The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:00:00 · David Morehead
[00:00:00] S0: The single reason that privates exist is to make money, period. End of story. I'm a little perplexed by the length of some of these funds. It's not clear to me that the GP incentives are aligned with the math that runs endowments. What we're really after is the velocity of capital, not just returns on capital. There's a rule in our office that you're not allowed to talk about returns without also talking about time. We happen to have about two and a half percent of the endowment in anthropic. I never wanna be all in. Things can always get worse. You are seeing the pushback on AI at the data center level.
00:00:44 · Harry Stebbings
[00:00:44] S1: This is 20 VC with me, Harry Stebbings. Now I'm a venture investor for a living, and something that's frustrated me for a long time is that we don't get to hear from the greatest CIOs, chief investment officers who invest in the venture funds that we run. We don't know how they think, what they like to invest in, what worries them when they're invested in a manager and they see them doing, how they think about the market today and allocating to managers. Today, I sit down with one of the best in that business, David Moorhead. He's the CIO of Baylor University office of investments, and he's one of the most respected CIOs in the business. Baylor's endowment is around $2,600,000,000. David is quite outspoken, which makes this conversation one of the most refreshing, but also articulate and clear for managers thinking about raising, looking to raise, and for managers now wondering how they should operate with their LP base. David was incredible, and I'm really proud of this show because it shines a light on a part of the industry that I feel needs a lot more transparency. But before we dive into the show today, founders face a different set of challenges at every stage of growth. For Sid Shait, cofounder and CEO of Dematrix, JPMorgan delivered the guidance and expertise to help navigate what came next. He credits JPMorgan's high touch approach with supporting dMatrix as it grew and expanded internationally. Whether you're in the early days or expanding into new markets, JPMorgan helps startups navigate complexity with real confidence, offering personalized guidance and deep sector expertise. Find out how JPMorgan helps founders at j p morgan dot com forward slash grow without limits. JPMorgan is the bank of the innovation economy. While JPMorgan supports growth, Corgi protects it. My word. What an arresting first line. Get your ass covered with Corgi insurance, and I'll tell you why. If you're running a business right now, you already know this pain all too well. Getting insurance, it's really slow, it's confusing, and my word, it's full of paperwork. Well, that's exactly why Corgi is here to change the game. Corgi is the first and only insurance carrier designed specifically for tech companies, allowing you to get covered in minutes instead of days.
00:03:07 · Harry Stebbings, David Morehead
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00:04:30 · David Morehead
[00:04:30] S0: Right. It's it's pretty important job, right, particularly in the place that we are with higher ed. You know, we obviously have fewer high school students in The US coming out of the great financial crisis. And so as number of high school students decline, that's obviously fewer tuition dollars. The other thing that we have going on obviously is that the last couple of years has been more difficult for international students to come over to the states, appropriate visas, stay, etcetera, all of those things. Those are full pay students, obviously. And so that kind of compresses higher ed, you know, financial books a different way. And so what that means is that collectively, there's a lot, a lot of competition for domestic students these days. And if you just look at the last, like this incoming class, I guess it would be the class of 2,030, there are a lot of schools across the country that did not meet their targets for, you know, incoming student class. And what that means, of course, is that the revenue has to come from somewhere else. And so in this time and space, and I think realistically for the next ten or fifteen years, the distributions that are coming off of endowment funds are going to be increasingly important. And so we manage sort of like with that in mind. Now we've always been good at the downside. Historically, our office, like first quarter of twenty twenty six, I think the S and P was down 4%. We were flat. If you go back over time and you look at the fourth quarter of twenty eighteen, the first quarter of twenty sixteen, twenty twelve, if you look at a lot of these different times, our office in general tends to outperform to the downside. And what we've kind of gone back and looked at is how could we get better at the upside? We started this about five years ago kind of knowing that this high school student issue was going to be a problem. And so we've reorganized things over the last five years to make sure that we're doing better to the... On the right side of the distribution.
00:06:36 · Harry Stebbings, David Morehead
[00:06:36] S1: Is it possible to do both? [00:06:38] S0: Well, I've had finance faculty actually laugh at me. Right? So when I when I say, like what we're trying to do and I'll let you be a little bit the judge of that. I mean, effectively, we're doing is we run sort of like a value centric, high quality book, particularly on the equity side, because it's really, really hard to control sort of like the equity beta. So you could buy puts, that's kind of like a money losing effort, like over long periods of time. And so we try to do it thematically through factor allocations. But that then means, of course that to the upside when you're in a momentum driven market, a growth led market that you're going to trail. And so the issue is, you know, the market's up 70% of the time. If you're going to trail to the upside, that's going to be problematic. And what we've tried to do over the last really three to five years is we've tried to increasingly solve that with convexity. And we've tried to do that in a manner such that we're actually not paying a theta bill on sort of like a normalized basis. [00:07:41] S1: I have to ask, increasingly solve that with convexity before we move to theta. What do you mean by that?
00:07:48 · David Morehead
[00:07:48] S0: Yeah. So basically, what we've done is typically higher ed outsources the investment of the endowment to a whole set of different managers. And so by nature, we have a bunch of investments in a number of commingled funds. And commingled funds by definition means that there's one GP who's managing the money and then there are like 100 or 1,000 LPs who are receiving the returns on that money. The issue with commingled funds is of course at any given point in time, you're receiving the average risk return profile that that manager is providing in order to keep all of those LPs satisfied. And at any given point in time, Baylor's risk return need might vary from what the average LP in that fund would desire. And so what we've tried to do is kind of go directly to the GP and say, hey, this commingle thing isn't like totally working for us. We need to like optimize our risk return profile better. If we give you a bunch of money, would you would you run the same strategy but do it just for us? And then we have a look or a call into what's going into the portfolio. So let me give an example. Say we have Nvidia in the portfolio, right? And then the next marginal manager wants to add Nvidia to his or her portfolio. Well, we can look at the portfolio like the GP doesn't know that. We can look at our portfolio and be like, look, we've got plenty of Nvidia. We actually say no, we don't need more Nvidia. Or conversely, let's say that we value high quality. The next marginal manager wants to add Nvidia. And we're like, we actually don't have any of that. So we'd take the NVIDIA that you're offering, but why don't you make it three times as big? Because that's what we need to, like, back into a more appropriate, more optimized risk return profile for our portfolio. And it's actually worked, like, exceedingly well over the last two, three years.