The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:26:32 · David Morehead, Harry Stebbings
[00:26:32] S0: No. The public markets are the big leagues. There's millions of people making decisions on dollars every single day for every single company. You know how things get valued on the private side? Of course you do. Three people get in a room and say, hey, I think the value is x. And they're like, I'll fund it at that. Great. And that resets the whole price. [00:26:50] S1: But I think public markets in many respects are as irrational as private markets are state. And you saw that. Dude, you saw that. Well, you saw that with the state. [00:26:59] S0: Can be irrational because they are governed by people. The difference is that there are tens of millions of people trading on that information, whereas on the private side, there's like three. [00:27:12] S1: And they decided, those tens of millions of people, that Elon Musk is a premium in himself, that SpaceX should be a $1,800,000,000,000 business. [00:27:23] S0: Yeah. That doesn't mean that they're right. It just means that it incorporates all available information, which does not happen on the private side. [00:27:30] S1: And so what you're saying is that the sheer scale of people voting in this buying decision means that it's a more legitimate price than private side. Just so I understand. [00:27:39] S0: Correct. I don't think there's any question about that. I literally have been in these conversations, right, where, like, three guys get together and are like, hey. I think it should be this. Like, on what? Right? And they're like, well, I'll give you $50,000,000 at that price. Okay. Fine. On the fact
00:27:39 · David Morehead, Harry Stebbings
[00:27:39] S0: Correct. I don't think there's any question about that. I literally have been in these conversations, right, where, like, three guys get together and are like, hey. I think it should be this. Like, on what? Right? And they're like, well, I'll give you $50,000,000 at that price. Okay. Fine. On the fact [00:27:56] S1: that I tried the product and I liked it, David, why you asking me such intellectual questions? Exactly. Right. Do you trust... And I I didn't mean that badly, like, do you trust the prices coming back from your managers? You know, we we will have our books, our portfolios for people listening and we mark them into different ways and We do.
00:28:15 · David Morehead
[00:28:15] S0: So that's one thing that the ladies have done extremely good job of recall again that I'm coming from the public side. So when you run trading books, everything has to be priced every day, right? So ostensibly, so you make better decisions because if you have things mismarked, then psychology works against you. Like if you say that this is worth $30,000,000 and it should be worth $10,000,000 and somebody offers you 20, then because you would ostensibly take a loss from 30 to 20, you're liable not to hit that even though it's a premium to the actual value. And so pricing is just a way to make sure that you are psychologically aligned to the reality of the market. And so one of the things that we really try to do is to make sure that our managers are not pushing valuations. We want valuations to be conservative rather than aggressive. And you can see that in sort of our return data in sort of like the six months, nine months prior to something being taken out. I think average gain on that is sort of like 60 to 90%. And I think from a market perspective, it's more like 30 to 50%, which would suggest that our marks, our managers' marks tend to be more conservative than others. So, you know, like I kind of sit on top of this thing and I kind of have to vouch for the valuations that we have as it relates to talking to the regents or administration. And I feel pretty comfortable that on the private side our our marks are actually more sane than on average.
00:29:51 · Harry Stebbings, David Morehead
[00:29:51] S1: As venture eats more and more of the world with your OpenAI's, your Anthropix, your SpaceX, your biggest companies in the world are being venture backed companies. Do you maybe feel that you need more in venture, more in tech? Does it change how you view the world? Does the mindset change? [00:30:07] S0: No, I feel pretty comfortable with where we stand. I think our biggest allocation is in growth equity on the private side. And we feel pretty comfortable with our capability and the manager set that we have there. [00:30:19] S1: Why do you like growth equity? Because of the returns timeline profile. [00:30:23] S0: The return timeline, there's also fewer zeros, and so that kind of goes to the value bit. I mean, it's just simple math. If there are fewer zeros, then everything else doesn't have to cover for the things that don't work, which is what helps get you to like, I think that their book is like annualizing it like 30% on sort of like the growth equity side. So that obviously meets our eight, 9% bogey. So I don't even actually know that I've ever had that question before. [00:30:51] S1: How do you think about like Mulligan vintages across Venture and Pete, Mulligan being like not very good vintages. A lot of people are talking about kind of 2122 for Venture and Pee being just like very bad vintages. We all just kind of went crazy. It was COVID. Sorry, Mayor Culper. And you've got now Toma Bravo. Obviously, had Medallia, which is obviously quite a well known return the keys situation.
00:30:51 · Harry Stebbings, David Morehead
[00:30:51] S1: How do you think about like Mulligan vintages across Venture and Pete, Mulligan being like not very good vintages. A lot of people are talking about kind of 2122 for Venture and Pee being just like very bad vintages. We all just kind of went crazy. It was COVID. Sorry, Mayor Culper. And you've got now Toma Bravo. Obviously, had Medallia, which is obviously quite a well known return the keys situation. [00:31:13] S0: I think that just kind of comes with the territory, right? I mean like basically what we do is we say, this is the amount that's gonna be in privates. And then we say, we're gonna allocate to PE expansion capital and VC, we're gonna do it in these sectors, and then I let the ladies have at it, and they come up with a portfolio and it had... The portfolio overall has sort of an expected return hurdle that they need to clear. If they're not clearing it, then that's a problem. If they are clearing it, then that works great. [00:31:44] S1: What are the annual liquidity requirements that, like... Obviously, as an endowment, you mentioned some of the... You're paying for tuition, really important. What are the annual requirements in terms of liquidity for you?
00:31:54 · David Morehead
[00:31:54] S0: Well, it's on a couple of fronts, like obviously on the distribution side, that's something that we can't get around, right? And that's about 5% on an annual basis. And so that dollar amount that keeps going up, which we want it to, right? Like that is the thing that pays for scholarships and professorships, etc. The sort of like subjective side, so let's call that like the objective side of the liquidity equation. On the subjective side of the liquidity equation is sort of like what capital do you need to have around to allocate to the next thing that's going to go up 20%, 30%. So we talked to our newer analysts about this and we say like what do you think the odds are that we find something to be up 20 sometime in the next four years? Like anything, anywhere. And they're like, wow, really high. And we're like, great. So then cash is worth 5% a year apart from what you're gonna earn on cash. So if cash is earning three and a half percent plus 5%, so opportunity cost, cash you is worth eight and a half percent. So if we find things to do that are north of that, then we do it. And if there's a period in the market sort of like seventeen, eighteen, nineteen, where we're not finding things to do in that ballpark, then we let cash get larger. So we kind of came into the pandemic with sort of 15, 16% in cash because we were looking around and we're like, I don't see something to do. And so our cash balance is sort of indicative of what we're seeing to do to make money.