The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:11:13 · Harry Stebbings, David Morehead
[00:11:13] S1: What would your answer be for what sort of liquidity profile you thought you needed when you were considering this? [00:11:18] S0: Right. So our allocation range around privates is 35 to 55, which means that we want 55 to be the case when we have a denominator issue, right? When equities have gone down and the public side is smaller than it usually is because of this particular difficulty in the market, that the private side isn't going to kick up so much that we're gonna be forced into selling, right? Like the number one thing to avoid is fraud and the number two thing to avoid is forced selling. That's a And so we kind of target 45% if publics race ahead, then it puts some downward pressure on that. And if we get into, you know, a financial crisis, something like that, it would put upward pressure on that. But for example, the last bit in 2022 when tech kind of slid a bunch or you could go back a couple of years prior to the pandemic, I think that our private side got to like 51, 52, But it wasn't so much that it either constrained our ability to allocate, and it certainly wasn't enough that we got into a forced selling situation. [00:12:28] S1: When you think about then the 45% say that we have as the ideal, drilling one layer blower, how do you think about how to split that up between venture, PE and every other private that we can do?
00:12:28 · Harry Stebbings, David Morehead
[00:12:28] S1: When you think about then the 45% say that we have as the ideal, drilling one layer blower, how do you think about how to split that up between venture, PE and every other private that we can do? [00:12:40] S0: We've had a different perspective on this over the last five or six years that really came out of what I was talking about before, when we knew that the school was going to have issues as it related to enrollment, right? And it's not just a Baylor thing, but like every school. Demographics can kind of be a slow moving train wreck, but the benefit of the slow movement is that we can sit back and look five years out and know what's going to happen. And so we started this five or six years ago, like shortly after the pandemic. And we basically said the single reason that privates exist is to make money, period, end of story. And so anything in the private book that isn't going to lend itself to excess returns. Again, we need to create money to create more distributions for the school that's gonna have enrollment concerns. And so if you're not going to keep up with the highest returns that we can generate out of the private book, we've kind of moved on from that. And so a lot of the real asset stuff in our book is sort of like winding down, not being renewed. And so we're really focusing to get back to your question, today we're focusing on VC expansion, growth equity capital and buyout, That's kinda it, right? So if we're going to lock up money, we want the highest returns.
00:14:04 · Harry Stebbings, David Morehead
[00:14:04] S1: How do you think about trying then, if you want VC, you want growth equity, how do you think about trying to get into the big names, the Sequoias, the Benchmarks, the Founders Funds, the... You name those big brands versus trying to find the young upstart, the little boutique provider that could do a 10 x? [00:14:22] S0: I will say that, you know, we're coming along a little bit later to the party than some of the Ivy Leagues or Stanford or what have you as it relates to the sort of like VC brand names that you're talking about. And so it hasn't been for lack of trying. It's just like when you knock on the door, they kinda like don't answer, right? So we've kinda had to go, we've kinda had to like try to figure that out, differently. What I will say though is that the ladies in our office have had exceptional, absolutely exceptional returns out of like the expansion growth equity category. So we've actually had, you know, some questions of like, should we just allocate more dollars to that sector of the market? At the margin we have. But I would say we still do VC. It's still in probably newer, upstarting names. David, do you like VC? I do. I'm a little I'm a little perplexed by the length of some of these funds. I've got to be honest, it's not clear to me that the GP incentives are aligned with the math that runs endowments. [00:15:35] S1: What does that mean?
00:15:35 · David Morehead
[00:15:35] S0: Let's just do it for example, right? You know, it's historically they were like ten, twelve year funds. Now they're like fifteen, eighteen year funds, right? So much to the chagrin of like all LPs. But the issue that you run into is that, okay, so you get your money back in fifteen or eighteen years and let's just say it was like phenomenal experience in Europe, like fifteen X. You're like, that's fantastic. But the issue is that it happened over fifteen to eighteen years. And what, you know, simple math would suggest is that like if you were in a like growth equity fund that was six years and weighted average life and you were up three X and then you redeployed into another growth equity fund that was up three x in six years and then you did it again. And over the course of eighteen years, you'd be up 27 x, which is better than 15 x by like a factor of two. So I understand why people want to hang on to their winners. But the compounding of capital, and I'm trying to create the largest pile of money for students, students can't pay their tuition with returns. They have to pay with dollars. So I'm expressly interested in creating the largest pile of money. And the largest pile of money is governed by like simple compounding math. And so what we're really after is the velocity of capital, not just returns on cap. Whenever the velocity of capital is going to start to asymptotically approach like wherever it's going to be, then we want to be out and move on to the next thing. In other words, like it's really, really hard to do like three x in six years, right? It's easier. You have winners now. The company's going okay. It's actually looks better on your marketing if you're up six x instead of three x. So like if people held on to it for another five years and got like a double, then they'd be up six x instead of three x that suggests that the next fund will be raised, etcetera, etcetera. But I actually don't care about any of that. Like, that's a business decision. That's related to the business. And I'm not optimizing for the best business for the GP. I'm trying to optimize for the biggest pile of money for our students. And so I get that there's a little bit of a disconnect there, but the math issue does kinda drive me nuts.
00:17:53 · Harry Stebbings, David Morehead
[00:17:53] S1: Can I ask you a blunt question then? Yeah. And I love this interview because it's completely not in my interest as a venture investor and as someone who interviews No. Venture No. This is why I love it. This I have the best job in the world. But given the requirements on velocity of cash and the value of compounding, which I very clearly see, do you not have a question internally of, well, why do VC at all? If we can do growth equity or mid market and get the three x in six years. I get you, David. I'm not doing that for you and and neither is the best firms. [00:18:24] S0: Yeah. And that is a question that gets batted around a lot in our office. And so, you know, there is something to be said about sort of laddering returns. Right? So it's okay to go allocate money to some manager and say, like those returns are going to show up like six, seven, ten years from now. These other returns are going to show up three to five years from now. And then like kind of on my side, the returns are going to show up one to three years from now. So we do think about it that way. But I would say that there's a rule in our office that you're not allowed to talk about returns without also talking about time. Because it's it's very common on the private side to just say everything like, well, you're up two x, three x, five x, whatever. But that tells you nothing. If you're up five x over thirty years, that's horrible. And if you're up five x in five months, that's amazing. I guess that's SpaceX.
00:18:24 · David Morehead, Harry Stebbings
[00:18:24] S0: Yeah. And that is a question that gets batted around a lot in our office. And so, you know, there is something to be said about sort of laddering returns. Right? So it's okay to go allocate money to some manager and say, like those returns are going to show up like six, seven, ten years from now. These other returns are going to show up three to five years from now. And then like kind of on my side, the returns are going to show up one to three years from now. So we do think about it that way. But I would say that there's a rule in our office that you're not allowed to talk about returns without also talking about time. Because it's it's very common on the private side to just say everything like, well, you're up two x, three x, five x, whatever. But that tells you nothing. If you're up five x over thirty years, that's horrible. And if you're up five x in five months, that's amazing. I guess that's SpaceX. [00:19:11] S1: Is Venture then just a pure diversification play for you, which is like [00:19:15] S0: It is for us. Yeah. It is. It could be the case that somebody allocates to something that really takes off and goes quite well. Like, for example, we happen to have about two and a half percent of the endowment in anthropic. We have no exposure to SpaceX. We've had no exposure to OpenAI, but about two and a half percent of the endowment is in anthropic. [00:19:38] S1: Well done. [00:19:39] S0: I mean, that's not us. Right? Like, that's managers.