How I Invest with David Weisburd
00:40:21 · Jack Selby, David Weisburd
[00:40:21] S1: I can go very deep on this. So if you're one of these b minus or worse managers that got spawned during the easy money period after the great financial crisis, what do you do? Because in venture, it's an existential crisis. It's not as if... Like, if you're an investment banker and you start your career at Goldman Sachs, and you hit a bump in the road, you can go work at Citibank. And then you hit a bump in road, you can go work at Jefferies. And you can hit a bump in the road, and no offense to any of those firms, but there's a natural kind of cascade you could potentially go through to kinda land the plane and remain employable. There's no equivalent of that in venture. If your venture firm goes south, you're done. And that means you gotta pull your kids out of private school, and maybe you can't pay the mortgage, and maybe you get divorced. It's an existential crisis for your life, you have no other choice. So you have to hold on for dear life and ride down with the ship, and it's very hard. And because of that dynamic, it makes this catharsis process that much slower to play out. [00:41:13] S0: So that's on the bottom of the stack. At the top of the stack, you have this famous study, professor Steve Kaplan, previous guest, and he did this study on the persistence of venture capital. So 52% of top quartile funds end up being top quartile. I believe roughly 75% end up being in the top 50%, so above above the median. Do you think that's gonna continue to persist in this age of AI, or do you think it'll increase or decrease?
00:41:13 · David Weisburd, Jack Selby
[00:41:13] S0: So that's on the bottom of the stack. At the top of the stack, you have this famous study, professor Steve Kaplan, previous guest, and he did this study on the persistence of venture capital. So 52% of top quartile funds end up being top quartile. I believe roughly 75% end up being in the top 50%, so above above the median. Do you think that's gonna continue to persist in this age of AI, or do you think it'll increase or decrease? [00:41:42] S1: So it doesn't directly answer your question, but let me ask you a question that I think helps get to an aspect of this that I think is arguably more interesting. So as the mega funds get larger and larger and larger and have to write minimum tickets that are commensurately very large themselves, who fills that gap below that? So they're sucking up. They're hoovering up all the capital. Who's left to write those tickets that are less than $20,000,000? Are these the little micro funds that are gonna do that? It's a real gap that's being left. So I think that has to be examined. And then if you're an allocator, do you put a fund like mine or benchmark, relatively small funds, in the same bucket as Marc Andreessen, who manages, I don't know, $60,000,000,000? Are those the same investment type managers? Like, you have a Yale endowment model, what buckets do you put those two firms in? Do you put them in the same bucket?
00:42:34 · David Weisburd
[00:42:34] S0: Empirically, seems like no. I had Eric Swerd some from AngelList, and AngelList is very interesting because they have one of the biggest datasets in the world. I think arguably the biggest on... When it comes to startups. I think 25,000 companies or so. And especially today, they use AI. They use the latest machine learning. And they figured out an interesting thing, which is they couldn't run the same mathematical models on all of venture. In other words, it was essentially two completely different and idiosyncratic asset classes, aka the early stage and the late stage. So even mathematically, it doesn't compute to just focus on venture capital as one asset class, meaning to assess pre seed the same way as you would a pre IPO company.
00:43:15 · Jack Selby
[00:43:15] S1: Totally agree. Yeah. I think the mega funds are a different asset class. I'm not saying they're better or worse. They're just in a different bucket. And earlier stage guys, like with what I do, I think we're in a different bucket. There's almost an analogy with what we do as being akin to middle market private equity in the sense that there's a difference... Important difference in the sense that I'm investing in business that are... Businesses that are in these middle market geographies. I'm not taking control stakes, but I only wanna work with entrepreneurs that want my help. So it's like synthetic control. And because it is venture, I do have more of a chance of going to zero than a typical, you know, private equity type business. But hopefully, that is compensated by the fact that my company should have better growth rates. They should have better margins, so therefore, should have a better multiple. Other than that, you could put me in the middle market private equity bucket if you so chose, because I think there is a a high degree of similarity.
00:44:02 · David Weisburd, Jack Selby
[00:44:02] S0: Perhaps not surprisingly to listeners, I'm very optimistic on venture capital. I'll tell you why. So venture capital is known as this access class Mhmm. Where the founders choose the VCs, and the top VCs, at least, choose the top LPs. And my thesis is that the reason that Anthropic, SpaceX, OpenAI, the reason all these startups essentially had to go public was not because they just suddenly decided, well, it's time to bring back liquidity. SpaceX had tender offers. OpenAI had tender offers. Anthropic, I'm sure the the early employees are are are not too worried about about their liquidity. So I actually think the reason it goes back to this kind of consensus and venture capital, 75% of q one twenty twenty six of the entire venture capital funding was put into five companies. [00:44:55] S1: Mhmm. [00:44:56] S0: Said another way, they wouldn't have room to do another round. If they did another round, they'd be approaching a 100% and now over a 100%. So I actually think if there was more capital, let's say it went from 3,500,000,000,000 to 7,000,000,000,000, now you would actually have the Anthropic, OpenAI's, and SpaceX doing one or two more rounds staying private because as we know, there's a preference for top founders to stay private. Mhmm. And that would be much more advantageous to both the startups, to the founders, to even early stage VCs. They have higher multiples. What do you think about that?
00:45:28 · Jack Selby, David Weisburd
[00:45:28] S1: The AI boom that is happening right now and has been going on for many years, it's very different, say, than the Internet period when we were putting together PayPal in the sense that the current market is very CapEx intensive. So you have energy needs. You have chip needs. You have data center needs. The list goes on and on on. You basically had none of that during the PayPal days, the doc... The .com days. And so because of the CapEx intensity, you have a tremendous off the charts amount of storytelling to essentially fuel the fundraising. And so when this kind of cycle corrects, and, like, Cliff Asness, who was on your show not too long ago, you said it perfectly. Like, it's it's never different this time. Like, this will correct. And when it corrects, there's going to be tens, if not hundreds of billions of dollars that are going to get zeroed. It's just a fact. It's an absolute fact. And I would actually... I would challenge in saying that anyone who doesn't believe that there's an AI bubble is an absolute contrarian today. Like, that just seems like a ludicrous proposition. Like, it is such a clear How do [00:46:41] S0: you define that? [00:46:41] S1: Whether it's the circular trading or the valuations, the multiples. I mean, the list goes on