How I Invest with David Weisburd
00:39:35 · David Weisburd
[00:39:35] S1: Absolutely. If twenty years ago, these companies, Amazon, Google, were going public at sub billion dollars, you could actually invested in the IPO price and done even better than the series a, series b investor if you continue to hold it. Today, obviously, it's very difficult to argue that SpaceX has another another 10,000 x as much as a holder and bull I am of SpaceX. There are there are there are limitations to once a company goes public at 1,750,000,000,000. I had Matt Wilt Tyler who runs growth at Wellington. We talked about this topic, and there's two aspects going on here. One is you mentioned 80,000,000,000,000 in public markets. Venture, I think the latest AUM number is roughly 3,500,000,000,000. So, you know, roughly, it's about, 20 x more in the public markets versus the the private markets. That's assuming all things being equal. I actually think all things are not being equal. And a bit of a contrarian take, but I actually think that the reason that SpaceX went public at 1.7 to 5,000,000,000,000, the reason that Anthropic is going public at a reported 2,000,000,000,000, the reason OpenAI will have to go public is because they've run out of private capital. Q one twenty twenty six this year, 75% of all of venture capital went to just five companies. Said another way, if they raise another round each, if they doubled the amount of money, it would be a 150% of all venture capital. Forget about even a 100%. And if you look at ground truth in venture capital in general, we call it this access class. What does that mean? That means the founders choose the VCs that they want to invest, the best founders, and the best VCs choose the best LPs. So if you take that to ground truth and then you look at the founder level, I've never met a founder, especially a great founder that says, I wanna go public tomorrow. I want the scrutiny of quarterly financials and all this stuff. Sure. There's some people that wanna ring the bell and and have a milestone. But I'd say 90 plus percentage of the top founders, they wanna be able to build their company privately. And the problem with that is just there's not enough venture capital. So I actually think if that 3,500,000,000,000 was now 7,000,000,000,000, a lot of that money would, for better or for worse, be absorbed by the same five companies doing just one or two more rounds.
00:41:52 · Brijesh Jeevarathnam
[00:41:52] S0: That's an interesting point. And I think the premise of these companies go public because they have run out of private financing options, I think it's always been true. It's just that the private markets have expanded their investment aperture along the way to accommodate much bigger investment dollars and much longer timeframes. We can talk about whether it's good or bad and the cost of capital and so on for the later stage investors. But I do think that across the spectrum from very early stage to, let's call it pre IPO round, the opportunity to make maybe not 100x, but attractive returns or attractive risk adjusted returns has really expanded over time. That is cyclical, of course. The closer you get to the exit part of this, it gets more cyclical. But the venture market today is no doubt massive, as I told you, 500,000,000,000 plus and three quarters compared to even a few years ago and certainly compared to fifteen, twenty years ago. And the question is, where does one draw the line in terms of where can I earn an attractive risk adjusted return in the private markets? And where does it get maybe a little bit upside down?
00:43:20 · David Weisburd
[00:43:20] S1: I want to also double click on something that you said that investors can't afford not to have venture in their portfolio. I'm summarizing. And there's two aspects to that. One is you could argue from the return standpoint over the last fifty years, venture capital has been the best returning asset class in the world outside of sports teams. I've been corrected on that. But if you if you can't afford, the Pittsburgh Steelers or the New York Giants, venture capital is the best asset class to own. On top of that, just 87% of $100,000,000 plus revenue companies are private. So there's actually another aspect to that, which is diversification. You can't just access technology in the public markets. You're just gonna have, like, a small portion of the portfolio. So in order to have a diversified portfolio, in order to to kind of have the the optimal risk and reward, there's an argument that you should be in venture just for the sake of diversification, let alone returns. Earlier on, you were talking about these three things that you look for in teams. I realized I cut you off. You said chips on shoulder and you also said team and team cohesion. What else is important when you look to invest in a venture capital manager?
00:44:27 · Brijesh Jeevarathnam
[00:44:27] S0: Three things, the team, which we talked about in terms of not just having the table stakes of being super smart, connected, etcetera, but also having team cohesion, complementary skills and a chip on the shoulder. Talked about... That's one. We talked about the track record, which is backward looking by definition. The third bucket we haven't talked about is investment strategy. By that, I mean, what is the investment thesis in this market? What's their worldview? What is their stage that they're pursuing to invest in? What's the portfolio construction? Do they have the right network connectivity and the now overused, I guess, phrase right to win in that particular part of the market, whether it's early stage seed investing or growth, writing bigger checks, etcetera. As you can imagine, as I talk about these three buckets, it's art and science, right? You can't just put this in an AI model and say, Hey, should I invest in this fund or not? There is a very heavy people element to this assessment. And we were talking before about the feedback loops. The LP job, the feedback loops are very long and we have to work extra hard to make sure we capture the feedback and then make changes to course correct. So we, for example, at Adams Street, we have three to four times a year, I'll call it kind of offsites or mini offsites, two main ones, one in January, one in June, with the entire team, the senior team, to talk about a number of things, including what we call our anti portfolio. What we miss three years ago, five years ago, and what was our underwriting then And how has it changed? This business is very humbling. David, when you invest, you make both kinds of errors, the mission and commission. And we don't need to be in every great fund, but every fund that we invest in, we want it to be great. And we make both those errors. So, anti portfolios things we missed. And then we make the other kind of error as well, which is, I think kind of four or five years in, we got this one wrong. It's in our portfolio. What did we miss? Or what has changed since then? And that kind of forcing function of looking at it two to three times a year helps hone our thinking. Human And nature is we forget this recency bias.
00:47:05 · Brijesh Jeevarathnam, David Weisburd
But by going back three, five, seven years and looking at what we did right and wrong, we've, I think, found a way to institutionalize and build upon this very long feedback cycle into something we keep improving every year. [00:47:22] S1: It's not an easy job to be an LP because you're constantly thinking about all these different frames, all these memes that you have to remember, all these mistakes that smart people make. And then you need to, the next day, go and break these same rules that have been hammered into you for decades, especially today. So many things are changing and you have to figure out what's changing, what's the same, what's... Doesn't even fit into this changing versus non changing framework. You have to truly think from first principles.
00:47:47 · Brijesh Jeevarathnam
[00:47:47] S0: It is challenging. Let me share some stats around that as well, because our job as allocators, both in venture and buyout, has become more difficult simply because there's way more firms and therefore getting to the signal and parsing out all the noise, it's just much harder. I think I said this before, there are something like 3,000 to 4,000 venture firms in The US alone today. And that compares to something like say the 400 to 500 in say fifteen, twenty years ago. And when I first started in the business, it was kind of clear of those, let's say 500 venture firms in The US, which maybe 10 to 20 were the ones that really were exceptional. And it was less about picking, it was more about getting access when I first started. Today with 4,000 plus venture firms that are active, there are years that are cycles where more new firms are created, venture firms, than ever existed when I first started in this business. So, we're meeting these new firms and all these names and these great people, etcetera. And this is especially hard in an outlier business. As I'm sure you've seen the stats, we're fortunate to have forty plus years of data. We've been investing in venture capital funds and companies since the 1970s. And we use the data as an offensive weapon. It's obviously proprietary. And our data tells us that 7% of venture backed companies generate all the gains and the rest, 93, is just a wash. It's just noise. Of course, ex ante before the investment, no one really knows which 7% I'm going to make it. If I go up one layer from that to the managers, right? Just like there can be an outlier effect at the company level, the funds that back these companies, some can get lucky or some can really find, to use the prior phrase we talked about, diamonds in the rough, etcetera. And it's really hard to predict in a linear way attributes of A, B, C, and D make for a great venture manager. We got to think really kind of outside the box and change our playbook, etcetera. So we invest in about, let's say 20 to 30 venture managers in The US. And we're picking, as I said, from a cast of about 4,000. Previously it was clear what those top maybe 30, 40 or 2,030 would be. Now it's not so clear. And it makes our job extra hard. And I think this is where the job of an allocator has become much more challenging because we have to move fast.