The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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.
00:37:44 · David Morehead, Harry Stebbings
[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. [00:39:01] S1: Does that make you nervous?
00:39:01 · Harry Stebbings, David Morehead
[00:39:01] S1: Does that make you nervous? [00:39:03] S0: No. We own everything under the sun. So does every e and f portfolio. Right? So, like, we own everything from like sunscreen to helium to like tech, like I don't know what, right? Like we own all sorts of consumer product goods that you would see in the mall. We own all sorts of business to business software or tech companies that I've never even heard of before, right? Like we own real estate development project. We don't like own everything, right? So like, it's always funny to me when people like compare an endowment portfolio to the S and P five hundred or something like that. You're like, we're infinitely more diverse than the S and P five hundred. It's not even close. So, no, if we get a little bit more concentrated on at the margin like that, that doesn't remotely change anything for us. [00:39:48] S1: What do you see your endowment CIO cohort do that you think is nuts or wild?
00:39:54 · David Morehead
[00:39:54] S0: There's something that we do that not a lot of schools at our size do, and that is we almost hire exclusively from undergraduate ranks. Now to be clear, the caveat there is schools or endowments our size. So we're about 2,700,000,000, fourteen months ago we were 2,200,000,000, couple years before that we were 1 0.4, right? So in that sort of like $1.03 to 3,000,000,000 kind of range, and I've sort of figured out why a lot of people don't do it, so it was a little bit of something that I missed. But the bit is, is like, if you hire undergrads, and based on where we are, our office is located in Waco, we're about a 100 miles from Dallas, we're a 100 miles from Austin, we're right in the middle between the two, it's pretty difficult for us to hire a mid career professional and get them to stay for a long period of time. It'd be really difficult to pull somebody from LA or New York to Waco and say like, I need you to be here for ten years. And so what we've done to try to solve that is hire from undergrad ranks. They clearly have chosen the school by definition, they've chosen the area, etcetera. They've been around. We actually screen pretty hard for that when we're hiring people. The issue is that when you do that for the next five or six years, you're spending a lot of time pouring into that person and helping them kind of like level up. And during that period of time, while they're leveling up, it's like all still on your shoulder. So I totally kind of like forgot that part. Like I totally got the, you know, we'll have a stable investment team and, you know, these people won't go anywhere or whatever, but I kinda forgot the bit of, like, yeah, and for the next five or six years, you're gonna be wearing, like, all sorts of hats during that time.