How I Invest with David Weisburd
00:27:06 · Gavin Ezekowitz
[00:27:06] S0: able But I think, you know, let's observe some really incredible dynamics. And it's not like I came at this as an adherent of the AI Elan approach or that was my thinking. In fact, I passed on XAI in that $25,000,000,000 early round. I just couldn't understand it. But what I would observe in that business, and I would observe that we can take away from many others, is that there is an incredible capability of great technology entrepreneurs, great entrepreneurs in other sectors, but great technology entrepreneurs to just figure out that there's a moment and they can swoop in. And I look at what Elon did in building out all of those data centers incredibly quickly, at an incredible scale, at a time where nobody was building 100,000 GPUs, and no one was doing anything like that. And then he arrives at this moment where we're just massively short compute, and he's able to charge a super premium to all these other companies to go and utilize that incredible asset. I see this, you can look at it with the leadership of a number of technology companies. There is an incredible ability to understand where the world might be going and how to make some really intelligent bets on that future state. These folks are not It's not everybody, but it's also what I look for in venture managers, frankly, is that that ability to say, you know, it's great. You can tell me about, you know, what might happen in the next year or whatever. What's happening now? Kind of where do you see when you look at your portfolio? Where do you see the things that are going to work in three to five years? Five to ten years when the world arrives in the with your vision or how does that company play in? What are the factors here? Because to me, that's super interesting when when folks have that kind of mindset. That's most often where I get really excited.
00:29:32 · David Weisburd
[00:29:32] S1: When people ask me about what venture funds should I invest in, what startups should I invest in, I always first make sure that they have the right framework. And the way that I do my venture investing is you have to really understand the role of venture capital in your portfolio. Venture capital is not treasuries. It is not the S and P 500. It is not real estate. It is not private equity. It has a singular role, and that is to deliver outsized asymmetric returns once in a while. It is the most bipolar asset classes, the most bipolar underlying portfolio companies. So the the way that I look at venture is you have to be both paradoxically bold and have the right portfolio construction. What does that mean? You wanna be bold. Every company should be this 100 or a thousand x or zero. Of course, depending on what stage you're on. But even today, I think the reason Benchmark is raised or is is raising a growth fund is because they believe that's... There's there's their power laws at the growth stage. Yep. I don't think Benchmark woke up and suddenly became greedy. They've been one of the most disciplined investors in the world. But regardless of stage, you wanna take these highly asymmetric bets. A 100 x or zero. Just think about it from from an oversimplified... Companies like Anthropic, companies like Instinct, which was Mhmm. This this personal AI app, which, you know, I don't know. Some probability, it'll go up to $500,000,000,000, and some probability, it'll go to zero. Right. And probably nothing in between. And then... And this is the thing that people get wrong. A lot of people get excited by that. A lot of people have this gambling compulsion. They're like, okay. Great. This is great. I wanna put all my all my money on, you know, the number 31 on the roulette table. The next and most important thing is you need to have the right portfolio constructions. You need to be diversified. In our fund, we have roughly 20 positions. So you wanna take these very aggressive bets, and you wanna be diversified across different verticals. If you're an LP, you wanna be across multiple funds. So now you have, let's say, five funds of twenty twenty companies per vintage. So now you have a 100 companies, and then, you know, you you have one Anthropic, and one of your 100 portfolio companies across your five managers who are doing well.
00:31:47 · David Weisburd
What do you think about that, and how would you improve upon that model?
00:31:51 · Gavin Ezekowitz
[00:31:51] S0: It's very, very similar to the way we we think about the world. So I I think that the very difficult part for investors is to understand that venture is a great twenty year asset class. In any given period, with any given fund, you may have a flat spot. Even the best managers, it is not as perfectly predictable as as people might like. What some folks do... You mentioned five. We use 10 in in our strategy. But what some folks do is say, well, great. Well, I'm gonna go and buy an index of venture of some kind. And so what you lose in that, which is the problem, is because of the dispersion, you end up losing all the convexity. And the only reason to do venture is convexity. It is you want the shot at an anthropic. You want to make sure that the the potential is that the weight of that anthropic ideally will be great enough that even if it was in one of your funds, that it would still give you a an an exceptional return. You would still have a much better return than you would have if you'd been invested in Nasdaq or or some other benchmark asset. And I think that's the first key. I think the second key that's really hard for investors, and I'm sure you've seen this in your portfolio, we see it in our own, is that it's always tempting to think there's a right time and a wrong time. Right? I shouldn't invest in the benchmark fund. It's the top of the market. AI's in a bubble, whatever. Yeah. Or or it's a terrible time. Companies are having trouble raising money. This doesn't feel like a very good time to be investing in venture. Or I've just lost a bunch of money. Now's a terrible time. Pacing and sizing. Pacing and sizing is what Matt Cortola, my partner, and I talk about all the time. It's the great advantage the individual investor has because they can set their portfolio. So pacing, develop a program, multiple funds, multiple years. Sizing, ensure that the size is adequate, that you can continue that program over time. And then if you're sizing individual positions, you know, size them on a on a matrix that that allows you to take sufficiently sized bets over time such that no one bet wipes you out. You know? As I say, the dead don't compound. So, you you know, you can't get... You gotta survive.
00:34:39 · Gavin Ezekowitz
And so I think when people think about that corner of their portfolio, then they can start to make probably what I would consider more appropriately aggressive allocations with the recognition that they... It's gonna have a very different return profile than perhaps what they're they're used to.
00:35:03 · David Weisburd
[00:35:03] S1: So so many great points there. On the indexing point, I think the biggest myth in venture capital across the last ten ten or so years is that every... Any manager could get lucky and to get into the greatest companies. And not only was I think this was a myth a decade ago, today, it's almost impossible. These these companies become so consensus so quickly Mhmm. That unless it happened to be that you... Your Stanford roommate just happened to be, you know, Evan Spiegel or or something like that. Like, that... That's the level of luck that you need today to get into a company that you don't deserve to be in Right. From a brand perspective. Even a decade ago, I think that was much more likely the case. We just know the counterexamples are just so memed sometimes for Uber. Everyone knows that Uber was going around and and raising in 25 k checks, a lot of people that weren't even, you know, restaurateurs and people like that got into got into the company. But how many stories are there like that? Not that not that many, especially in the last ten years. And on top of that, you learn, and frankly, I I was heartbroken to learn that Airbnb itself was also... You know, people love this, like, story of the David versus the Goliath Airbnb. Nobody loved them, and, you know, they... It took ten years for them to get all this attraction. When you actually look at the facts, and I was told this by by early investors because my my interpretation of the story was wrong. Yes. It is true. Airbnb, when they went to pitch to Paul Graham at YC, he didn't really like it. And then they're like, well, what do you have there? And they had these cereal boxes and that that Obama owes and the McCain, and he's like, holy crap. You guys are selling cereals in order just to, like, make make it and kind of the tenacity that you need as a start up. But they were hot at their vint... At their y c class. In fact, Sequoia, I believe, invested. They didn't even go to demo day because they got that investment from Sequoia. So even these stories that are supposed to be these great counterexamples, these great examples that anybody could invest in these great companies that they are on the lookout enough. Even they themselves are not are not true. So I think that's the problem is when people hear indexing, sometimes they start to think, okay.