E203: How Elite Endowments Invest w/John Felix

This episode features John Felix, General Partner & Head of Research at Pattern Ventures, a specialist fund-of-funds focused on backing small venture managers in the $5–50M range. We talk about the endowment principles that shaped John’s investing mindset, how to separate true specialists from résumé-driven narratives, why access and selection are two very different games, and the traps LPs face in co-investments. John also shares lessons on reserves strategy, portfolio construction, and what allocators consistently overlook when evaluating emerging managers.

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

• 0:00David Weisburd?

  So right out of school, you spent two years at Washington St. Louis, one of the most storied investment offices in the country. What did you learn during those two years at Wash U?

• 0:11Speaker 01

  So those are my first two years in the professional world. And I had interned throughout college at a hedge fund. But, you know, everything was still kind of very theoretical at that point from what I learned in undergraduate business school. And Wash U was really drinking from the fire hose for two years. So I'd say the first thing I learned was the art and the science of investing. I started covering public markets when I was at Wash U. And we invested with long on lay public equity managers. We tended to favor very concentrated managers that did deep fundamental research, you know, very long term time horizon, kind of like that private equity style investing in public markets. And so I got a great training and just like really deep fundamental research.

• 0:55Speaker 01

  My managers there, my bosses started a book club. This was a great crash course in learning from some of the greats. And so we read Ben Graham and Philip Fisher and things like margin of safety and zero to one. The other thing that I learned was about transition. And I saw three different chief investment officers during my first two years at Wash U's endowment. I joined during the kind of tail end of the long time tenure of Kim Walker, who had been there for almost a decade. And then when she retired, Eric Upin, who had actually run Sanford's endowment for a period of time, and then later went on to run McKenna Capital Management. He was on our board. He stepped in to kind of steward the endowment while we looked for a full time CIO. And Eric was there for about a year, kind of just steady as she goes.

• 1:40Speaker 01

  You know, we didn't do a ton of crazy stuff. And then we ended up hiring Scott Wilson, who came on and is still running the show now. And he's done an amazing job. But three different chapters during those short two years. And so I learned a lot about just resiliency and change and like and just being in a workplace where people come and go. But it was amazing and really like learned a lot during the different kind of three chapters over those two years.

• 2:02David Weisburd?

  And you're around some of the best fundamental public investors at Wash U. Give me a sense for, do you believe that the market is efficient, whether in the long term, in the short term? And how do you look at the pricing of public assets?

• 2:19Speaker 01

  That's a good question. And this is something that, you know, in undergraduate like business, where you learn about this efficient market hypothesis and you learn about all of these like theoretical things. And you're taught. In school, that a lot of these things are like how the real world works and you're kind of taught them as gospel, but then you get into the real world and you realize that nothing is black or white. And I think one of the biggest things I learned is that the market is often not efficient in the short term, or at least that's my belief. And I think that lack of efficiency in the short term creates, you know, longer term opportunities for investment. So the way a lot of our managers thought about it, the way I think about it is in the short term, the market can be inefficient and present,

• 2:59Speaker 01

  whether it's pricing irregularities or just areas for really good long-term investment opportunities. And I think in the long term, at least my philosophy is that over the long term, the market is efficient, but you know, it might not be efficient at any given time. But if you buy something that's mispriced or you know, compounding over the long term, eventually that price should, you know, eventually reflect the underlying fundamentals of the business. It could take a year, it could take five years, but over a long enough period of time, those things should converge.

• 3:29David Weisburd?

  Eventually, the trading catches up to intrinsic value of the asset.

• 3:34Speaker 01

  Yeah, at least that was how we thought about it. And that's how I think, I think I still think about it today. You know, but again, it's hard to predict that timeframe and it's hard to predict like all of the incremental inefficiencies that might happen in the interim.

• 3:47David Weisburd?

  You spent some time under Scott Wilson, who's considered one of the top CIOs in the country. What makes Scott such a great CIO?

• 3:54Speaker 01

  Scott is very different than I'd say a lot of the traditional archetypes for endowment CIOs. So, you know, the first thing is Scott had a very non-traditional background. He was not trained by David Swensen, or he didn't kind of grow up in the endowment world. He was actually a rates trader and spent a lot of time in Tokyo, sitting on rates, you know, desks. And he had kind of a quant background. And I think this was actually a really good thing for him because it allowed him to come in and take kind of a first principle approach to endowment investing, right? He wasn't influenced by the way things had been done for many decades beforehand. And he was able to kind of build his own approach. And so the first thing I would say is like, he disregarded convention completely. You know, there was

• 4:33Speaker 01

  kind of a standard way, this endowment model of managing a portfolio that most other endowment heads had embraced. And by the way, that had worked really well for a lot of endowments. But Scott didn't really care what other people said or did and kind of built his own approach. Um, one of the, the tenants of I think like Scott is a CEO was he is just, he is completely ruthless when it comes to making manager decisions. And I, I don't mean that in a bad way at all. I think that's actually like absolutely critical to being an elite investor, but it's really hard for a lot of people to do. Um, there's a lot of psychological headwinds in this industry. If you're invested in a manager over the course of many years or even a decade, you become friends with the manager. There's a lot of close relationships and I think it gets really hard to,

• 5:18Speaker 01

  you know, get off the train. And I think a lot of institutional investors are bad at, at putting in redemptions, are bad at, you know, not re-upping in funds that they probably should get off the train. And, and Scott was really good at that. And so the first thing we did when, when Scott joined was, we went through every asset class in our portfolio and we force ranked every single manager in every single asset class. There could not be a tie. There had to be a one and there had to be, you know, whatever the last number was, right? And, um, and what that did is, is it forced you to acknowledge and to admit like, who are your really high conviction managers? Maybe we should give them more money, but also who are the low conviction managers? And like, why are they still in the portfolio? Um, and I think it was kind of close to,

• 6:00Speaker 01

  you know, Jack Welch, who was a long time CEO of GE, every year they would look at their workforce and, and they would fire the bottom 10% of their employees, right? I think Scott took like a very similar approach that if something was in the bottom, you know, quartile or 10% or whatever was of our portfolio, why is it there? And why do we still have capital with that manager? And every day we continue to have capital with that manager, was almost making a conscious decision that we wanted to be invested with that manager. And so he really, I'd say forced us to look in the mirror and take a hard look at our portfolio and make those tough decisions and, um, and do it in a really objective way.

• 6:34David Weisburd?

  It accounted for this consistency bias where by default you wanted to re-up in a manager. But here his system was more an opt-in where you had to force rank and you had to consciously make a decision who to cut. You didn't need a reason to cut somebody. You need a reason to keep somebody in.

• 6:51Speaker 01

  Exactly. And I think that's something that a lot of LPs struggle with. And look, it's, it's, it's really hard, right? Like the default every morning when you wake up is you have an existing portfolio already. And so like, let that existing portfolio continue. And I think Scott's view is kind of the converse of that, which was, you know, like I said, every day you continue to have capital with that manager, you know, you should view that as like, you're making a conscious decision to re underwrite that manager and have capital with them today. And if you would not invest with the manager today, then why would you still have capital with them, even if you made that decision?

• 7:24David Weisburd?

  The zero-based budgeting type of framework. It's the same with employees. If you wouldn't hire them again, why, why are they still at your firm?

• 7:31Speaker 01

  Exactly.

• 7:32David Weisburd?

  Lack of friction.

• 7:33Speaker 01

  Yeah. And it's, it's such a simple concept to understand, but I think it's, it's, it's really hard to actually do it in the right way. And I think a lot of LPs still get this wrong pretty consistently.

• 7:45David Weisburd?

  How do you balance being very opt-in conscious about your portfolio versus what people call relationship alpha? Or the alpha that comes from having deep relationships with managers?

• 7:56Speaker 01

  After Scott joined Washington Dam, and he did a podcast, actually, a couple of years later, and he talked about how they ruffled a lot of feathers in those, in those first few years. And, um, you know, I think a lot of, a lot of managers were unhappy with Scott, but, you know, that was him coming in with a clean slate and, and wanted to rebuild the portfolio from scratch. When, you know, Scott decided to commit to a manager and re underwrite a manager, you know, he would set expectations with them upfront, like very much like, hey, this is why we're underwriting you. This is what you said you're going to do. And if you do it and you do it well, we will continue to be a great partner with you for a while. But if you don't, um, you know, like this is a business and, and we're going to move our capital somewhere else. And I think just being really objective about it, not being personal about it, um, and setting expectations upfront is really important.

• 8:40Speaker 01

  And, and if, if you're a rational investor, a rational human, rational business person, like you under, you should, you should understand that those decisions, while tough to make, like are often the right decisions. And I think like the right managers did not take it personally.

• 8:56David Weisburd?

  And from my understanding, Scott is very focused on finding the best in-class athlete, the best managers versus kind of trying to fit somebody in a box. Talk to me about that strategy.

• 9:06Speaker 01

  Yeah, so there's a few components of that. So the first thing I would say is Scott very heavily favored concentration, both in as we thought about the number of managers in the total endowment as a whole, but also as we thought about positions within our underlying manager portfolios. And so, you know, we called our manager roster a ton when Scott joined and really tried to, you know, concentrate capital on like our top manager ideas. But then going a layer beyond that, Scott would also want to concentrate in underlying positions within those managers. And so, the way like Scott's general philosophy as a whole was, he didn't really care so much if an opportunity came from the public equity

• 9:50Speaker 01

  sleeve, the private equity sleeve, the real estate sleeve, like he took effectively this opportunistic approach where at any given time, he wanted to concentrate capital on the best ideas, regardless of the asset class, regardless of kind of the end exposure. And so we would actually like spend time with underlying managers. And they started to do this a lot more after I left. I mean, Scott kind of joined at, you know, the tail end of my two-year analyst program there. But we started to do this. And we would, we would meet with our managers, we would go through their portfolio, we would talk to the managers about their highest conviction names within their portfolios. And then oftentimes, we would do our own research on those names. And if we agreed with the manager where we

• 10:30Speaker 01

  had outsized conviction in a certain name, we would often increase our exposure to individual names within our portfolio. This was something that a lot of other institutional investors were not doing at the time, right? Like they're, you know, the traditional endowment model is identify best-in-class managers who are great at their domain, give them capital, and effectively like outsource your decision-making to them. Scott had this perspective where

• 10:57Speaker 01

  We could do our own really good research, not that we thought we could do research better than our managers, but we focused on incremental research, incremental insights, leveraging their research and conviction and perspectives to maybe build a little more of an incremental perspective that would give us the conviction to increase exposure to those individual names. And that concentration has really been a huge tailwind to watch these portfolios since Scott joined.

• 11:26David Weisburd?

  You could think about it almost as a counterbalancing factor to growth of AUM of some managers. So if you think about it from first principles, the reason that returns go down as fund sizes go up is because deal flow does not scale in proportion with the increase in AUM. So let's say that the AUM goes up by 2X, but the quality of deal flow goes up by 50%. So that incremental, you know, fourth of their portfolio is lower quality than it would have been in the previous fund. And said another way is GPs will never admit this, but GPs have a grading system

• 12:07David Weisburd?

  for every single opportunity. Now, it might be A++, A+, A-, B+. And maybe no opportunity ever goes below B+, let's just give the benefit of the doubt. But there is a grading system. So by actually going double clicking, having the relationship and having the FaceTime with the managers, you could actually figure out you could double down on those A and A+ opportunities. Even forget about co-invest and lowering of fees, that obviously moves the needle a lot as well. But just by re-concentrating your portfolio, you could actually get higher returns in the underlying fund, if you do it right, which is huge asterisks.

• 12:50Speaker 01

  Yeah, yeah, exactly. And like when I think about the traditional co-investment model, I think it's more like reflexive and reactive and a lot of LPs, you know, they'll wait for a manager to come to them with an idea and the manager might say like, "Hey, like I've got excess allocation, you know, in this company that's raising a new round. It's we have really high conviction. Do you want to participate?" And LPs might often participate in that. Scott was very proactive about this, right? Like we would, we would, we would identify companies, right? And we would, we would spend a lot of time building those, building our own conviction in those companies. And, you know, to your point, like, yeah, if we do a good job of that and Wash U has done a good job of that,

• 13:31Speaker 01

  like that adds a lot of alpha to the portfolio. And, you know, you could, you could also like take a step back and say, "Well, like if managers had such conviction in their top ideas, why not just make, you know, size those bigger in their portfolio?" We were already investing with very concentrated managers. I mean, you know, the managers in our long only, in our, in our long only public equity portfolio, they would sometimes already have 10, 15, 20%, you know, sometimes even more than that, 25% in their top name. And, and often 50 to 75% of their portfolio in their top five or 10 names, right? And so they were kind of maxed out on concentration, but we really thought like, "If you have such conviction in these names, why shouldn't we have more exposure?" And, and actually, one of the, the projects, one of the last projects I worked on at Wash U before I left is,

• 14:17Speaker 01

  we looked back at all of our public equity managers going back, I think, 10 years. We looked at the performance of, of their portfolios as a whole. And then we compared each of their, you know, 10-year performance periods to, to the performance of their top one, two, and three single names in their portfolio. And almost always those top names outperformed. It wasn't always like the top one name that outperformed that brought our portfolio, but it was usually either a combination of like the top one, two, or three, or, you know, some combination therein. And that really gave us the conviction that like managers are generally good at, at sizing, you know, higher conviction bets better. And that I think also gave us the, the conviction to, to execute on the strategy where we would buy more of, of their top names.

• 15:01David Weisburd?

  Said another way, you could be very confident on investment, but would you stake your entire career on it if you went over the ledge? Or would you stake little Johnny's college? Tuition on it. So, you know, asking managers to take a career risk is such a high standard. And there's somewhere between that and the average investment in the portfolio, there's this alpha. So you might be very convinced on it, but not willing to stake your career on it. And there's still, that conviction is still valuable, valuable LP insight.

• 15:31Speaker 01

  Yeah, exactly. And like, you know, look, if we, you know, we, yes, we have the conviction in, in, you know, every position that we put more money in, but we would sometimes get it wrong. And, and I think the way to mitigate that risk was to still have exposure to the manager's broader portfolio. Right? It wasn't like we wouldn't invest in their, you know, number two to 10 idea. We would, we would still have that through their, our core LP check in their, in their fund. We would just increase exposure to, to some of their best ideas as like a complement to that strategy.

• 15:57David Weisburd?

  I'm still struggling to understand, how do you operationalize a best idea strategy within the context of an endowment portfolio? So how do you go about taking that strategy and turning it into practice?

• 16:07Speaker 01

  It's a really good question. So the first thing I would say is, and the first thing Scott did was, prior to Scott's running, we were siloed by asset class. And so I worked on the public equity team, we had a hedge fund team, and we had a private markets team. Right? And, and, you know, anybody working within one of those teams, all you did was, was work on that asset class. The first thing that Scott did when, when he joined was, he got rid of that structure and, and everybody became a generalist. And almost retrained and rewired us to think about, not only finding the best ideas within, you know, a single asset class, but at any given, at any given time, trying to find the best ideas in general. Right? And so we thought about this idea of like, everything should be competing for capital against everything.

• 16:53Speaker 01

  And at any given time, let's be opportunistic to, and flexible to put capital in the best idea regardless of asset class. And so I think like decoupling, you know, any individual from one asset class just gave us like the broader mental space to not only think, you know, again, about like the best ideas within a constraint, but like the best ideas in general. The other thing we did, and they started to do this a lot more after I left, but WashU team is on the road traveling all the time. They go meet with not only managers, but they're meeting with management of portfolio companies, like constantly. They're touring factories, they're talking to customers, they're doing like that really deep primary research that a lot of other endowments don't do.

• 17:37Speaker 01

  And I think to execute this strategy well of really forming an opinion on individual assets, like you can't do that without traveling, without doing this level of primary deep research that the WashU team does.

• 17:49David Weisburd?

  Double click on that. So let's say I'm backing Bill Ackman in activist investing, and I'm sitting with him and he's saying, this is my one or two best ideas. WashU would also go and essentially visit these companies, let's say they're private companies for simplicity. What are you trying to do? How are you trying to get better information than a Bill Ackman or choose your top quartile manager?

• 18:12Speaker 01

  So we didn't necessarily think about it as trying to get better information than the underlying manager, right? A lot of it was, we started from a place of, one, validating the underlying manager, because as an LP, you're really two degrees removed from the underlying asset typically, right? You're one degree removed from the manager, who's then another degree removed from the underlying asset. So a lot of LPs take whatever a manager says at face value, and you have to believe them. But WashU did not ascribe to that. And I think we were like, very much, we started with, let's re-underwrite the asset and build conviction in the manager's thesis, right? So almost like testing what the manager told us. And then from there, seeing if there was any incremental, you know, value or insights that we could add. But we didn't, we definitely did not think that we could do a better job

• 18:57Speaker 01

  of underwriting the asset than the underlying manager. It was like doing the work to kind of re-underwrite it, understand their thesis, borrow a lot of conviction from them, and then see if we could add anything incremental.

• 19:09David Weisburd?

  Another way to look at it is co-investments. There's a lot of pressure to give co-investments to large institutional investors. If you think about that from a first principles perspective, that pressure could lead to bad incentives and offering the incremental co-investment that maybe is the average investment in the fund, or maybe even sub-average. But there's so much pressure to offer that, that the GP may have no choice but to give kind of a sub-average opportunity to LP. So you have to re-underwrite that from your own perspective, just to make sure that truly is a great opportunity.

• 19:42Speaker 01

  Yeah, exactly. And I think to your point, like in the co-investment world, the biggest problem that LPs deal with is adverse selection, right? You have to understand, well, if this is such a great deal, like, why am I seeing this? Right? And, and I think that problem is more prevalent in the private markets where things are capacity constrained and, and less prevalent in the public markets where anybody can go and, and buy a security in the open market. But we did a lot of public markets, you know, almost co-investing as well, where we would go and, and buy more of a stock, typically through an SPV that the manager set up to align incentives where they would, they would manage the asset. But it was, it was, again, it was much more of that proactive approach, where we weren't waiting for managers to send us an idea where, you know, who knew what the incentives were like, we were really

• 20:26Speaker 01

  going to them and saying, hey, let's, let's talk about your best ideas today. And even if you weren't planning on like, actioning on them, let's create a structure where we can increase our exposure and align incentives at kind of the appropriate.

• 20:37David Weisburd?

  So after Wash U St. Louis, you went to Bowdoin College, so considerably smaller endowment, but still today, couple billion dollars. What was the difference in Bowdoin versus Wash U St. Louis?

• 20:49Speaker 01

  There were a lot of, a lot of differences and some similarities, but both had done exceptionally well over a long period of time. And, you know, the first thing I, I observed at, at Bowdoin was just excellence. I joined at the end of, of Paula Valens tenure. She had spent 20 years at Bowdoin and grew the endowment from something like 400 million when she joined to over $2 billion, you know, net of, that was net of spending, net of paying out, you know, distributions to the college. So just an incredible track record. And I, I learned a few things from, from Paula. The first was kind of going back to this Buffett adage of like, be greedy when others are fearful. And she aggressively leaned into venture capital in the early 2000s after the dot com bubble, when I think a lot of LPs

• 21:33Speaker 01

  had still had scar tissue and trauma and. You know, she wasn't at Boden before that. And so in a way, it was like fortuitous that she joined after this and had this amazing opportunity to invest like without the legacy baggage of, you know, major markdowns and that trauma from that bubble popping. But she was really greedy during that time and it worked out really well. And she was early in a lot of amazing Sequoia funds and other great, other great managers. So like definitely learned the be greedy when others are fearful. One big difference between Boden and washy was Boden was a lot more diversified than than washy under Scott. So, you know, Scott had this really concentrated approach. Boden had a lot of line items, a lot of manager line items and Paula

• 22:16Speaker 01

  wasn't afraid to kind of try things out. And if it didn't work, you know,

• 22:21Speaker 01

  redeem capital and kind of move on. And so, you know, what that resulted in was a much more diversified portfolio, but still a portfolio that generated exceptional returns. And so this, you know, kind of made me question convention a little bit, or what I learned at Scott. And I think it made me realize that there are more than one ways to win in investing. And, you know, it works for somebody, it might not work for somebody else. And another kind of good example of that was, you know, Scott was really allergic to, to macro managers, right? Managers that did not do fundamental research, but took more of a tops down approach. And Boden, especially under Paula, really leaned into that type of manager. Stan Druckenmiller, who's a Boden alum, was, you know, on the, on the board and investment committee and, and obviously famously ran DuKane,

• 23:05Speaker 01

  which had done really well and was probably one of the best macro shops ever. And Paula leaned into that, you know, really leaned into his conviction, a lot of his network folks that, you know, had worked at either for him or at Soros and spun out. And those managers had done really, really well for Boden over a long period of time. And so, again, challenged like some of my convention that, you know, Maybe those didn't have a place in a portfolio and made me realize that actually they can, you know, those type of managers can do very well. And again, it goes back to this like one size does not always fit all kind of approach.

• 23:37David Weisburd?

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• 24:21David Weisburd?

  What would you call Boden's investment philosophy? How would you explain it?

• 24:26Speaker 01

  I would say very manager driven. And so, you know, we had somewhat less opportunistic than Wash U in the sense that like we did have asset allocation targets and parameters, and we did view our portfolio more in buckets, but it was very network driven. And so we would, you know, Boden would get in, in deep in a network, whether it was Stans Network or Adventure Network, and just continue to compound within that network. And so being early to venture, you know, and investing in Sequoia's funds in the early 2000s meant that we got really close to, and this was before my time, but you know, Paula got really close to the Sequoia team, got really deep relationships in venture, and then would back

• 25:08Speaker 01

  like people that came out of those networks. And those networks compounded over those 20 years. And so we ended up being really early to a lot of great new funds that launched between, you know, 2005 and 2015, funds like Founders Fund and Andreessen. And, and I think like being early and like really leveraging those networks to compound was, was core to Paula's philosophy. Like she really took advantage of those networks that she built to get really good access. And that was like where I first really, like Scott was much more about the individual manager and like underwriting them and being opportunistic. And Paula was very much about like, we have this amazing access to these amazing networks. Let's use that for all we can and like use that to get access to really interesting things.

• 25:52David Weisburd?

  That's almost like. Founder product fit, they both played to their strengths and really leaned into their strengths and trying to kind of fit their personality to a strategy.

• 26:03Speaker 01

  I think that's, I think that's definitely right. And again, it goes back to my, you know, this whole philosophy that like different things work for different people, right? And what works really well for one person might not work for the, for another person.

• 26:16David Weisburd?

  And then you went to allocate, which just full disclosure, I was a seed investor in the platform because I believe in it, obviously. What was your role at allocate and what were some of the lessons that you learned there?

• 26:27Speaker 01

  So I joined allocate right after it had raised its seed round and I effectively launched and led allocate's emerging manager platform. So allocate is, you know, it's a startup, it raised venture capital and it's building an alternative investment platform with a couple of different parts. On one end, you have this asset management platform where we would, you know, we had fund to funds that we managed, but we also would get access to really good venture funds and effectively syndicate out that access. And then on another end of the platform, we built software for the private markets. And, you know, it's funny, the reason I joined allocate in the first place was by this point in my career, I had been, I'd kind of become a venture specialist. I moved away from being a generalist and I really wanted to concentrate venture, but

• 27:11Speaker 01

  I thought that, you know, still being an LP in venture, you're, you're always two degrees removed from like the real action. And I thought that if I worked in a startup and saw that zero to one phase, it would give me a lot more empathy for my managers, but it would also just make me a better investor and make me able to ask better questions. And so, you know, we were, even though I, I kind of managed a fund to funds and acted like an institutional investor, we were still doing it within the context of a startup and we were breaking conventions and really like doing things from a first principle standpoint. We didn't have to like do things the way they've always been done, which is like the worst thing you could ever mutter within the context of a startup. And, and so we, we backed a ton of emerging managers, you know, when I was there.

• 27:55Speaker 01

  We also backed a lot of not emerging, a lot of big platform firms. And I learned a lot about selling and sales and, you know, things that you didn't have to, to do within the context of like a, a non-for-profit endowment.

• 28:09David Weisburd?

  I often think about with how I invest, I think about how do people become better investors? And one of the things that's really important is to get ground truth in different industries. How could you be a great endowment investor without understanding AI and what's driving that market? How do you become a good venture investor without understanding what drives startup returns? I think it's really important, especially if you're focused on one asset class to go as close to ground truth as humanly possible in order to be better and be able to go back, you know, 10,000 feet up and be a better investor.

• 28:46Speaker 01

  Yeah, absolutely. And like, I had never seen how the sausage gets made within a startup. I didn't know what it took to, you know, scope out, building a software product, working with an engineering team and a product team and like actually building and shipping something. You know, these were things that were like very much in the abstract for me and still, I think very much in the abstract for a lot of institutional investors. But but being an allocate, like seeing that zero to one, seeing what it takes to hire a team and go from 10 people to 50 people, seeing what it takes to raise a series A. You know, these were all things that happened when I was there and just seeing it upfront, I think, gives me, it just gave me a lot better understanding and appreciation for like, how hard these things are, like how hard it is for founders to build companies, how hard

• 29:30Speaker 01

  it is for investors to pick companies and understand companies.

• 29:36Speaker 01

  And it just gave me a lot more empathy, I think, for what like all of these players in the ecosystem have to go through. And I'm really glad that I did it because I think it's made me a better investor.

• 29:47David Weisburd?

  So then you went on to found a fund of fund, Pattern Ventures. Why in the world do we need another fund of fund?

• 29:54Speaker 01

  It's a good question and my somewhat snarky response is like, the world doesn't need another fund of funds, actually. And I tell this to managers we meet with, like, the world doesn't need another venture fund, but if you have the right to exist, then I think there's always room for more. And I think we earned the right to exist for a few reasons. You know, in venture, if you want exposure to the big brand name firms, the light speeds, the Sequoias, the Andreessen's of the world, it's really purely an access play and you don't need a fund of funds to do that. You can try to get access directly, or you can leverage a platform like allocate to get access. Like, there's ways to get access. It's not really

• 30:37Speaker 01

  like a diligence or an underwriting game, it's an access game. And I think it's becoming increasingly easier to access these bigger firms. But in the emerging manager world, it's much less of an access game, and it's much more of like a discovery and diligence and manager selection game. And it just takes a lot of time. There's thousands of venture funds in the emerging manager world to pick from. You need the right network to find these funds, you need the right skill set to diligence them, you need to reference them, it takes a ton of time. You know, return dispersion in this world, in the emerging manager world, is massive. And so manager selection matters even more. And that means you need to spend

• 31:20Speaker 01

  a lot of time meeting with a lot of managers to pick the right funds. And a lot of LPs just don't have that time, or don't have the bandwidth or the skill set to do that. And so, you know, to do this part of the market right, I think a fund of funds makes a lot of sense. And, you know, I've been doing the emerging manager, you know, LP investing for a while. My two partners who started Pattern have been fund of funds investors for multiple decades, and they've been investing in venture companies for multiple decades. And so, I think we've earned the right to do this. But I don't think, I don't think the world, again, needs another fund of funds, unless you have earned the right, like I think we have.

• 31:56David Weisburd?

  Another way to look at return dispersion, there's obviously just beta and market beta, but I would actually call it LP error. I think there's significant LP error in the venture space. Said another way, the return dispersion is only partially due to actually...

• 32:16David Weisburd?

  Just variance or randomness, a lot of it is actually due to picking the wrong managers. I caution people to really think critically about their venture exposure. First of all, it's completely idiosyncratic to every other asset class on the planet. There's no learnings. In fact, if you know a little bit, or maybe even a lot about private equity, it's a recipe to be a terrible venture investor because of power laws versus downside protection and things like that. The second aspect is there's a right way and a wrong way to enter any asset class that you have no experience with. So if you look at how endowments or institutional investors enter asset classes, at least most of them, the humble ones, they'll start actually with a fund of fund.

• 33:01David Weisburd?

  They'll start with the most high view, kind of 10,000 square foot view. Then they'll start to see what does look, good look like. Maybe the fund of fund will start giving direct exposure into the funds. So they get kind of this, this sense for what does good look like? It's almost impossible in the first year to even know what an asset, what a good asset looks like. And then maybe five, 10 years later, they'll start to actually build out a direct platform into the actual underlying companies. And if you look at the behavior of 70, 80, 90% of high net worth investors, when they go into venture, they actually go the other way. They go directly into startups because that's what naturally comes into them. Then they go into funds if they kind of learn from their mistakes.

• 33:44David Weisburd?

  And then once in a while, they'll go into fund of funds. But again, the, the LP error on the manager's side, and even more so on the startup side, that, that LP error, because there's almost no barrier to entry startup startup, is so massive that whatever investors save in fees, they pay, you know, five, 10x oftentimes. Oftentimes, they just lose all their money. It's like, do you want to pay 2% management fees or do you want to pay 100% mistake fees? Anytime you're going into a new asset class, benefits for the first year, maybe two years, going with a fund of fund and learning the ropes on somebody else's dime, I think is so valuable.

• 34:25Speaker 01

  I completely agree and it's the crawl, walk, run approach, right? And it's funny, I made this mistake earlier on in my career, actually. After Wash U, I joined an OCIO where we manage endowment capital. When I joined, we had almost no venture exposure and I kind of took the lead on building out our venture program. And I, we were starting from zero and this was when my venture network was, was very, very limited. And we basically spent a year trying to just get up to speed and understand. And, and then we started making a few commitments, you know, the following year. But I think in retrospect, like I should have started with a fund of funds to help me get to know the ecosystem and build relationships.

• 35:06Speaker 01

  And then maybe co-investing alongside the fund of funds directly in some managers as you build kind of conviction. And then eventually going to do it myself. We could have jump started the program a lot better and like we made some mistakes early on backing managers that, you know, in the early days, everything sounds great, right? When you're, and even now when I'm, you know, training like our analyst or intern, you know, in the beginning, everything sounds great and everyone's interesting. And by the way, like almost every manager we meet with, even if we pass, they're all very impressive. They have great experience, they have great backgrounds, they worked at a great company or they worked at a great firm. But it's really hard to delineate between who's, who's just okay or good and who's really great. And, you know, we've had LPs come to us and say like, hey, look, I tried to do this myself and I just got really burned.

• 35:52Speaker 01

  And I just need help, right? And, and I don't think it has to be like an either or, right? Like, you know, you can, you can use a fund of funds and use it as an educational experience to start doing this yourself, which a lot of our LPs too. And so I definitely am a big believer in the, in the crawl, walk, run approach.

• 36:09David Weisburd?

  I made the same mistake, which is why I so intimately understand. And I think I probably did 100 startup investments before even investing in a manager. So I did not take my own advice had I known it, I of course would have done it.

• 36:22David Weisburd?

  I want to double click on something that you said that's rather obvious for people in the industry. But if you made your money in a widget factory and then you start investing in venture, the average, let's call it the bottom quartile venture investor is the top 1% of society or the top 10% of Ivy League. So. The bar to even have a venture fund or raise 20, 30, 50 million, 100 million is so high that even just to be in the game, there's a quality bar. That's why you have to meet like 100 managers before you actually know what good looks like. It's because everybody actually looks pretty good. That's a common mistake that people make.

• 36:59Speaker 01

  Yeah, absolutely. Like, everybody's smart in this industry, right? Like, when we talk about the managers we like, it's, you know, we're not saying things like, oh, they're so smart, like, we need to invest, right? Like, those are, that's table stakes. And I actually think this is what some managers get wrong about their differentiation, right? Because we, you know, we'll talk to some new managers and I'll ask them, like, why do you think you have the right to exist? Or why do you think you have the right to win? And they'll say something like, oh, well, you know, we're operators and we have great operating experience and founders want that. And by the way, that's great. And maybe you do have great operating experience, but I've met with 200 other firms that also, you know, were operators at great companies. And that in and of itself is not enough, right? It's impressive. And it's impressive

• 37:43Speaker 01

  when these folks worked at great companies and did great things. But it's almost table stakes. And it makes it a lot harder to really differentiate, again, if you haven't met with hundreds of firms and you don't know, like, where that relative baseline kind of is.

• 37:56David Weisburd?

  So for your fund, you're targeting sub $50 million managers. Tell me about your strategy and your portfolio construction.

• 38:03Speaker 01

  Primarily, what we do is 50 million funds. The reason why we settled on this is, well, there's a few reasons. One, when my partners were setting a pattern, they went back and looked at every fund going back about 45 years, I think to 1980 until today, and looked at every 5X net venture fund in that period. And what we noticed was, the largest cohort of 5X returning funds was in the sub $50 million range. This is for a few reasons. One, smaller funds are less competitive against the bigger incumbent firms. You know, you don't have to compete for that lead spot. Leading around is binary. You either win the lead position or you don't. You know, sometimes you can co-lead. But if you have

• 38:46Speaker 01

  to, you know, have a bigger fund and you have to deploy more dollars and lead. Now you're becoming competitive against not only the big, the other seed funds, but also the, you know, the big incumbent kind of tier one brand name firms that occasionally do seed as well. And so we like that smaller funds are less competitive. They can get better access to deals. We also like that they're purely focused on pre-seed and seed, where we think the, you know, the biggest opportunity for, for outlier power law driven exits exist. Valuations are better. And the fund math, most importantly, to get to a good return, it's just a lot easier, right? You don't need to rely on the next Uber just to three extra fund. If you're a $50 million fund, you know, an acquisition at a couple hundred million dollars can really move fund level returns. And, you know, if you

• 39:29Speaker 01

  get a single billion dollar company that could return your fund sometimes multiple times over. And so, you know, venture, we believe is hard enough as it is. And we just want to try to stack the odds, you know, even more in our favor in terms of generating great returns. And so that's why we focused on this sub $50 million.

• 39:44David Weisburd?

  I had, recently I had a podcast with a guy that runs a lean AI leaderboard, which is looking for these one, one person led, kind of, he calls it seed strapping, which is you raise a seed, seed round, and then you, you become profitable. I've been thinking about the second order effects of AI on, on investing. So if AI does bring down costs, and what I've kind of settled on is this bifurcated model, pre-seed and seed, and then the mega funds. So you need money to prove out your thesis, and then you need capital as a moat. So in my version of the future, you see these highly value added pre-seed and seed investors, and then the Andreessen's and Sequoia's writing kind of

• 40:28David Weisburd?

  a billion dollar check. What do you think about that thesis? And help me refine that thesis?

• 40:33Speaker 01

  So I agree. I very much agree that venture is becoming bifurcated. And I think you either need to be like a small nimble, you know, collaborative, early stage investor, or you have to be really a deep pocketed multi-stage, you know, big brand name. I think in the middle, it's really hard to win for a few reasons. Put it this way, I think a lot of founders at the pre-seed and seed stage, they know the risk of taking capital from those big incumbent tier one multi-stage firms, right? The risk is You're kind of an option check to them at the pre-seater seed stage. And if they don't follow on and do your A, there's material adverse signaling in that. Right. And so a lot of founders say, I'm going to raise my pre-seater seed from a smaller specialized pre-seed seed fund where I know I'm going to get, you know, really good engagement from the GP.

• 41:18Speaker 01

  Often it might be a solo GP where like, I know exactly what I'm getting and who I'm getting it from. And they can be really helpful and I'm meaningful to them as a part of their portfolio. But the best founders, when it comes to the series A, I think they want to raise from a big brand name firm because it's signaling, you know, raising from a big, great firm in your series A is a great signal, but more than that, those firms have deep pockets and can fund you, you know, theoretically through IPO and beyond, right? And if you're a founder-

• 41:44David Weisburd?

  Which they want to do too. Which they want- Their new business model today.

• 41:49Speaker 01

  Yeah, absolutely. Which they want to do. And if you're a founder, the biggest distraction to your business is fundraising. It can take a lot of time. And if you have to go out and fundraise for every round, a new process, like that's a big distraction and a big time commitment. And so, you know, if you can just raise your series A from a big brand name firm and then effectively not have to worry so much about raising subsequent rounds because you can just go back to them, like that's a really attractive value proposition. And I think it makes it really tough for, you know, the mid-sized series A specialist funds, you know, like the 200 to $400 million series A funds, who maybe they can lead your A, but after that they can't. And you're going to have to go out and find a new C, you know, series B investor. And again, you know, a new investor beyond that. And so I completely agree with you that this bifurcation is definitely happening.

• 42:34Speaker 01

  And I think it's only going to get more pronounced.

• 42:36David Weisburd?

  You're investing in these sub $50 million funds. Is there a pattern in terms of are they concentrated? Are they leading rounds? Are they collaborative? Distill what you see as best in class strategies?

• 42:48Speaker 01

  So we take a very GP centric approach to investing, meaning we focus a lot on the GP. And what I mean by this, and kind of going back to something you and I talked about earlier. This concept of like GP thesis fit or founder market fit. What works for one GP might not work for another GP and beyond. And so we want to back GPs where their strategy is really playing into their strengths. And that means sometimes we back very concentrated GPs where we think like they're exceptionally good at picking or engaging with founders and like they have to have a more concentrated portfolio. But sometimes we pick more diversified GPs where maybe they have really good network, really good deal flow, really good access. Maybe they're not as strong on the picking side.

• 43:28Speaker 01

  And so having a more diversified portfolio like allows them to like really take advantage of their network and their deal flow without having to make like even more concentrated bets. And we've seen both both models really work out. We have a pretty eclectic portfolio where our managers look different from one another. Like we've got, so we have a lot of solo GPs in our portfolio. We have one or two partnerships. We actually tend to to prefer solo GPs. This is maybe a little counterintuitive to a lot of, to what a lot of other LPs think. But I think there's more risk in a partnership, actually. I've just seen so many partnerships blow up and I've seen so many partnerships formed out of convenience rather than out of a real like reason to partner with someone.

• 44:12Speaker 01

  And, you know, if you're a solo GP, you don't have to worry about, you know, dealing with someone else and the psychology of that. And investing is such a business of biases. And I've, you know, I've seen in organizations where people become possessive about their investments and when people want to strike down other people's investments because, you know, maybe that person has struck down one of your investments. And like, I think the decision making and staying power and underwrite ability in a solo GP is actually more attractive at the end of the day. And so we tend to focus a lot, a lot on those. But we're open to partnerships so long as there's a real reason for the partnership and and we don't think there's a lot of risk there.

• 44:49David Weisburd?

  What's one or two mistakes that you've made early on that you've since corrected?

• 44:53Speaker 01

  One thing that I've actually changed my mind on over the, really over the course of my career, but more of the, over the course of the past couple of years is, you know, I used to think that having meaningful reserves in your portfolio was a really good way to, you know, increase exposure to the best names and like juicy returns even more. But I think it's really hard, at least what I've noticed and observed is.

• 45:18Speaker 01

  A lot of pre-seed and seed managers, it's really hard for them to effectively deploy their reserves. And here's why. If you're a seed manager and you invest in the seed and maybe you have reserves to take you through the A. You know, series A companies still have a very high failure rate and it's, you know, you, you often don't have a lot of time to gather a ton of new incremental information between a seed and a series A or even a, you know, pre-seed or seed, right? And so by the time you have to deploy those follow-on reserves, you're often doing it only with marginally incremental more information. And you're doing it at a materially higher valuation usually, right? And so I think like reserves are actually really tough to be effectively deployed for pre-seed and seed funds.

• 46:01Speaker 01

  And I would almost rather those funds just buy up more ownership in the early days. And I, I can't tell you how many times I've talked to managers and asked them like, if you went back and, you know, by the time this seed company raised a series A, like, did you know that, like, did you know which companies were going to break out or did you know which companies were going to fail? And oftentimes they say, you know what, we, we actually didn't. Or the companies that we thought were really, you know, strong out of the gate, ended up plateauing and stagnating. And the companies that were slower out of the gate ended up really ramping up. And so I do think reserves can be really effective. But I think they're more effective actually in the later stages. Like founders fund have been, has been like exceptionally good at deploying reserves and doubling and tripling down.

• 46:43Speaker 01

  But that's because they can deploy massive reserves at like the series C and D and beyond where like, there's metrics, there's traction, you know, which companies are already like really on that hockey stick trajectory. And so I've, I've kind of come around and, and actually prefer our managers to have lower reserves, if that makes sense.

• 47:00David Weisburd?

  It's, it makes total sense and it's very interesting that the managers are telling you that they may not know who the breakouts are because there's a very direct incentive for them not to, to say the opposite. To say, oh yeah, we should have just let's double our fund size. We're, we could have piled into these three, we knew for sure that these three were. But the fact that they're saying the opposite despite the incentive is a pretty strong signal.

• 47:22Speaker 01

  Yeah, and I think this is a tough thing that you need to like, try to figure out managers. It's very easy for managers to retrofit a story and to say, oh, you know, we made this like five years ago, we made that investment because we had this thesis on this thing that nobody else believed in. And we did it. And we knew that this company was, you know, gonna break out and become a billion dollar company or 10 billion dollar company. The reality is venture managers think every one of their companies could become a, you know, a 10 billion dollar company at the time they invest, right? But, you know, obviously, not every company is going to be successful. Most actually aren't going to be. And I think what people don't realize is oftentimes, it's not until much later when it becomes obvious that that a company is going to be successful.

• 48:05David Weisburd?

  This has been an absolute masterclass on downman investing fund of funds. What would you like our listeners to know about you? Pattern Ventures? Or anything else you'd like to share?

• 48:14Speaker 01

  The first thing I'd say is, you know, Pattern, we're open for business. We're actively deploying. And so we'd love to chat with, you know, any managers that are really high quality and raising. And we source through our network, we source through a data tool that we have, but we don't have a monopoly on sourcing. We don't believe anybody does. And so we're always happy to meet with folks that, you know, people really highly recommend. And the other thing is, I would just say, like, you know, when we were building Pattern and how I've thought about being an LP over the course of my career is, I've seen too many LPs that I think feel entitled or feel that GPs owe them something because like, we're giving them capital. And I just think this business needs more like true partnership. And, and I think like, at the end of the day, these are, these are marriages. These are really long-term relationships. They're two-way streets. And, and so I would just like encourage

• 48:58Speaker 01

  everybody listening, like really think deeply about partnership, both if you're an LP or a GP and, and recognize that like, none of these relationships are one-way streets. And I think that's like something that we really hold near and dear to us here, here at Better.

• 49:10David Weisburd?

  Big purpose of this podcast is to tell the LP story in hopes of basically telling kind of both sides of the story so that there could be more empathy and relationship in the industry. Thank you, John. Look forward to sitting down in person very soon.

• 49:24Speaker 01

  Likewise, David. Thank you for having me.

• 49:26David Weisburd?

  Thanks for listening to my conversation. If you enjoyed this episode, please share with a friend. This helps us grow, also provides the very best feedback when we review the episode's analytics. Thank you for your support.