The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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?
00:43:48 · Harry Stebbings, David Morehead
[00:43:48] S1: Do you worry about the impact of AI on education? [00:43:51] S0: I worry about the impact of AI on human thinking. There are a number of studies out, I don't know about their veracity, but they're coming out of MIT and austere places like that. This suggests that students who are using AI for everything that they do actually show less brain function, right? And this isn't really a surprise, you see the same thing like if you just sit in a chair all day that your muscle atrophies. And so I do have concern about the effect of AI on actual human logic thinking. That's sort of like an innately human trait. Animals don't think, humans think. But if you abdicate your responsibility for thinking, it's not clear that humans do that either. So I have concerns about that. I think education can figure it out and use it beneficially. I think it's more of a human discipline problem. [00:44:43] S1: For a lot of my friends, CIOs of other endowments, sometimes larger, they've been hit with obviously the endowment fund tax, which is really hitting larger organizations. How do you think about that? How do you advise that?
00:44:43 · Harry Stebbings, David Morehead
[00:44:43] S1: For a lot of my friends, CIOs of other endowments, sometimes larger, they've been hit with obviously the endowment fund tax, which is really hitting larger organizations. How do you think about that? How do you advise that? [00:44:55] S0: I would love to be in their position. We are because our endowment per student is too small to be subject to that. But I promise you, if I went to the president of Baylor, I've actually had this conversation with Linda. If I go to Linda and say like, there's good news and there's bad news. The bad news is that we're gonna have to pay an endowment tax. The good news is that our endowment is three times bigger than when I last talked to you. She'd be like yeah and? So I would love to have to pay the endowment tax because the endowment was bigger. [00:45:28] S1: Do you play a game of comparison? What is it comparison is the thief of joy? And, you know, I think you said earlier in downtimes, you you obviously are brilliant. And in uptimes, more challenging. I think you play a defensive game. Full year 2025, Baylor returned 9.4%. [00:45:43] S0: Mhmm. [00:45:43] S1: Dartmouth lowest 10.8. Do you do the comparative side by side, or do you row your own race?
00:45:50 · David Morehead
[00:45:50] S0: We do both, which I think is the right way to do it. Every school has a different set of priorities, needs, etcetera. Baylor's is currently to get the endowment higher on a per student basis. And so, for example, what you're referring to in terms of last year, that was disappointing on sort of like a relative basis. But there were two bits that were going on. One was that we had increased the allocation to privates by in sort of like annual commitment amount by about 60, 70% in 2020, 2021 and following. And so returns from the private side have been dealing with sort of like a second J curve, if you will. And then the funds of one and then there's like another asset class that we had allocated to. Those have been like flat and starting to inflect up. And so this fiscal year was the first year that we weren't dealing with the J curve impact on the private side. And the first year that we got returns from both the fund of one category and this other category. And so we feel very, very good about sort of like, you know, our newest analyst was like, so basically, you guys tried to change the engine while the car was moving. And yeah, that's 100% what we were trying to do. We were trying to put a new bigger engine in the car while it was still going down the highway. And we did it. We had, like, a little bit of a lag last year. I think we'll be 18 and a half, 19% this year without any SpaceX or Cerebras or anything like that. So structurally, I think the next couple of years look pretty good from sort of a tailwind perspective.
00:47:35 · Harry Stebbings, David Morehead
[00:47:35] S1: Can I ask you, we chatted before about a friend of mine who you're gonna be working with? How do you think about position sizing in positions that you do decide to engage with? [00:47:46] S0: Yeah. So this is an interesting one, you're you're talking specifically on the private side. So we we spent a lot of time on this sort of because what I had talked about earlier that like we own everything under the sun. And one of the things that we had figured out is that, yeah, you know, we have this relationship with GP and we have this, you know, they send us a little note, so and so company got sold. It was like a 7x return. And I'm like, Okay, great. What does that mean to us? And they're like, Well, we'll get back like $400,000 And I'm like, What? Who cares? Right? Like, it means nothing to the overall endowment. And so one of the things that we've changed in sort of sizing is we start with how much money do we want to have in each underlying company. So in other words, if the company is going to be up five x, we want that five x to matter to the overall fund. So basically, what we're doing in sort of like expansion, buyout, ventures like a little bit of a different thing because it's a bigger company set. But basically, what we're saying is we want $3,000,000 to be in each underlying company. And so if they have 10 companies platform, that means we'll allocate $30,000,000