The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:12:26 · Harry Stebbings, Scott Wilson
[00:12:26] S1: So were you just better company pickers then? Because what you just told me is that actually you'd be average if it were just funds only. And if that were the case, you must just be better company pickers than everyone else. [00:12:38] S0: Yeah. It's not us, though. Like, we're not doing what you're doing. You know, I think you have to be humble. Like, I I think, you know, we're trying to identify what we think is a really unique thesis or really unique company, but we're not sourcing that from scratch. And so I think we're starting on second or third base because, you know, we're already invested with Harry and we think Harry's a really smart guy and he really likes this investment. And we'll do our own work to kind of independently verify the thesis. And sometimes we don't agree with the thesis And we have certain partners that we think, you know, is high signal and and lower signal. But but that's where we start our process. Hey. Somebody we think is really smart already thinks this is a great investment. [00:13:17] S1: Tell me, how much will you have in one company? We have a mutual friend in mister Lee Fixel, who I happen to think is wonderful. And he told me that I had to ask about concentration limits. How do you think about concentration on a per company basis?
00:13:17 · Harry Stebbings, Scott Wilson
[00:13:17] S1: Tell me, how much will you have in one company? We have a mutual friend in mister Lee Fixel, who I happen to think is wonderful. And he told me that I had to ask about concentration limits. How do you think about concentration on a per company basis? [00:13:31] S0: Well, I would separate cost versus, you know, NAB. And Lee and the board and Adam should get a lot of credit for for the big win in SpaceX. You know, I think that became such a large position for the portfolio, you know, at one point north of 20% of the portfolio was in SpaceX. And at that point it become like, we had conviction as a team and we had many chances to take lots of liquidity in that name, but we advocated for holding it and letting that compound. And we did several kind of continuation vehicles that allowed us to hold onto that stock up and through, through the IPO. But you can't do that without the right government structure. So at cost, you know, if we were gonna put more than two or 3% of the portfolio in, in a single name, we probably, we would need to notify the board. I think it's 4%. We need their approval, But we have a lot of leeway to concentrate the portfolio quite a bit. [00:14:19] S1: You've also worked with some of the best funds, and we have capital concentration limits on a per company basis. Do you think those are inhibitors of great venture returns?
00:14:19 · Harry Stebbings, Scott Wilson
[00:14:19] S1: You've also worked with some of the best funds, and we have capital concentration limits on a per company basis. Do you think those are inhibitors of great venture returns? [00:14:27] S0: I do. They're mostly artificial. You know? If you think over the course of, like, say you're gonna do five funds, that's, you know, x amount of capital and and to have a 10% concentration limit in any individual fund, I don't think it makes sense. I think, like, we have lots of funds actually that... Where we have a mandate where it's, like, two or three stocks, and we certainly wouldn't have a problem with... If you think about it, if if you're 1% of our portfolio or 2% of our portfolio and you have a 50% position, that's only a 100 basis points for us. [00:14:56] S1: Have you had a position with a lot of capital concentration that hasn't worked out? [00:15:01] S0: Oh, yeah. For sure. What did you learn from it? Well, a lot. There's a couple that come to mind where we, you know, we had super high conviction going in. One was an automated manufacturing company and another was an additive manufacturing company. Maybe we're just poor at underwriting manufacturing companies where, you know, we have substantial investments. I don't think the story's completely been written on either company, but but certainly it's painful. It's painful when the... Those don't work out. [00:15:27] S1: Do you think 50% of your private book being in directs is the right allocation? [00:15:32] S0: I I would take it to 80%. You know, when we started, it was it was just a tiny fraction.
00:15:32 · Scott Wilson, Harry Stebbings
[00:15:32] S0: I I would take it to 80%. You know, when we started, it was it was just a tiny fraction. [00:15:37] S1: Could you have it as 80% given that you are fed by the managers you back? [00:15:42] S0: Yeah. There's a natural equilibrium there, and that'll ebb and flow over time, you know, as you do get some of these bigger positions become liquid. There's no kind of artificial limit on it. And it's somewhat of an organic process when you, you know, if you're right on the underlying thesis and it can compound for a decade or more, and it massively outperforms the rest of the portfolio, like, you get natural high concentration in that portfolio. [00:16:05] S1: I think investment decision making processes are the product that we sell our LPs. I'm intrigued by your investment decision making process on the direct side. What does that look like? How do you decide on directs?
00:16:05 · Harry Stebbings, Scott Wilson
[00:16:05] S1: I think investment decision making processes are the product that we sell our LPs. I'm intrigued by your investment decision making process on the direct side. What does that look like? How do you decide on directs? [00:16:17] S0: Yeah. I mean, we have to agree with the thesis, and we also have to underwrite it. So there's a ton of stuff that people bring to us that, you know, for whatever reason, the team is not smart enough. We just don't have the right skill set, or it's impossible for us to differentiate between this company and five of its competitors. And there, we just don't play. So we have to be able to independently verify the thesis, understand the thesis, have the ability to underwrite the company, ability to monitor it going forward. And we have to think it's our best marginal use of capital. So we we look at a lot of potential investments. And I would say we do... It's probably more like point 1% of those investments than 1%. [00:16:57] S1: Is it challenging as you've scaled? Because now you're close to $20,000,000,000 and just something that moves the needle. I mean, writing a $20,000,000 check into a growth round at 20 to $50,000,000,000, even if it 20 x's, it doesn't move the needle in any meaningful way.
00:16:57 · Harry Stebbings, Scott Wilson
[00:16:57] S1: Is it challenging as you've scaled? Because now you're close to $20,000,000,000 and just something that moves the needle. I mean, writing a $20,000,000 check into a growth round at 20 to $50,000,000,000, even if it 20 x's, it doesn't move the needle in any meaningful way. [00:17:13] S0: Yeah. And I think if I look back, the biggest mistake that I've made since I've been at WashU is not adding capital to our winners just because, you know, they became a relatively sizable position early on, you know, so we had lots of opportunity to add capital to some of the names you would know that have done extremely well. And we, we didn't do that when we could have just because they were already north of, you know, one or 2% of the portfolio. But I still think our model probably scales better than the traditional fund to funds model because it's hard to scale with managers as well. And what you end up doing is you just have to add more managers and then, you know, each manager means less and less. So we can maintain, I think, better concentration. Now we're still probably over diversified, but we can hopefully maintain this comp... Concentration even as we double in size from here. [00:18:00] S1: You say you're potentially overdiversified. What's the right amount of managers to have in a book, you think?