The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:33:28 · Harry Stebbings, David Morehead
[00:33:28] S1: Very difficult to keep your head of when everyone else is losing theirs. It's a brilliant Rudyard Kipling poem, but it's very difficult to do when momentum and excitement kicks in. Takes one discipline. [00:33:39] S0: Interestingly, in this period, this... So in the seventeen, eighteen, nineteen kind of cycle, we weren't finding other things to do. This time, we actually are finding stuff to do. And so we've actually kept our cash balances pretty low because we keep finding, you know, 20, 30% annualized things to do. And so our cash balances just end up being a function of, like, you know, what the environment is. [00:34:02] S1: I think one learns a lot from their mistakes if you are reflective. When you look at allocation decisions, what's an allocation mistake that comes to mind first? And and how do you reflect on it and learn from it?
00:34:02 · Harry Stebbings, David Morehead
[00:34:02] S1: I think one learns a lot from their mistakes if you are reflective. When you look at allocation decisions, what's an allocation mistake that comes to mind first? And and how do you reflect on it and learn from it? [00:34:14] S0: I can't come up with a specific example right off the top of my head, but I will say this, is that whenever you're trading, you for sure are going to lose money. And sometimes you're going to lose a lot of money. And sometimes you're going to lose a lot of money for a long period of time. And the takeaway from that, basically everyone goes through it. Everyone walks into the seat and thinks like that. It's not going to happen to me. This seems pretty easy. Sort of invariably you get kicked in the shins and then hit over the head by a two by four. And the takeaway from that is I never want to be all in. So things can always get worse. So when we're allocating to software in, you know, February, March of this year, we're not like drawing a line in the sand. We're like every available dollar is going into software, right? It's down 50, 60%. Like who's to say it's not going to be down 70, 80%? And so we set it up so that we're methodically and sort of mechanically allocating into difficult markets. And the reason we do that is to try to take the emotion, the psychology out of it. [00:35:18] S1: How do you literally do that? Methodically allocate into market?
00:35:18 · Harry Stebbings, David Morehead
[00:35:18] S1: How do you literally do that? Methodically allocate into market? [00:35:22] S0: Yeah. So I'll give you a perspective on the overall markets, right? So we basically say if the market's down zero to 10, we don't care. We're an infinite live portfolio. Zero to 10% is like normal stuff. The way that I approach it with young analysts, I'm like, if something's on sale for 10%, do you rush out to the store to buy it? And they're like, well, not, No. Not really. I'm like, what about 20%? And they're like, I'd think about it. Maybe. 30%? Yeah. Probably. 40%? For sure. And so we think about declines in the market in sort of 10% increments. And we have liquidity set up in such a way that we could allocate sort of, like, every 10 percentage points down. We don't really worry about zero to 10%. [00:36:07] S1: How do you think about catching a falling knife? Let's make this real. I've done that before. I've looked at your Wix or your monday.com, which were down impressively large amounts. I love the founders. And, dude, I just determined that I couldn't determine baby from bathwater and did nothing. But do they had another 10, 20, 30% to drop?
00:36:07 · Harry Stebbings, David Morehead
[00:36:07] S1: How do you think about catching a falling knife? Let's make this real. I've done that before. I've looked at your Wix or your monday.com, which were down impressively large amounts. I love the founders. And, dude, I just determined that I couldn't determine baby from bathwater and did nothing. But do they had another 10, 20, 30% to drop? [00:36:25] S0: And that's why we do it methodically and mechanistically because we're never like drawing a line in the sand and saying like down 20, oh, I'm all in. We're like down 20, maybe I'm 20% in. Down 30, I'm another 20% in. Down 40, I'm another 20% in. So we're doing it in that way. And the reality is is that we actually never get all the way invested before it rebounds. And so you could say that, you know, we leave money on the table. That's true. But the benefit is is that we're never in the situation where we're like, oh my gosh, I love this so much and it's down and I just can't have any more of it. So that's the scenario that we're trying to avoid. And that just comes from like perspective, history and experience of, you know, having trading scars all over your body from you thought that you were right. You thought that you knew where it was gonna go. You put a whole bunch of money to work, and then it went lower. It's a terrible place to be.
00:36:25 · David Morehead, Harry Stebbings
[00:36:25] S0: And that's why we do it methodically and mechanistically because we're never like drawing a line in the sand and saying like down 20, oh, I'm all in. We're like down 20, maybe I'm 20% in. Down 30, I'm another 20% in. Down 40, I'm another 20% in. So we're doing it in that way. And the reality is is that we actually never get all the way invested before it rebounds. And so you could say that, you know, we leave money on the table. That's true. But the benefit is is that we're never in the situation where we're like, oh my gosh, I love this so much and it's down and I just can't have any more of it. So that's the scenario that we're trying to avoid. And that just comes from like perspective, history and experience of, you know, having trading scars all over your body from you thought that you were right. You thought that you knew where it was gonna go. You put a whole bunch of money to work, and then it went lower. It's a terrible place to be. [00:37:21] S1: It is. When you're holding a stock and it's just down and you're not in a good place, how do you determine between the balance of it's gonna come back and I was right, and I'm gonna stick to my beliefs versus fuck it, I just need to sell because the utility value of cash again, even if it's a loss, it can be recycled again. How do you think about that?
00:37:21 · Harry Stebbings, David Morehead
[00:37:21] S1: It is. When you're holding a stock and it's just down and you're not in a good place, how do you determine between the balance of it's gonna come back and I was right, and I'm gonna stick to my beliefs versus fuck it, I just need to sell because the utility value of cash again, even if it's a loss, it can be recycled again. How do you think about that? [00:37:44] S0: Yeah. A lot of that is in the hands of the managers, of course, right? Because we're not trading individual stocks. But what I do find is we spend a lot of time working with managers sort of making sure that their psychology and their emotions are in the correct place. So for example, interacting with Sean, you brought it up, software space, you know, first part of this year, I was probably on the phone with Sean every day for four weeks. And we're talking through individual names. I'm relaying what I'm hearing in the market. He's relaying what he's hearing in the market. We were sending each other articles or quotes or, you know, news stories at all hours of the day, etc. And I constantly ask him, okay, you have this name, but if it goes down like another 20%, what are you gonna do? Or you have this name and you have another name versus each other. Which one do you feel better about or has better risk adjusted opportunities that here? And then I'd push them to be more concentrated. And that's actually what the portfolio ends up doing. And I think kind of to your point, that's what ends up happening in most cases in sort of real life downdrafts is that portfolios end up getting more concentrated.