The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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
00:47:46 · David Morehead, Harry Stebbings
[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 [00:48:57] S1: I get you totally or another way that I think about it, and you can tell me if I'm wrong, which very possibly could be the case, I'm a low IQ individual after all, is it's a $200,000,000 fund and you commit $20,000,000 to it with the theory that if they say we are 10% ownership in every company, great. If we're 10% of their fund, our exposure is 1% per company.
00:48:57 · Harry Stebbings, David Morehead
[00:48:57] S1: I get you totally or another way that I think about it, and you can tell me if I'm wrong, which very possibly could be the case, I'm a low IQ individual after all, is it's a $200,000,000 fund and you commit $20,000,000 to it with the theory that if they say we are 10% ownership in every company, great. If we're 10% of their fund, our exposure is 1% per company. [00:49:20] S0: Yeah, we think about it in terms of dollars. So we say, how many companies are you going to have? Eight, 10, 12? And then we want two and a half to three million dollars in each company. Obviously, it's up to the manager, you know, etcetera. We're not dictating that, But we're just doing the math from a dollars perspective. So if you have 10 companies, we want $3,000,000 in each company. So if it was up five x, we'd get $15,000,000 back. That matters. That's enough to matter. [00:49:46] S1: Do you want your managers to do what they said they'd do or to play the game on the field? Ventures change more in a year than I've seen in a decade. And, actually, playing the game on the field, as Bill Gurley says, is the job of a venture investor. That may be different from what I said to you at I'd do.
00:49:46 · Harry Stebbings, David Morehead
[00:49:46] S1: Do you want your managers to do what they said they'd do or to play the game on the field? Ventures change more in a year than I've seen in a decade. And, actually, playing the game on the field, as Bill Gurley says, is the job of a venture investor. That may be different from what I said to you at I'd do. [00:50:03] S0: We always want managers to do what they said that they were gonna do. So like my example is always this. I sort of view my job as like the general manager on a baseball team. Right? So I'm gonna hire a third baseman, a shortstop, a second baseman, first baseman, etcetera. For various reasons, like depending on your fielding percentage, your batting average, etcetera. But if I walk out on the field and I have two people on second base, someone's getting fired. And it's probably the third baseman who switched to playing second. Because, like, I have people set up on the field to play particular roles for particular reasons. So, like, if you're a third baseman and you think you can play second base better than my second baseman, then you should come talk to me. But if I ever walk out on the field and I have two second baseman and no third baseman, the third baseman's getting fired, like, full stop. Right? Like that, I don't I don't care what your returns are. So, again, we started off by talking about this. We spend much more time on asset allocation and why things are where they are than we do on individual managers.