The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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.
00:52:51 · Harry Stebbings, David Morehead
[00:52:51] S1: Kind of get that given that example. I think venture's more nuanced. It... It's kinda close-up. [00:52:55] S0: It always is. Right? I'm not talking about like lines in the sand around artificially generated category limitations, right? Like that's just an artifact that people made up. I'm talking about like, hey, we're gonna invest with a manager who is investing in companies where product market fit has already been determined. And then that manager is like, yeah, that doesn't work anymore. We're just gonna like invest in two guys in the garage and we don't know if they'll come up with something or not, right? Those are two very different approaches. So, yeah, the switch between those, yeah, that's a no. If you wanna go from b to late a, like, who cares? Right? That's the same thing.
00:52:55 · David Morehead, Harry Stebbings
[00:52:55] S0: It always is. Right? I'm not talking about like lines in the sand around artificially generated category limitations, right? Like that's just an artifact that people made up. I'm talking about like, hey, we're gonna invest with a manager who is investing in companies where product market fit has already been determined. And then that manager is like, yeah, that doesn't work anymore. We're just gonna like invest in two guys in the garage and we don't know if they'll come up with something or not, right? Those are two very different approaches. So, yeah, the switch between those, yeah, that's a no. If you wanna go from b to late a, like, who cares? Right? That's the same thing. [00:53:33] S1: So we're actually aligned completely, actually. It's interesting. I thought we were misaligned. I 100% agree. I think your example there, it's kinda like, I would say pre and post data, which is like, you either have nothing and we're selling Walt Disney. Tell me a story. Some people are great at that, and you should bet on them for being great at that. Or you're Jerry Maguire, show me the money, which is the post data. And some people are great at that. And so I totally get that, and I think you're absolutely aligned there. Can I ask you a tough one, which is in venture, it's kind of assumed, and it's the unwritten rule that you commit for three funds? And you should do because that's the duration required to determine quality in a manager. Do you think that's kind of bullshit coming from a more macro perspective where you see different asset classes?
00:53:33 · Harry Stebbings, David Morehead
[00:53:33] S1: So we're actually aligned completely, actually. It's interesting. I thought we were misaligned. I 100% agree. I think your example there, it's kinda like, I would say pre and post data, which is like, you either have nothing and we're selling Walt Disney. Tell me a story. Some people are great at that, and you should bet on them for being great at that. Or you're Jerry Maguire, show me the money, which is the post data. And some people are great at that. And so I totally get that, and I think you're absolutely aligned there. Can I ask you a tough one, which is in venture, it's kind of assumed, and it's the unwritten rule that you commit for three funds? And you should do because that's the duration required to determine quality in a manager. Do you think that's kind of bullshit coming from a more macro perspective where you see different asset classes? [00:54:16] S0: I don't know. I think we've kind of done that. The issue with one fund, even two funds is like, you almost don't have enough data to make a decision, right? You don't. And so, yeah, that kind of makes sense because you don't have data to prove it otherwise. Analyzed. And we tend to be less good at, you guys have a vision, I got a dog, like give us some money. Like, that's really hard for us. So, yeah, people are good at different things. [00:54:44] S1: If I would say you had unlimited money today, unlimited constraints, and you had the Harvard balance sheet, what would you do differently?