The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:04:40 · Scott Wilson, Harry Stebbings
[00:04:40] S0: Yeah. Well, thanks for having me. [00:04:42] S1: Not at all, but I'd love to start with a couple of lessons from the past. You obviously had roots with Grinnell, spent several years there building out an incredible book. What are some lessons for you from Grinnell that really stuck with you and you took with you to WashU and impacted how you think about building out your book with WashU? [00:04:58] S0: Yeah. I I think we ran a similar strategy at Grinnell. So I I was fortunate to to work for this guy, David Clay, who hired me at Grinnell. Grinnell had a long history of kind of a a mix of direct co investments and, external partners that managed the portfolio. It was pretty concentrated portfolio. Think it was super concentrated relative to the peer group. And we do a lot of the same things, but David was a great guy to learn from because when I first landed at Grinnell, I, I really had no idea what an endowment actually did, you know, on a day to day basis. And I I think our strategies evolved over time, but we we still fundamentally do the exact same things we were doing at Grinnell here at WashU. [00:05:36] S1: Which is concentrated managers, concentrated positions in diarize as well. [00:05:40] S0: Yeah. I mean, if you if you really wanna dumb it down, it's... There's nothing particularly clever about it. You know, we try and find really good external partners. When they find something that we think is really unique, we try and double, triple, quadruple down on it, and then hopefully let that compound over long periods of time. That's it.
00:05:40 · Scott Wilson, Harry Stebbings
[00:05:40] S0: Yeah. I mean, if you if you really wanna dumb it down, it's... There's nothing particularly clever about it. You know, we try and find really good external partners. When they find something that we think is really unique, we try and double, triple, quadruple down on it, and then hopefully let that compound over long periods of time. That's it. [00:05:57] S1: If we go forward to WashU, I heard... And this was... I can't I can't remember who told me, but they said that the first week in the job, most people have a bit of time, get used to the new environment. Nope. Scott did a fire sale, sold 75% plus of the WashU portfolio. [00:06:14] S0: Yeah. I saw that stat. I'm not sure that it was 75%, but it... We put in redemptions for over half the portfolio in the first week. But I also had the portfolio for a couple months before I actually landed in the seat, so there was a lot of preliminary work that went into those decisions. It wasn't, it wasn't a complete... Like, we're just fire sailing everything. [00:06:34] S1: Were you worried about doing too much too soon? That is a very large shift.
00:06:34 · Harry Stebbings, Scott Wilson
[00:06:34] S1: Were you worried about doing too much too soon? That is a very large shift. [00:06:38] S0: Yeah. I mean, it was a mix. There was this kinda obvious tension that performance hadn't been great for for quite some time, and the the board, you know, wanted to see results quickly. And and they had kinda given me and the team three years to really make performance show some real pro performance improvements. And to do that, you know, we had to really restructure the portfolio relatively quickly, you know, and changing around an endowment portfolio is more like turning around an aircraft carrier than a speedboat. So we knew that was gonna take a decent amount of time. And then the private side... Luckily, private side was in better shape, I think, than the public side of the portfolio. But we, we had 36, 37 hedge funds in the portfolio and then we got rid of them all. So we certainly weren't popular in certain parts of Manhattan. Ultimately, we we turned over more than 75% of the portfolio through secondary sales on the private side. [00:07:30] S1: That is a fire sale. That would constitute... Yeah. I'll I'll tell you that. And you just [00:07:34] S0: over eighteen months. [00:07:36] S1: Oh, fine. And just don't go to Manhattan for a while. He won't be the most popular dude on Wall Street. Okay. And the endowment then is $8,000,000,000? [00:07:44] S0: Yeah. It was just under 8,000,000,000 when I started. [00:07:46] S1: Okay. And it... Today is how much? [00:07:48] S0: The total managed pool is probably just under $20,000,000,000 today.
00:07:48 · Scott Wilson, Harry Stebbings
[00:07:48] S0: The total managed pool is probably just under $20,000,000,000 today. [00:07:52] S1: I hope you have a 20% take rate personally. No. [00:07:57] S0: Unfortunately, that's not the way it works. [00:07:59] S1: Unfortunately, not. That would be a $2,400,000,000 take. So, well done. So you have that restructuring of the portfolio, and you then have the freedom to bluntly reallocate and start a little bit more afresh. How did you approach it then going, okay. This is how much I want publics, privates. What did the portfolio construction look like when you had that flexibility? [00:08:20] S0: I mean, I always say we're pretty much indifferent between publics and privates. And I would tell my board, like, you know, the only difference between those two asset classes is how often they're mark to market. So if you have, a ten, twenty year time frame, do you... Should you really care that something is marked every day or something is marked once a quarter? Within that, we have obvious liquidity constraints. So our big broad target, I would say, is half publics, half privates. We're definitely out over our skis and privates, but that's reversing quickly. [00:08:48] S1: With the greatest of respect, I get you on the mark to markets, but the biggest difference is, as you said, liquidity. No. I mean, the extended period that funds are now in terms of being twelve to fifteen year funds and the time it takes to get cash back, the fundamental difference is available liquid. No?
00:08:48 · Harry Stebbings, Scott Wilson
[00:08:48] S1: With the greatest of respect, I get you on the mark to markets, but the biggest difference is, as you said, liquidity. No. I mean, the extended period that funds are now in terms of being twelve to fifteen year funds and the time it takes to get cash back, the fundamental difference is available liquid. No? [00:09:04] S0: Yeah. I mean, we obviously have liquidity constraints, and that drives that ratio between public and privates. But it's not like if Stripe goes public tomorrow, it should be in a different asset class. [00:09:14] S1: In terms of the capital requirements, you have net outflows a year of, like, 5%? [00:09:19] S0: Roughly 5%. It's it's smoothed out over kind of rolling five year average. [00:09:23] S1: If you didn't have the required net outflows, would you do anything differently in terms of capital allocation? [00:09:30] S0: Oh, for sure. We would probably have, 70, 80% targeted privates. [00:09:34] S1: Wow. Can you walk me through that thinking and just say, I... I'm the board. Rationalize that for me, Scott.
00:09:34 · Harry Stebbings, Scott Wilson
[00:09:34] S1: Wow. Can you walk me through that thinking and just say, I... I'm the board. Rationalize that for me, Scott. [00:09:39] S0: Yeah. I mean, well, payout is a function of your liquid assets. Right? Because you can't always convert your private portfolio into the payout is not guaranteed, right? In theory, like, you know, some percentage of your private portfolio should become liquid every year, but you can never count on it when you actually need it. So if you have a 5% of payout on, and half your portfolio is liquid, that's 10% of your liquid portfolio that you're paying out every year. And if you're paying out zero, well, you really don't have that constraint. And if you look at the relative performance, you know, over the last decade, we've probably compounded our privates by in the low to mid twenties and we've compounded, you know, our public equities at 10%. [00:10:18] S1: Did you always have this belief in privates being the value driver of a portfolio? [00:10:23] S0: No. I I... But I do think, like, the markets are less efficient. [00:10:26] S1: What do you mean by that? [00:10:28] S0: I mean, like, you can get access to investments that are less picked over. Like, there's always natural buyers and sellers, and I think it's much harder to create alpha in public markets than it is private markets. And I think this is, you know, well documented over the course of time.