The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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.
00:41:39 · Harry Stebbings, David Morehead
[00:41:39] S1: So do you think your colleagues are then for not hiring internally? [00:41:43] S0: I think that nuts is not the word that I would use. I would say that they are accepting alternative risks. And so the alternative risks are on the the upside to me is that I have a stable team. So I have worked with Renee for almost sixteen years. The next person that we hired, Jin, she's been here eleven years, and you can like kind of go on down the line. That actually accrues is pretty evident across the industry. It's like longevity begets returns. So I'm benefited on the stability front. The negative for me is that the upfront bearing of all of that, you know, there's a period of time where I have to like carry the team. On the flip side, if you hire mid career professionals, you don't have sort of like that upfront cost of like having to carry the team, right, because they're more plug and play, but you sort of wear this risk of turnover and potentially poor returns. [00:42:43] S1: David, do you think the incentive structure for LPs is broken? And let's be specific on LPs or endowment fund investors. You know, if you look at funder funds, if I crush it for my funder funds, they obviously have carry, and they will do very well from that. With traditional endowment fund investing, if I do really well for you, it doesn't necessarily translate to a huge paycheck. Do we have a wrong incentive mechanism?
00:42:43 · Harry Stebbings, David Morehead
[00:42:43] S1: David, do you think the incentive structure for LPs is broken? And let's be specific on LPs or endowment fund investors. You know, if you look at funder funds, if I crush it for my funder funds, they obviously have carry, and they will do very well from that. With traditional endowment fund investing, if I do really well for you, it doesn't necessarily translate to a huge paycheck. Do we have a wrong incentive mechanism? [00:43:05] S0: I don't think it's a wrong incentive mechanism. I think that it requires people in the space to be very missional. So like I wake up every morning motivated by sending some, you know, sophomore in high school to Baylor that hasn't even thought about college yet, or some like seventh or eighth grader who doesn't know if they're going to go to college and they're thinking about baseball scores from the prior night, right? Like me getting out of bed in the morning, going to work and wanting to crush it is entirely due to that. So everyone likes to be able to get their wife something nice or to redo the kitchen in their house or go on trips, but like that is not the motivating factor for either myself or the people on my team. [00:43:48] S1: Do you worry about the impact of AI on education?