How I Invest with David Weisburd
00:32:29 · David Weisburd
[00:32:29] S0: Let's talk about support for today's episode comes from Square, the all in one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, and sometimes they even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop ups, and everything stays synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built in tools like loyalty and marketing so your best customers keep coming back. And right now, you could get up to $200 off Square hardware when you sign up at square.com/go/howiinvest. That's square.com/go/howiinvest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. One thing that I've learned from talking to hundreds of investors, founders, and business leaders is that planning for the future isn't just about growing assets, it's also about protecting the people who matter most. Life comes with a lot of important milestones. Maybe you're buying a home, starting a family, planning for college, or simply thinking more intentionally about your financial future. As those responsibilities grow, it's worth making sure you protect those you love. Not sure what kind of life insurance you may need? Concerned about how much it may cost? Think life insurance is too complicated? Your local State Farm agent can help answer those questions.
00:34:24 · David Weisburd
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00:35:32 · Jack Selby, David Weisburd
[00:35:32] S1: I was essentially on the road every single week for the first six months of this year, and I took a very significant sample set of meetings with LPs. So I feel like I have a reasonably well informed opinion on this topic. So here's the distillation of what I found. So one, the industry has done a poor job of returning capital to its investors over the last decade, and we can talk more about why that's the case, but that's just the fact. So that's number one. Two, the mega funds. So essentially, eight firms went out and raised, I think, an aggregate of $70,000,000,000 earlier this year for whatever capital that was still positively disposed towards this asset class. That's two. Three, any capital that is left over that is... Remains positively disposed towards private technology, that capital is infatuated with shiny toy late stage AI deals. That's the entire landscape today. Full stop. [00:36:32] S0: And you think that's wrong?
00:36:32 · David Weisburd, Jack Selby
[00:36:32] S0: And you think that's wrong? [00:36:34] S1: Well, to step back as to why Venture got into this position in the first place, after the great financial crisis when the printing presses at the Federal Reserve and other central banks was on full tilt for thirteen plus years and interest rates were zero, it caused a real problem for the venture capital industry in the following way. So yields were zero. Investors were reaching for yield. They associated tech with growth with yield, so they stuck way too much money into the venture capital asset class, which by the way is tiny, especially compared to its big brother private equity. So venture is probably... I don't know what that number is. [00:37:10] S0: Three and a half. 3 and 1,000,000,000,000. [00:37:12] S1: Right. It's a tiny asset class. In good venture, top quartile was the only place you really wanna be or higher. It's even smaller. And so essentially, way, way, way, way too much capital got stuffed into this otherwise tiny asset class that then spawned way too many managers that have turned out to be b minus or worse, and here we are. And because of these private capital structures, the Darwinian cathartic culling of the herd takes forever. There's [00:37:41] S0: ten year vehicles.
00:37:42 · Jack Selby
[00:37:42] S1: They're ten year vehicles, and these venture firms that turn out to be b minus or worse just play the game of manage... Management fee ventures, and they just ride it out and they milk the fees and they're zombies. And so in 2021 hit, and so so many venture managers rode the wave up, top of the cycle, crystallized no gains, which is their fiduciary responsibility. I'm not saying you need to be a macro manager and know when to top ticket, but they crystallized no gains and rode the wave down. So those paper gains just went poof, and that's a real problem. So you have a vintage of venture managers that are ostensibly still in business today, but they're walking zombies because they screwed up by not returning capital to investors at the last cycle peak, which is back in 2021. So that's a problem. And now so many of those folks have reinvented their portfolios as all being AI companies. So if you had a way back machine and looked at their portfolios from five years ago, you would not see nary a mention of AI, and if you fast forward today, all of them are AI enabled companies doing something or another. And they're doing that because that is their only chance of potentially staying in business, because if they can throw a Hail Mary and have one of those companies potentially get acquired, go public, whatever sort of liquidity outcome you could have, then they can stay in business. But otherwise, they're zombies. And probably... I mean, Peter wrote an amazing editorial in Barron's about the hedge fund industry back, I think, in 2006. So... But how does that cleansing, that Darwinian culling of the herd, it just takes forever. And I've been wrong about this because I've been pounding the table about this dynamic, and I would have thought if it was a baseball analogy, we would be in the fifth or the sixth or maybe even the seventh inning of this process. And the reality is we might be in the second inning at best. It's a very, very
00:39:23 · David Weisburd, Jack Selby
[00:39:23] S0: small process. Realizing the losses. [00:39:25] S1: In terms of these firms just going the way of the dodo and going out of business. And so they're all out there, and they're they're they're trying to get in front of the same LPs, the guys that I were seeing nonstop for the first six months of the year, and the l com... LP community is like, listen. You haven't given me money back in over a decade. You haven't raised a fund in three or four years. You need to go do something else for a job. And that's a very difficult conversation. And so these firms, in the meantime, just kinda hang on for dear life, reinvent themselves as AI companies, throw a Hail Mary, see if they land the path. [00:39:54] S0: The way that I would explain this from the psychological lens is a lot of these people also have this identity as a venture capitalist. And once you're a venture capitalist, you really could only be two things. You could be a founder or a venture capitalist. That's the perception, whether real or imagined. And then if you really humble yourself, you could be a CXO at some startup. But, essentially, a lot of managers have this identity of being venture capitalists, and the pain is not painful enough for them to have to kind of decouple from this identity.