first time, really in my memory, we're going to have at least three companies, probably more, that will be immediately entered into the index upon their IPO.

• 34:22Speaker 00

  I mean, that's astounding. That will create massive amount of structural, technical demand for the shares of those companies. Usually it waited till the six-month lockup was up. It's going to happen on immediate index entry because you've got two exchanges competing each other for the business and they can relax their rules.

• 34:38David Weisburd?

  Yeah, it's such a good point that you make. If my thesis comes true, which now the $2 trillion company, now it's a $5 trillion company. What does that mean? That means entire private markets is now delivering 5, 10x returns. At some point, the LPs that we're investing in public markets see that. They're like, holy crap, we should be more in private markets. And now they start deploying. So it's like this equilibrium.

• 34:59Speaker 00

  If you look at the clients that we have and have had for decades, over time, they have marched down their public equity exposure. It used to be 60-40 was kind of standard model asset allocation. They've marched down their public exposure and marched up their private exposure. And the same thing happens in liquid fixed income. It's marched down and moved into the private market. So private markets have just become a lot bigger. They're the place where you get a lot of the growth. And so I think it's just shifting asset allocation. So if there's a bigger opportunity, more money will shift. I mean, capitalism does move capital to places that generate the highest return. I think it's very good at that, and I think that will continue.

• 35:35David Weisburd?

  What keeps you up at night today?

• 35:38Speaker 00

  I'm really excited about the future of private investing. It's a terrific space to be in. You're constantly around innovation and disruption. I mean, the whole private market ecosystem exists because creative destruction exists. There's the innovator's dilemma. Big companies, they get market share, they get bloated, they're public, they're worried about quarterly earnings reports. They have, you know, a board that understands the industry less than the board that was a private company. The whole innovator's dilemma is the thesis behind private markets. So I'm incredibly bullish. I love creative destruction. I love being around innovation. We don't worry too much if we just stay what we're doing. I don't worry too much about the broader macro stuff around us.

• 36:15David Weisburd?

  To what we were talking about earlier, you focus on portfolio construction, not on individual outcomes, individual trends.

• 36:21Speaker 00

  That's right.

• 36:23Speaker 00

  If you do two things really well in our asset class, I don't care if it's venture capital, buyout, private credit, you pick managers well and you time diversify, you're going to perform incredibly well for a long period of time. And by producing top quartile returns, even upper second quartile returns in most of these asset classes, if you do that consistently over a long period of time, you're going to have explosive ending multiple compared to what the median return will be. I mean, if you look at Warren Buffett's report, he shows his compounded returns as the S and P over a long period of time. There's a staggering multiple that sits at the bottom of that page that very few people appreciate. If you just put it on a line chart, it's pretty impressive. So that's the same promise of what we're trying to do, and I think good actors in our system are trying to do.

• 37:06David Weisburd?

  Warren Buffett was once asked, what's the key to success? And he said, I started early and I'm still investing into my 90s. And it was kind of discarded as this overly humble interpretation. But then when you actually look at the net worth, I've looked at this, he was only at 25 million at 40, and he just kept on compounding. It's like this thought experiment, this compounding exercise thought experiment people put into their retirement account, he actually played that out in real life.

• 37:30Speaker 00

  The human brain does not comprehend compounding over a long period of time. So if you just took the median private equity return, which has been very high with low interest rates for a long time, and said over 50 years, just get that median return, let's say you're going to produce a 400x on your money over those 50 years, if you can produce, outproduce that by five percentage points per year, it turns into 45,000x. I mean, it's just an order of magnitude that is hard for the human brain to comprehend. But that's the promise of compounding at high rates. And to do that, you've got to get in consistently to companies that can compound their revenue growth over a long period of time. And got to get the best managers to do that.

• 38:09David Weisburd?

  Jeff, if you could go back to 2000, when you first started out at Adam Street, what is one piece of timeless advice you'd give a younger Jeff that would have either accelerated your career, helped you avoid costly mistakes?

• 38:20Speaker 00

  I think there's no substitute in making your own mistakes for learning, in particular in the investment business. The best learning experience I had is where I made an investment and lost all my money. I still keep a T-shirt that I walk around with. People say, was that one of your successful investments? I said, actually, no, it's a $12 million T-shirt. It was the most expensive thing. It's the only thing I got left from that investment. But it helps me remember to be humble about the mistakes that I made and the diligence things that I missed. So I don't get any question. There's a best learning experience is making mistakes. Problem is if you make too many of them right away, you probably don't have a career in the investment business.

• 38:53David Weisburd?

  Survivorship bias.

• 38:54Speaker 00

  Survivorship bias. Someone told me you get a punch card of five, you get five investments, you gotta hope at least a couple work out to offset the ones that don't. And we don't want a new person to come in and have wild success for their first five deals because then there's a lot of hubris and there's very little learning. And so I would say you gotta be able to make your own mistakes, but do your best to surround yourself with mentors and ask them as many questions you can to absorb as much life lessons and knowledge lessons for whatever career path you're going to choose. And just be constantly curious and have really good recall on that curiosity once you learn it to hopefully help you make fewer mistakes. But you know, have some humility when you come into the business because investing, you're going to be humbled and you gotta be okay with it. You gotta be able to dust yourself off and get back up and proceed on.

• 39:40David Weisburd?

  Famous philosopher called Carl Popper, and he had this concept of how do you get better? How do you get closer to ground truth? And it's actually through falsification, which is you go out with your ideas, you get feedback from it, you get feedback on why it's wrong, and you keep on improving that idea until you get closer and closer to ground truth. And by the way, the opposite is true as well, which is if you never test your ideas, or even worse, if you're always surrounded by yes, men and yes, women, you're going to get worse and worse feedback. You're going to get farther and farther away from the ground truth.

• 40:09Speaker 00

  Yeah, I think the best partnerships have a dynamic where people are willing to challenge each other on their assumptions and press them. And I think they end up performing incredibly well. You know, Charlie Munger made this great statement. He's like, you know, the reason we're as been as good as we have for such a long time? Because we're willing to call our younger selves stupid. And that's a humility that shows you that they're constantly willing to, you know, learn and develop. That's critical to being a good investor. I don't care if it's venture capital or buy a constantly absorb lessons from mistakes and be willing to ask for feedback on your thesis and actually be interested in it.

• 40:45David Weisburd?

  Well, Jeff, this has been absolute masterclass. Thanks so much for jumping on and looking forward to doing this many times over.

• 40:51Speaker 00

  Great. Thanks, David. It was a thrill to be here.