The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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.
00:50:03 · David Morehead, Harry Stebbings
[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. [00:51:04] S1: Okay. Is so interesting for me. So the markets have changed in the time that I've raised from you. I've moved with those markets, and I've done that well. And I'm showing you great numbers. I'm making you money. [00:51:17] S0: Mhmm. [00:51:17] S1: But my position doesn't [00:51:19] S0: fit what we're trying to accomplish, we won't re up.
00:51:19 · David Morehead, Harry Stebbings
[00:51:19] S0: fit what we're trying to accomplish, we won't re up. [00:51:22] S1: That's so interesting. So you would rather I stayed on second base, do worse financially than move to third base where you've already got someone else? [00:51:30] S0: I would like you to have a conversation with me before you change your stripes. [00:51:35] S1: What would you say in that conversation?
00:51:35 · Harry Stebbings, David Morehead
[00:51:35] S1: What would you say in that conversation? [00:51:37] S0: I'd be like, why do you think that you should be able to do this when we have no data to suggest that you're good at this? Let's move out of VC. Let me do something on public equity that's easier. There are managers who are like, we don't know how to time allocations into and out of cash. We're just gonna be fully invested because we don't know, like, if the market's gonna go up, down, or sideways. Like, we're good at picking stocks. So we're going to keep basically zero cash. That's what we do. And then there are other managers who are like, we actually use cash as an allocation methodology, and cash will be from zero to 15% depending on what we see to do, whatever. Both of those track records are subject to comparison to benchmarks. Like, don't change the benchmark depending on like if somebody holds cash or doesn't. And so if somebody is like, we're fully invested all the time, and then I wake up some morning and they have 10% in cash, yeah, they're getting fired. Because, like, I don't wanna be the guinea pig. Like, I don't wanna be the person that are like, hey, you have a new idea now, and now you're more of a global macro equity manager, and you think that you can time the markets when you have no prior experience or data to suggest that you can, yeah, no, you're fired. [00:52:51] S1: Kind of get that given that example. I think venture's more nuanced. It... It's kinda close-up.