The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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?
00:18:00 · Harry Stebbings, Scott Wilson
[00:18:00] S1: You say you're potentially overdiversified. What's the right amount of managers to have in a book, you think? [00:18:06] S0: Well, if you think about the underlying look through exposures, right, the quantitative benefits for diversification trail off really quickly when you get more than 20, 30 names in the portfolio. So if you have 20 or 30 investments, you know, Charlie Munger would say if you have three, you're fine. But there's really no quantitative benefits beyond 30 for 30 underlying look through exposures. And, you know, really the way we think about diversification is we want the top 30 names to have a, be a significant driver of our performance. And the way we target it, we actually target, like, I, I would say half of our portfolio is in our top 50 look through positions. And it's taken us a long time to get there. And that's probably a good target for us, a realistic target, but it's still very diversified. I mean, you look at a diversified hedge fund, typically they have the bulk of their capital in their top 15, 20 names. [00:18:58] S1: So just so I understand, we have 50% of privates and directs. In the venture funds allocation, how much do you allocate towards those 20 to 30 names?