So my message here to all venture capitalists, now is the time.
Please take your companies public.
I breathe investing.
These business models, these GPs are creating, are some of the best high margin businesses ever created.
My question to any new allocator or an investor is do you think you're going to have access to top decile managers?
Because at that point, top decile, you are achieving returns above the PME consistently.
But below that, even top quartile, you're not.
This is 20VC with me, Harry Stebbings.
Now, the best podcasts are shows where you've never heard the guest on any other show and you hear truly unique stories.
Well, today we dive inside the 4 billion Carnegie Mellon Endowment Fund with a first time interview with this guest, when we uncover what they look for in managers, red flags, how they view venture today in their portfolio, the rise of multi-stage funds, what specific funds they love and what they don't.
And joining us in the hot seat, Carnegie Mellon's Managing Director of Investments, Miles Diffenbach.
Now, this is a newfound friend for me and this is one of the joys of doing the show making incredible relationships with awesome people.
A very special conversation today.
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You have now arrived at your destination, Miles dude.
I am so excited for this.
Listen, we've been friends for a while.
I'm so excited that we could also make it happen in person.
What no one knows is I dragged you around London for a walk last night and it poured with rain.
You were so patient and great, but thank you for joining me, man.
Thank you for having me.
It's a pleasure to be here.
You've had some incredible guests on the podcast, and I'm honored to be one of them.
It's amazing, given the fact that I've known you for a while and then also in the research for this, learning more and more about you, because I didn't actually realize this, but at 26 you went through a cancer experience and you're a cancer survivor now.
Pretty unbearable to think about, given the fact that I'm 29, just the most incredible strength.
How did having cancer and facing your own mortality change your mindset?
And I've never asked that question to start a show before.
Well, let's dive into it.
We'll dive into the heavy and hot.
It's a surreal moment when that happens.
I think everyone at that age thinks you're invincible.
I did.
And you get that news and you're in a bit of shock, right?
And it was so abnormal to me when they told me I had lymphoma.
I said, oh, great.
What's lymphoma?
I thought it was like a cold.
I didn't even know what it was.
And they said it's cancer and it's progressed quite substantially and we need to start a chemo process here within the week.
And so, like i'd say, most all people i i sulked for about 12 hours, went home, was mad at the world, didn't want to speak to anybody.
Why me?
And and i woke up that next morning and one of my college football coaches had a had a great quote that that really stuck with me, which was you know, success in life is 10 what happens to you, and 90 how you react what happens to you.
And so you know I took that running that next day.
I said, I'm going to attack this.
I can't change the situation I'm in, but I can change, you know, how I react to it moving forward.
And so I basically said, you know, cancer can't kill me if I don't stop moving.
So I basically started, you know, a pretty insane regimen of workouts.
And when I would go in and get my chemo, that was like my R&R.
That was my recovery period.
I'd get out.
I'd start that again.
And flash forward four months, I was cancer free and have been so ever since.
Do you remember the moment you were told you were cancer free?
Yeah.
It was crazy because I got in there.
You get a scan right before and then you go into the office.
And I waited two hours in the office post scan.
Usually it's like 30 minutes.
And I'm sitting there like, I might be like biased towards negativity.
I'm like, it's got to be bad news if he's waiting two hours.
And he came in, he had his arms wide open, gave me a big hug.
It was pretty incredible.
Wow.
That must be the most special moment.
Yeah, it's special.
And, you know, looking back on it, you know, everyone's have adversity.
You know, you've had adversity in your life.
You know, a lot of people do.
Everyone does.
No life is perfect.
But there's there's beauty in the struggle.
Right.
Like that makes you who you are as a person.
Right.
And it builds you into a stronger person.
And so the trials of life are many.
And, you know, I wouldn't change anything.
Did it set a benchmark of shit that now everything else seems kind of OK?
I mean the perspective you have.
You know, moving forward after that is one of the great blessings of that right.
Life is an incredible joy and a blessing, right?
And so, there's not many things that can take me down, you know, mentally at this point.
How on earth does one go from like…
Surviving cancer, beating the odds, amazing to the endowment model.
There we go.
I mean, it's a pretty smooth transition for me.
Give me credit.
I do want to start with just laying the kind of landscape framework for how CMU operates is structured today.
If you think about a construction that's easy for everyone to understand, how does that portfolio construction look like for CMU today from a top down?
From a top-down perspective, we manage 4 billion on behalf of the university.
And so, starting at the highest level, we think of equity and fixed income as kind of the two parts of the endowment.
85% of the endowment is equity, 15% is fixed income.
That is our allocation.
And we manage to that on a quarterly basis.
One step below that then is the sub-asset classes within that.
And so our target is 50% of the portfolio is in privates.
That's a mixture of venture capital, private equity, real estate, natural resources. private credit.
The other 50% is hedge funds and liquids, which the liquids are public equities and fixed income.
And so that is the top down management of the portfolio within that private bucket.
We have free rein into the underlying allocations within that.
So we call it a best athlete portfolio.
So how do we find the best risk adjusted returns globally across all of those different private asset classes so we can have the best risk adjusted return for the portfolio?
When you look at it today, how has that makeup changed over time in terms of where the private commitments lie?
Yeah.
So we, from a liquidity perspective, we've been fortunate compared to most endowments where that private equity book has been self-funding the past three years.
So our distributions have paid for our capital calls. over the past three years.
Now, the sub-asset classes within that have had much different performance.
So our buyout portfolio, our private equity portfolio, has contributed the most to those distributions.
Venture has been the largest detractor of those, but it's been self-funding, right?
So our private equity book, at kind of that 50 number, has stayed relatively consistent for the past six or seven years.
Venture, as the distributions had slowed down over the past three years dramatically, has risen as an average, but there's been markdowns over the way as well.
So, when you think about commitment to venture as a whole, what is the percentage commitment to venture as a whole of the endowment?
So for us, venture globally is a little less than 25%, the total endowment.
So almost half of that private equity book.
How does that compare to others like you?
I'd say we're overweight venture, but I call it anywhere from five to 10 points versus most other endowments of our size.
We're underweight hedge funds and real assets, which would be real estate and natural resources.
Privates as a whole were right on par with most endowments, plus or minus five points.
When you think about all of those different asset classes that you can allocate to, how do you think about opportunity cost?
And I think you said it before which is unit of return per unit of risk.
We take everything from a lens of risk first, starting off.
So when you think about the different private asset classes there, you've got real estate, natural resources, private equity, venture capital, which is a mixture of growth and early stage.
Take real estate, for example.
You could have a Industrial building that does triple net lease rents being leased to Amazon.
Those rents increase 3 a year.
It's a very stable asset.
There's a replacement cost to that asset.
Not nearly as risky, and so the returns will compensate for that it is not as risky of an asset.
Venture picture early stage venture.
It's a 100 million fund investing into two or three people in an idea.
Could be a completely new idea.
It could be an idea going against big incumbents.
The company's not going to be profitable when they start out.
Probably the riskiest asset class you could have.
So you want to get compensated.
You need to get compensated for that risk you're taking within that asset class.
Do you think LPs are getting paid for the risks that they are taking investing in venture?
Absolutely not.
Why not?
I mean, we take a very hard look at the data that comes out of the asset class.
There's really good data from call it 98 to today.
You look at the median IRR for the asset class over that time period for mature funds, right?
So we'll look at the 10 and 15 year returns for every one of those vintages of stopping at 2016, as that's going to be the closest to a mature vintage you're going to get.
The median IRR is about 8% net for that asset class.
And the top quartile is a bit higher, 15%, but the MOIC is about two and a half X, right?
And The big difference is when you look at those performance numbers.
Then, on a DPI number, we'll stretch that from 10 to 15-year.
Top quartile DPI from 1998 15-year vintage funds per vintage year up until 2015 is 18x top quartile.
And so, when we think about those underlying asset classes and our public equity portfolio, we have a public market equivalent for every private asset class we invest in.
For real estate, it could be VNQ, which is Vanguard's REIT index.
For our portfolio, it could be a smaller mid-cap value index.
And for venture it's the QQQs, the NASDAQ 100, and That's been the best performing PME globally over the past 25 years.
When we think about though, like absolutely not.
You're not getting paid for the risks that you're taking.
And then a statement that you said to me before, which is 90 of LPs shouldn't be investing in venture.
Who should and who shouldn't then?
That's the million dollar question.
I think you need to have a frank conversation with her.
Say you're a new endowment or a new family office and you say, we want technology exposure.
You've got two options.
You could do that through the public markets.
You could do that through the private markets.
My question to any new allocator or an investor is do you think you're going to have access to top decile managers?
At that point, top decile, you are achieving returns above the PME consistently.
But below that, even top quartile, you're not.
That is the question.
And I think most people clearly by the data, especially as a new entrant to a mature asset class, are not going to have top decile access.
That instantly suggests though, that you're working on historical lagging data, which is obviously their prior returns, not a first-time fund or smaller micro funds who are in their first vintages.
And that is where we see a lot of family offices and even smaller endowment funds playing today.
How do you think about that?
A strategy that a lot of people are taking first-time funds and smaller funds as the incredible performance of the now multi-stage venture firms they've scaled as that performance has allowed them to.
We spend time in that space as well, but it is a time, a place that is quite risky.
New funds, small funds, and it's a hyper competitive part of the market.
There's thousands and thousands of managers, you know, specific seed funds, angel funds, operators.
You know what I find funny?
I want this also to be an open and free discussion, but I find it really funny how all LPs love 50 to 100 million seed funds.
And when you actually run the maths now on average seed round sizes, that's the worst place to be.
The average seed round is $4 to $5 million.
To write a check with ownership, you need three, three and a half.
If you want enough diversification, you need 30.
And so you need $33 million checks.
Well, that's 90.
Well, you're not going to have that with a $50 to $100 million fund.
It's impossible.
So then you either have subscale ownership or subscale diversification, or you do what everyone does, which is like they end up writing tweener checks like one and a half million dollar checks.
It is fucking hard to get a one and a half million dollar check in a three to four million dollar seed round when the best in the world want it.
Put a 50K in for one and a half?
Mm-mm.
My response to that would be consensus seed deals either consensus founder or consensus idea extremely hard to plan because the multistage firms have all planted a flag at seed and have essentially said all these seed funds are our shrapnel.
We're going to blow your model up, a much cheaper cost of capital than you.
And we can deploy five, $10 million checks at seed when the model traditionally was two to three.
But if you're doing non-consensus founders, non-consensus ideas, you know those rounds are usually non-competitive and that shows up in price and ownership.
And so I'd say that's the question.
Do you actually see that in your portfolios?
Because I don't actually know what is non-consensus anymore.
Like the rounds that were in the old days, they're kind of not now.
I find non-AI deals, but non-AI deals are still priced incredibly rich.
Actually, when you push now, it's such a mature asset class.
I don't think you have that luxury on price, the true moat of early stage venture capital, the picking skill.
And you look at some of the most incredible companies that have ever come out of the venture asset class Airbnb Uber SpaceX Amazon, all struggled mightily to raise their seed round.
So to your question is there so much capital available at seed today that that's never going to be the case?
I hope and pray not as an allocator to the space.
And so I still believe there is a moat around picking, but we'll see.
So unfair of me.
Do you think venture is an access game or a picking game?
You're in some of the best brand names.
Is it access or is it picking?
I think it's both.
You have to weigh it out of a hundred.
Weigh it out of 100.
I would say, if you are a multi-stage firm that is deploying large checks at scale 70 access, 30 picking.
If you are a small and nimble early stage fund that is trying to break into the mold, I'm going to say it's 80, 70 picking.
I'll flip it.
Yeah, 30 access.
So we mentioned that.
You know multi-stage funds going to seed.
We mentioned the seed firms, which 50 to 100.
Well, i don't like them.
What do you like when you see a fund come through the door?
Where are you like?
That's straight down the fairway for me, size wise, geo wise, hit me.
I think for us, the sweet spot is dependent one on the GP skill set and what they've done prior.
But for us and our commitment size, which at the low end call it 10 million bucks anything from at the low end we'll do an 80 million fund.
At the high end, anywhere from 400 to a billion.
And that range dependent on the skill set and the track record of the team.
But it's very much dependent on the people, what they've done, what they've proven, what they want to do with this fund and the pattern matching and diligence we can do against that.
We said about access and picking.
We spoke before this about the pillars of venture.
I'd love it if you could just unpack the pillars of venture and how you think about them and where you place more and less emphasis.
Yeah.
So the five would be sourcing, picking, winning, helping, and selling.
Selling is going to be the new of those five, I think, for the asset class as a muscle, as a whole.
Do you think your managers have been good at selling over the past decade?
Some, yes.
Some, no.
Union Square, broadly.
And we're not an investor there.
We wish we were, but...
I think they've perennially been the best at selling and they've got a very strict protocol that they run through from years 8 to 12 on those funds and with those founders to let them know that they are going to be active sellers.
Do you think managers should distribute shares, stock?
Do you think Sequoia are right that the evergreen fund structure they are best placed?
They have asymmetric information.
How do you think about that?
We like them to distribute cash versus stock.
Reason being if they distribute stock to us, there is sometimes a time lag between when we sell that and when others sell that.
And so there could be a 1 to 2 pricing discrepancy on that versus them distributing cash day one is quite easy.
They sell that entire book immediately and they distribute that to all their LPs equally.
Do you think the last generation did a good enough job selling in the 21, 22 vintage?
Clearly not.
I mean, I think that's a pretty easy one.
The one thing I'll say the reason it got so crazy was the public markets were pricing growth assets for an 18-month period.
The median error or multiple for a software company was 20 times.
And if you were a top quartile grower, it was 40 times.
And so everyone looked at their models and thought their company was going to be worth two, three X what it was in three years.
You had public market comps to support your reasoning of holding stock, but that all changed very quickly.
Do you believe managers books?
We all come back with these prices in terms of the marks on our books, which is where we mark our portfolios.
Latest valuations.
Do you think managers are accurate enough in how they price their books?
Certain ones, yes.
Certain ones, no.
Who's the best?
Usually the multi-stage firms, think you're perennial like Excels or Sequoia, they're taking very aggressive discounts on basically all of their securities.
Even if it's a great company that is maybe achieving even a higher price on the secondary market, they're still going to hold that at a 20 to 30 discount.
But 2021 caused us to create new muscles in regards to underwriting as a group as well.
And so for any re-up or any new manager Weed Diligence, we'll look at the top 10 company NAVs within that general partnership.
We'll underwrite those companies ourselves.
And we will, on a rough approximation, determine are these assets extremely overvalued?
Are they undervalued?
Are they fairly valued?
I think my biggest worry is that you've got a generation of like marked books where they're like oh, it may not be the 5x fund, it might be the 25x fund.
I'm worried that it's not even going to be that.
Do you think there's a realization amongst LPs of, bluntly, the dire nature of some of the books?
Look at the data.
A top quartile TVPI is 2.5x.
Top quartile DPI is 1.8x.
One thing that really pisses me off because I do do some LP checks when I meet managers is like listen, I don't know if we're going to do like an 8x, but we'll definitely do a 6x.
And I'm like, do you know how hard it is to do that?
Brutal.
Any things that managers say in early meetings with you where you're like, oh no, just don't say that.
When i've had a few manager meetings where folks come right out and proactively say how easy what they're doing is and how great, much great access they have in in the great performance that they will have and that with the market they play, is just it's.
It's just like shooting fish in a barrel and that is always to me like we're gonna, we're gonna stop this call early.
Just the, the kind of hubris.
I mean, this is one of the most competitive asset classes in the world and and we look at returns of everybody, right.
So we, we see how hard it is, like you said, to achieve, you know, a 6x net fund, so that's, that's definitely a big one.
Starting at the start of the i'm jumping around so much, but i love this, fuck it.
We said about the five pillars.
Starting at the start of that process.
We've got the access element or the sourcing element.
How many managers do you actually think have like proprietary sourcing, where you're actually like oh, i see, they see shit that no one else does the premier funds on Sand Hill Road and in London, such as yourself?
Well played.
Thank you.
I think there is no systematic sourcing strategy.
It's the partners and the brands are so strong and they're so networked in the S tier founder community.
They're just going to be a first call for a lot of these firms.
I think you can build automated CRMs to maybe track some of those companies that are going to be off the radar of your traditional Silicon Valley firm.
But I think those more traditional firms, the brand and strength of the partners.
I don't think there's much systematic sourcing strategy there.
The thing I think, when you are such a tiered brand name, is you just become a de facto meeting in the fundraise process.
Whereas before I sign the term sheet, I'm going to go to index Excel Sequoia.
You name your firm, but you just want to be one of the flag posts.
I'll always remember Pat Grady saying to me a brilliant thing, which is he's like people think that we're so successful and he's so humble, which is why I love him so much.
He's like, people think we're so successful.
Harry, Pretty much every software company that goes public.
We've missed that.
We're not in because we do see a lot.
That's on us.
And I thought that was A incredibly humble but B the flagship.
They see everything at some point in the journey.
100%.
Yeah.
I mean, those partnerships have stood the test of time, clearly.
When you think about like proprietary access where you actually buy it, who stands out most to you?
On the sourcing side?
Yeah.
Yeah.
Well, I mean, like, you know... So I'd say, like, the Potovys.
Ali Potovy.
The dude is in, like... Yeah, that fund is incredible.
What the... Cursor... What the fuck?
You know, a few others, yeah.
Amazing, Tim.
I'm so pleased for him.
But, like, that stands out to me.
Any for you?
It's become such a... crowded market.
There's so many alternatives.
You've got South Park Commons.
You've got Ali Partovi and their network.
You've got YC.
You've got Techstars.
You've got a thousand seed funds.
Outside of maybe a few.
Like Ali, I think sourcing broadly and I'm willing to be wrong here, but I think there's a lot of luck in sourcing.
You're just hustling.
You're going out.
You're getting emails from friends.
You're getting emails from partners.
You're taking as many meetings as you can.
You're on a call with a Harry and he's like, wow, Harry is fucking unbelievable.
I'm going to dive into this.
You know, it's the magic of venture, right?
That's how I think I see most of it.
I agree with you, which is why, in some respects, I do think it is a young person's game, because it's about pounding the pavements, being there showing up at 7 am.
That takes youth in a lot of ways.
Picking is the next element.
Difficult to unpack in a lot of ways.
Who do you think is the best picker that you know?
I love the way Mike Maples discusses picking and the way he thinks about these companies that are going against the grain of the universe and are inherently not going to be super attractive or super hot because it is against the grain and it is dysfunctional against the way that our human minds work today.
I'll never forget, when I first heard of Uber, I thought it was the stupidest idea I've ever heard.
I mean, that's how you know I'd be a bad venture capitalist.
I mean, I was in, you know late in college.
I'm going to get in some random person's car and they're going to drive me somewhere.
Same with Airbnb.
I'm going to go to some random person's house.
I'm just going to sleep in their bedroom.
I mean, this is the craziest idea ever, right?
Those are the people and investors.
You know Cyan Bannister, another one like who in a lot of those companies Uber, right that we mentioned like their ability to see into the future is something that not a lot of people can do.
And it's a superpower.
How do you unpack whether someone's a good picker?
Is it just looking at track?
I think it's looking at track understanding the true thought behind.
What were they thinking when they made that investment and when they met that founder?
And then, you know, we speak to founders.
And so we want to hear from their side of the story as well.
What was that pitch like with the broader community?
They'll usually tell you, you know, no one would even pick up the phone for us, right?
No one would respond to our emails.
And you know, Cyan or Harry, you know, sat down and they had a blink in their eye and they saw the idea.
They believed in us before everyone else did.
We really want to understand the depth and granularity of those stories.
Do you often get bad references?
Yeah.
Yes.
Do you?
Yes.
Wow.
The way we think about referencing.
When we do a new fund, we're looking for at least 20 references.
Calls right.
20 reference calls.
And we'll take five from the GP, which those are the worst references we'll get, right?
Yeah, Mars was great.
Mars was great.
Yeah.
And by worst, I mean, they're going to be patting Harry on the back, right?
He's also the godfather of my children.
He's my best friend from school.
So you know those ones.
We don't spend too much time on the golden references or the offshoot references.
And thankfully Venture is such a networked community that you spend enough time in the asset class.
You're able to build those networks pretty quickly.
And so, we are proactively trying to shoot deals.
Do you give a shit about other people's perspectives on other GPs?
Like venture to venture, does that make much?
Perspective on strategy, not so much.
We are very much trying to find interpersonal risk and partnership risk.
Those are two things that we are really digging.
We want to know, are they a good person?
You know, have they created a bad persona amongst other people?
Have they wronged others in a pretty malicious way?
And then understanding the partnership dynamic, things that they will never tell us on a phone call.
We could ask them blunt to their face, is there any risks in the partnership?
Does Harry like Sally?
How is the mesh?
Oh, it's incredible.
This is the best partnership ever.
We love each other.
We sit down every day.
We've never disagreed on a deal.
We spend a lot of time trying to understand that partnership risk.
What is the number one reason you think partnerships break down?
Incentives.
Incentives and who's working the hardest.
Those are going to be the two every time.
Do you think we have a generation of venture firms where the partnerships are staying together for the kids?
I mean, I personally think you've seen partnerships.
What's the word I'm looking for?
The amount of change you've seen at partnerships over the past two years is the most I've seen combined in my eight-year history as an LP.
How do you justify that?
How do you reason that?
I think there's a lot of reasons.
I think one folks who had made a lot of money didn't want to deal with the crap that you're dealing with today, right?
These three years of no liquidity, dealing with broken cap tables, dealing with founder transitions.
It's just a lot of hard work, gritty work that... if you made a lot of money and why do it?
I think too, if you were a newer GP, you were promised a certain amount of compensation for your role.
And part of that was variable carried interest.
That carry has evaporated, right?
And as performance has come down and now you're getting paid 70 less than what you thought you were.
And so why not start fresh?
Why not start with a new book or why not start my own firm?
Why not start your own firm?
We're seeing a lot of spin-outs too.
Do you love spin-outs?
I think they're drastically overrated.
Yeah, we historically have not done many, if any, spin-outs.
Call it from your tier one, maybe clean spin-outs, right?
Kevin Hart's at A-Stars is a new partner of ours.
He was at Founders Funds for a few years.
He wasn't there that long.
He was still- And he was kind of tinkering on the side.
We both love Kevin.
He was always a founder.
Yeah, exactly.
And so, yeah, I mean, we traditionally have not done many spin-outs.
When you think about getting a good read on that, time helps.
How do you think about your willingness to write checks fast versus the need to build a relationship over time with the knowledge that they might scale if you wait?
Three funds.
It's a risk we take openly.
I'd say half of our new funds that we commit to we will not invest right when we meet them over a six-year period and invest in their fund that year.
And the other half will take either one fund or two funds into the future.
So three to six years, we'll build that relationship over time.
And so the way we think about it is if you're an early stage venture fund, it's going to take at least 15 years for that fund to be wrapped up, probably 18 to be fully done.
All positions liquidated.
And when we back a new manager, we want to back them for at least three funds.
So call it 25 years of an e-liquid relationship.
It's longer, like twice the length of like an average marriage in the US.
I don't know what marriages are like here in Europe, but.
I think we're less.
Yeah, probably less.
Yeah.
So one thing we're more proactive than Americans.
Yeah.
So like we really need to be sure who we're partnering with.
You know what's fascinating about that, given the duration you mentioned there, is also LP churn.
LP churn is freaking real right now.
Yeah.
Oh my God.
How should GPs think about LP churn?
One, it's good to have a relatively diversified LP base, which protects you from that, right?
So a mixture, and not everyone can choose their LP base, right?
Sometimes it's Money's green, right?
But in a best case scenario, you've got a mix of endowments, foundations, family offices, founders, maybe a couple of GP checks in there from some venture funds, a mixture of folks who are aligned to your long-term vision.
And inherently, stuff's going to happen.
Folks are going to have a liquidity crunch, a family office.
The family's going to say fuck Fender, we don't want to play in this asset class anymore.
You're going to have some things come up.
Being open to that and trying to still be as good of a partner as you can is pretty important.
How much is the right amount in terms of concentration from your biggest investor?
Anything more than 30%.
30%.
Wow.
I'll never forget Mickey Malker.
I think it was telling me 10%.
Yeah.
I mean, best case scenario, you don't have anyone more than 10%.
But if you're raising a 50 million fund or 100 million fund and you can secure a 10 20, 30 million check in their long-term line, that still makes sense.
But best case scenario, yeah.
Yeah, I was lucky we did 10% on the back of Mickey.
Yeah.
Fantastic advisor.
Okay, so totally get that.
And so we have the 10% there.
In terms of stability.
I was always taught that endowment funds are like the blue chip for stability.
Is there a rubric?
How do you think about advising managers on stability amongst different asset class of LPs?
Yeah.
I mean, I think you're right historically, endowments being quite long-term oriented.
The endowment model in the US today has headwinds, in particular certain endowments where they're going to start getting taxed.
They call it the 8% range.
That's five endowments.
That's a headwind to their model, to a sense.
It's not as bad as the 20% that it was going to look like a month ago.
Would you expect them to cut positions, downsize?
It's all going to depend what they do with their draw, right?
What does that mean?
So an endowment is mandated every year.
5 of the endowment goes to campus to support scholarships professors salaries buildings, and that can range anywhere from call it 4 to 6, but most endowments have stayed right at that 5 number forever.
But if it turns out we're going to start getting taxed 8, we could lever our drawdown to 45 versus 5, because the real risk you run as an endowment is eating into the purchasing power in the endowment.
The way an endowment works.
You've got a 5 draw every year, and then inflation is called 3 for higher education here in the US.
Just to maintain the corpus, the purchasing power of that endowment, you need the 8% return.
Most endowments are targeting a 8% to 10% return over the long term, 10 or 15 years.
When you start getting closer to that number, you run into some real risks.
It'll depend on what they do with their draw.
If they don't reduce the draw, I think venture broadly will be okay.
It'll still be the idiosyncratic headwinds of there's just no capital coming back from venture.
That's the headwind to the asset class for LPs re-upping today.
What do you advise managers in terms of closes?
First closes, many closes, one close.
I mean, I think GPs should be spending the least amount of time fundraising as possible.
That's not your job and you make your money investing, but some people are not as fortunate to just do the one and done closes right.
And so I think it's very much dependent on your situation.
Best case scenario, you have a very crisp timeline.
We're going to do our first close here.
Lining up your LPs and being sure they're committed to that process and doing work on the subdocs and the legal work prior to that really important.
And just setting clear timelines.
Do you mind if a manager's ever sold part of the management company?
Yes, absolutely.
Massive red flag for us.
And I would say most institutional LPs.
I'm not going to speak for everybody.
No, it is.
But it's just one of those ones where I see so many first time GPs bullied into it by one large investor, often a family office, and then really regret it over time.
It's the one thing where I'm like, no, no, no, never.
The magic of a partnership is the care and interest.
And you are now giving that care and interest away to a silent partner who is not going to be like we said, grinding and taking 100 calls a week and working 996, like you.
Yeah, baby.
And so how do you feel when you deliver incredible returns and a silent partner is getting you know a decent chunk of that care and interest?
It's a problem.
How do you think about the rise of multistage platforms, dude?
You mentioned now that 8 to 10 that these kind of endowment funds and the endowment model kind of relies on to keep that kind of corpus the same.
Everyone says, oh well, it's going to be fine because basically yes, they will have worse returns being multistage funds.
8 to 12, say.
But the LPs they have are different now, and that's good enough for them.
How do you think about that?
It worries us.
The funds are extremely large today and I think it's hard to assume the same returns you had from 2010 to 2017.
I think you know Masa and SoftBank.
I would put as the flag in the ground Vision Fund 1 when all the other venture firms saw that as the opportunity to just absolutely scale their capital base.
It's wrong to assume the returns you had from those years where most all venture funds were basically raising a 400 million Series A fund all the premier funds.
And maybe they had a $400 million growth fund attached to it.
But the fund sizes stayed basically the same for a decade.
And so it worries us tremendously.
Do you think they will post as good returns then?
No.
No.
I'll walk you through a very simple math that other LPs can put in their back pocket.
But for how we underwrite these big funds now today, it's simple math, but I'll walk you through it.
And this is a live manager.
I won't share their name, but this is a manager we underwrote a year ago.
So we'll look at their fundraise.
So this manager was targeting a $7 billion fundraise.
And so what we do is we do a dollar weighted entry ownership across their different funds.
So this had a billion dollar early stage fund, a two to 3 billion growth fund and the rest was an opportunity fund.
And as an LP, most LPs have to invest para-pasu across those funds.
So like equally as a percent of the fund across those funds.
Inherently, your smallest check is going to be to that early stage fund.
Your largest checks are going to be to the growth and opportunity funds.
What we do is we look at the early stage fund.
This fund, call it, had 15% entry ownership for that fund.
The growth fund had about 6% to 7%, and the opportunity fund had about 2.5%, 3% ownership.
We dollar weight that on the funds, and then we look at our check.
What is the average entry ownership our check is getting within those funds?
And so this fund was about 5% across those vehicles dollar weighted.
And so the very simple math there is 7 billion divided by 5%, which is 140 billion, right?
So that's the enterprise value.
That is the market cap of companies, that the size of those companies.
They are just deploying that fund into 140 billion.
And so for us, when we do a venture fund, our target is a 4X net.
That's our goal.
And so if we want a 4X net, these funds the early stage funds charge two and a half, and 30 growth funds charge two and 20.
So you're going to need a 6X gross at least to get a 4X net on that fund.
140 billion times six, you're close to 800 billion of market cap needed to return a 4X net for those multi-stage funds.
Now for reference 2021, the best exit year of all time.
There was 850 billion ish of market cap exit value from that year.
Okay, you need an entire year of IPOs in M&A just for this one manager.
Clearly, it's going to be broken off of numerous years, but that's a staggering number.
My counter to you there would be you're assessing performance today on the current outcome size, not projecting forward to what it could be in 10 years' time.
In other words, now we have 9, 10, $1 trillion companies.
We didn't have any 10 years ago.
The outcome sizes are so much bigger than they've ever been.
If we project forward a decade, there's a very real chance that Microsoft is worth $10 trillion.
And actually, we have $50 trillion companies.
If that's the case, we could see that play out. could.
We acknowledge that we could be wrong and SpaceX and OpenAI and Anthropic go public at Trillion Dollar Vations.
What we look at and, like I said, this is backwards looking data, but we'll give you a few data points.
There's been 11 $50 billion IPOs venture-backed, 11.
The two largest venture-backed IPOs ever were Facebook in 2012 and Alibaba in 2014.
So we've got a decade, one of the greatest venture bubbles of all time 2021 and we still haven't had a bigger exit than we were getting in 2012 and 2014.
So my guess is that a 100 billion IPO over the next 10 years is still going to be a generational outcome.
And so the question I throw back is do you think there's going to be 10 20, 100 billion plus IPOs?
I do not think so.
You look at the trillion- I think there'll be 10, 20, way more actually, $100 billion plus outcomes.
Because I think what I'm finding so worrying right now is bluntly, there are so many exciting companies that I would love to be a part of, whether it's your Anthropix, whether it's your OpenAI, whether it's your SpaceX.
I can't get access to them, given the extension of private markets.
These are all companies that would be in the $100 billion IPO price range.
Oh, Stripe, SpaceX, OpenAI.
Those are all $100 billion companies today, for sure.
But where does the rubber meet the road there?
At some point, the liquidity can has to be passed to someone who goes, fuck it, I need it.
Yeah.
And even still, 2021 is a good learning opportunity.
Most, if not all, call it, except maybe Palantir and a few others.
These very large 2021 IPOs are down significantly still today from that price.
These were the greatest venture assets of that vintage.
And so to say that it's a guarantee that OpenAI is going to be worth a trillion in five years?
There is a lot of risk involved in that.
And so what we posit back to our team is what is the margin of safety that great investors, Warren Buffett and Benjamin Graham, kind of coined in these terms?
What's the margin of safety we want, investing in a fund for what we have to believe in to achieve our desired return?
I would rather not have to believe in 800 billion of market cap IPOs and MA transactions to get a 4X net versus other funds where maybe we have to believe in maybe it's a billion dollar fund but kind of that entry ownership is 10.
And we have to believe in 10, 20, 30 billion, right?
And anything above that is where you get the real alpha.
And so it's hard for us to imagine on these very large multistage funds having that kind of alpha.
Who is the single best performer to you at scale?
Index.
I think they have to be.
I mean the performance they've put up in the last 12 months is in a market that is as bad as you hear in the news and from all the folks on the podcast.
The performance that they've delivered and are delivering here in the future is unbelievable.
I mean largest shareholder in Figma, largest shareholder in Dream Games, largest shareholder in Wiz, second largest shareholder in Scaleai Revolut.
It's...
Unbelievable.
And I give index all the credit in the world for not scaling.
They even reduced their latest fund size.
They reduced it after the 2021 era.
The credit I give them for not, they could raise as much capital as they want to.
And they don't.
They are the most performance driven culture that we see.
And so I give them a ton of respect for that.
Danny has been unbelievably good to me since I was very, very young 18, 19 years old, which I think is testament to him helping the next generation amazingly.
My question to you on the back of that is do you think they're in for a hard time and not singling them out?
But the funds that are in that billion to two billion range, where they're sizable but they're not that sizable.
When you're GC Lightspeed SoftBank, your cost of capital is just like to throw out a 10 million check.
And it's like, thanks for the coffee.
When you're in the index range, you're not one or the other.
You're in the middle ground.
How do you assess and think about that?
I absolutely think they will continue to survive and thrive at that range.
I think The performance-driven culture and what that brand stands for, being the backer of some of the most generational companies of all time.
And you had Vlad on the show recently.
You should ask him, why did he go back to Index for his new math company, right?
He could have gone to probably a cheaper source of capital and gotten-
You probably could have gone to a cheaper source of capital and raised from Masa at SoftBank or General Canalist or you name it.
Right.
Just to be clear, you don't actually inherently believe in that fund size range.
You actually just think index is so good.
And what do you mean?
You don't love the one to two billion dollar fund sizes.
You just think the index are so good that they'd make anything work.
Well, I mean, most people, right, most funds can't raise one or two billion, right?
So most are inherently going to be in the lower end.
And then the ones that can, they've had good enough performance.
Most of them scale.
Have they?
Most of the big funds have not got great performance.
I think so.
We've looked at all of their returns.
I mean, these people deserve to raise larger funds, right?
I mean, they've produced really strong performance.
So when do you say enough's enough?
I'm out.
It's too big.
It's not my game.
One.
We lean on the math where, even if you do own 10 of a generational 20 billion outcome, which is still going to be, you know, Figma generational company.
It's probably going to, we'll see where it prices, call it 20 to 25 billion.
If you're a GC, their last fundraiser was $7 billion.
Say you own 10% of a Figma, which is a generational company, $2 billion.
They're going to take 20% of that.
I mean, you've returned, what, 0.2x?
You need 15 Figmas.
It's mind-boggling to me.
I mean.
My favorite also was Wiz, which was obviously a 30 31 billion outcome in the GDP of the country.
And it returned a third of Insight's fund.
And you're like i'd be really pissed if i was the guy that led whiz.
And i'm like oh, thanks for the.
I'm sure he's happy enough that he still did it.
I listen, i'm sure he is.
But i'm just like, oh yeah, so you go back to core math, we go up to core math and really what we try to understand this is more qualitative, but at some point the alignment breaks, in our opinion, between the gp and the lp.
I don't ever blame a GP for raising bigger funds.
I love incredible business models.
I study, I live, I eat, I breathe investing.
These business models, these GPs are creating, are some of the best high margin businesses ever created.
And they're stacking funds.
So you think of a firm that has raised 7 billion in this fund.
They raised 5 billion in their prior fund, they raised 3 billion before that 15 billion of capital.
They're charging full fees on all of that, right?
So they're making, call it $300 million a year, a year in fees.
For often like five or six partners where 80% of that fee stream goes.
Yeah.
We really try to understand.
Has the magic bond been broken between GPs and LPs which leads us to we think the fee structures need to change to accommodate for that?
Why do you think the fee structures need to change?
Because when you're investing at that size and scale, so when you're a fund that big, you are inherently setting up for 100 million checks into very well-established well-run, well-oiled companies.
You are essentially acting as a long-only public equity investor.
You're not actively managing the company.
They've got their own HR team.
They're doing all their own hiring.
They've got a 20-person product team.
They've got a 10-person BD team.
This is a well-oiled machine.
These are what public companies would have been 10 years ago.
And so you're charging two and 20 on basically passive investing.
You're not actively managing most of those positions for the most of the time.
I don't think the early stage managers are actively managing and I don't think they should be.
I work with many and when they actively manage, they do not get the right decisions.
They push managers to do things they shouldn't do.
Push them to go enterprise before they should.
Push them to do more products, push them to scale faster, take more cash on, because they want markups.
I think you want passive.
Yeah.
But you, you still need the fees for that, you know, in a, in a, in a $400 million fund, right?
You need a team to go out and meet all of these people.
You need an office to bring these people in.
So like with a $400 million fund, Harry, like you're not become a billionaire off of that, right?
You're not sadly.
Yeah.
If you had 15 billion in AUM, which you know, God bless, I hope you do someday, you're going to become a billionaire.
Off that fund, off those funds, right.
And that's the difference, right?
Is you need that capital as a true early stage venture capital firm.
They're utilizing it.
But so I get you totally, but fundamentally leverage is everything.
And these firms can raise the money without changing the fees.
So they not just go, dude, thanks for the advice.
Fuck you.
Yes.
Yes, absolutely.
So we're never going to get this fee structure change.
I, I, I, you know, the, the performance.
Like, do you puke when you see three and 30?
Yes.
Yeah.
Yes.
And that's nuts.
Yeah.
It's remarkable.
Right.
But you suck it up and pay.
This is, this is, this is the one I, the Renaissance tech, right?
You know, the best hedge fund of all time.
They were so good that at one point I think they were charging like 60 or 70 carry and like 20 management fees.
And they kept increasing it.
They kept increasing carry and increasing managers to incentivize their LPs to get out of the fund because they wanted all the capital for themselves.
The performance is so good that folks would pay them whatever they wanted to be in that fund.
And so what's hard for us to understand today is I shared the performance data with you.
The performance is.
You don't look at that data on a 7 billion fund and think God, we will pay whatever we need to get into those funds.
What our hope is, and the hedge fund industry went through this cycle after the global financial crisis.
There were thousands upon thousands of hedge funds.
They were all charging two and 20.
Performance was incredible for a very long period of time.
All the funds increased competition, returns came down, the global financial crisis happened and you had a complete bottoming out of the hedge fund industry, which obviously rose to these incredible multi-strat hedge funds.
But fee structures changed dramatically from 05 to 07, then at 2010 to 2013.
What will fee structures be in venture in 10 years time?
If you're raising that early stage fund, the core 500 million Series A fund, charge us two and a half and 20.
And if you're good enough, two and a half and 30, we're okay with that.
But those growth funds that are really for scaled businesses, that are mature assets, you should be charging long only public equity fees, which are one in 10.
And if you really love your LPs, it'd be zero in 10 or budget-based, right?
Based on the team.
But 10% carry.
I mean, that's the number for a passive long-only investor.
Going back to the size, and we scale out of you, so to speak, when you're too large.
Is there ever a case for LPs where it's like you know what?
You've made us so much money before, even though we may not believe like we're in for loyalty.
You know, i think certain lps yes, us no.
I mean we are in an extreme performance driven culture.
But if a fund does you a six or a seven x net, which is amazing, and then they raise a big ass fund which most would do a post, that great number do you ever like?
We've got to come back and you should have a six seven.
That's not for us.
It depends.
It depends on it depends on how different that fund is and how different the strategy is right and it it very much is dependent on the situation.
How do you think about?
I have a lot of LPs where they're like I want to be an X brand name.
And I'm like, that's not the best risk adjusted return.
There's an opportunity cost to your cash.
I think you should be in one of these three names.
And they go, no, no, you don't get it.
I don't care about the performance.
I just want to be in Andreessen, in Sequoia, in Index.
How do you respond to the brand driven nature of LP allocations?
I get why.
I think it goes back to an incentive problem in the LP industry.
For me personally, I could be your janitor here at 20 VC offices and I'm going to be the best janitor you've ever had.
These are going to be the cleanest floors you've ever had.
This is going to be the cleanest table you've ever had.
If my name's going to be on it, and I'm going to be a part of it, I am going to put my 150%.
But maybe there are certain people that are incentivized to part capital in brand names that won't get them fired.
No one gets fired for buying IBM.
That's the classic quote.
That's a problem.
And frankly, there are for you.
Is it easier for you at CMU to get a check done into X brand name versus saying, hey, I love cyan.
I'm going to go out on a limb and get long journey in.
You know, we have an investment committee that we go to for approval.
That's our governance committee.
And we write a detailed memo for any re-up or any new name in the portfolio.
And we got to present our merits and concerns.
But we've educated our governance, which is such an important part of any LP that's wanting to get into venture, having the proper governance set up to allow you to take these very long-term bets.
We educate them on the math and the risk-adjusted return of the funds and the fee structures.
And so they're very understanding of our strategy and how we think about the world.
The LPs not realize that some managers are doing 30 40, 50 million a year in fees in terms of like back to them at the large multi-stage and lps hate it.
I think certain lps choose to just not even think about it frankly, And so certain LPs you know, such as ourselves.
I will never blame you Harry, for raising 10 million.
Like, I will give you... But you're not going to write me $1 million?
No.
Dude, come on.
No.
Come on.
No.
I thought we had such a good war.
I'll never blame you for doing that.
And I'll never blame a GP for that.
I'll never bash a GP saying, oh, how dare you, right?
It's the market.
Like, you've obviously done something well enough that's allowing you to raise that capital.
It's our choice to determine, is that the right place, risk-adjusted for our capital?
I think not enough people see this as a game of levers.
And what I mean by a game of levers is like you can have a smaller fund but deploy it more quickly and actually kind of play that lever game to actually just amass a fee game in the AUM game.
How do you think about temporal diversification?
We saw a real shift from three-year deployments to two-year deployment.
How do you think about that?
I think it's very important.
It all stems from what did that GP tell you they were going to do?
If they told us that this hey, this is a two-year fundraise cycle, we're investing it in two years and they come back to us two years later, we're okay with that.
We underwrote that, right?
And you come back in two years, then we'll have some questions for you.
And we'll want to work with you to understand why.
You know, what's the reason?
Because time diversification is extremely important.
What happens if they're slower?
Is that bad?
No, I don't think so.
Because a lot of people say, oh, play the game on the field.
Play the game on the field, right.
I think certain folks would have today bear hugged their GPs for not playing the game on the field in 2021.
We're not investors, but Mark Suester, I give him all the credit in the world.
He's been in the game for a long time.
He saw 2021 as an insane period and he strip-sailed majority of his portfolios and his funds for a very good price.
DPI in the pocket.
All of his LPs are bear-hugging him for that.
Brutal market.
Is it a brutal market?
Yes.
You look at the data both at European venture fundraising and US fundraising, we'll see what Q3 and Q4 will look like.
But in the US, this is going to be the lowest year since 17.
In Europe, same.
It goes back a bit further, maybe to 2016, but it all goes back to liquidity.
What's the takeaway to that?
Is that the lack of liquidity?
Is that the concentration of capital to a few number of names?
You've scaled and just eaten up more of that.
Dollar allocations.
What is the kind of conclusion from that?
A lot of different reasons.
I think the main reason is liquidity.
2002 to 2004, you had more dollars raised in the public markets from IPOs than you did from 2022 to 2024.
And with an asset class 10 times the size.
And just for reference, the dot-com bubble.
It took you 13 years from the peak of the dot-com bubble to get back to par on your public equity position in the Qs or the NASDAQ.
That was a real downturn.
It makes obviously 2021 look like pennies.
And you had more IPOs raised the three years following that.
And so something clearly is broken in the industry, given how bad the liquidity was over the past three years.
And I think what really frustrated LPs is, you watch the public markets continue.
Especially the factor exposure of technology has done tremendously.
Not a believer ever that the IPO markets are closed.
It's purely a function of price.
That is the problem.
Folks paid significantly too high prices during the peak.
Growth has slowed down.
There's not much of a market for 100 million ARR SaaS company growing 15, with break-even free cashflow, when you can buy Microsoft growing top line at 14, growing earnings at 17, with real gap profits, buying back 1 of the company every year with the strongest competitive moat in the world.
People get frustrated when it's like oh no, one's going to give me eight times ARR, 10 times ARR, for this business.
Well, look at the alternatives.
What investors could invest in of a similar factor to your company?
I think PE is not coming to save us.
Everyone thinks it will.
I think people always also have lower expectations of what it takes to buy good companies.
Like you said that you need to be 20% grower and profitable.
And there are so many companies where they're bluntly at 10 and not profitable.
That's a tough spot to be in.
Yeah, I mean, we look at the data.
Historically- How close do you get to the underlying portfolio companies?
Very close.
We ask for trending revenue, trending gross profit and trending free cash flow for the top 10 NAVs.
Every fund we underwrite.
Does every LP do that?
No.
No, definitely not.
So when you look at that, do you think you are able to predictably tell good managers in real time?
Yes.
Really?
Because they've got great assets, even though you have the ones like circle say, where for years it's like maybe, like okay yeah, and then it turns into an absolute freaking monster.
There's always going to be an extreme distribution right tail outcome in these funds.
That is going to be impossible for us to underwrite right, and that's the beauty of venture capital.
So we acknowledge that we're not going to Our valuation of the company.
We know it's probably going to look quite different three, five years down the road, but we just want to know are these good, fundamental businesses that are growing in value and that give us conviction in that these are going to be real, durable businesses one day?
How did you analyze the Yales and the Harvards doing sales without venture portfolios?
I think there's a lot of factors that go into it.
One being the headwinds we talked about to the endowment model.
But you look at Harvard selling $1 billion.
It's a $50 billion endowment.
So $1 billion, it's not like some monumental thing for them.
That's probably just a refresher of the portfolio.
But I think there's real lessons learned.
I mean, there was an article out today about Yale and CalPERS.
CalPERS was the buyer, a piece of Yale's portfolio.
And I was on the phone with our CIO this morning, just take a step back.
We had a venture capital fund that we committed to in 2012.
This fund was in its tail life, 13 years old.
We hadn't looked at this fund in three or four years.
There was one asset left in the fund.
It was basically fully realized.
We have a great analytics team and our analytics system that tracks our underlying portfolio companies, but the companies have to be over a million bucks in NAV to us for us to be it in our system.
And so this company wasn't even showing up Circle, the company we're talking about in our system, because it was below a million bucks.
Flash forward, they were holding it, the manager, at a 30% discount.
And you saw it on TV, right?
No, I was reading the S1.
My son woke me up one morning and I was up early.
And so I'm reading the S1, kind of as just for fun, and I'm looking through the cap table and I see our GP on there.
And I'm thinking, oh my gosh.
And so I go and start looking through the quarterly reports.
And so they were holding at a 30 discount plus or minus to the last round valuation, which was, I think, their last price round was around 5 billion, three and a half billion-ish valuation.
And you look at Circle and it's a $50 billion company today.
This is a 13-year fund that is essentially going to do an extra three turns on the fund in its 13th year.
Unbelievable.
And so the article with Yale and CalPERS was CalPERS bought a very large piece of their portfolio, of which part of it was General Catalyst and Circle was the largest position in that fund.
And essentially in a two months timeframe.
I think it said in the article they bought 500 million.
You had 100 million write up from Circle alone.
That's the risk of selling secondaries as a long-term venture investor is that you're going to have these crazy right tail outcomes in the fund that could come to fruition at years 8 9 10 11 12, 13 that you're traditionally, even if I said to Chuck, I mean I'm not that smart, right.
But we would have underwrote Circle if we were looking to sell that fund a year and a half ago and we probably would have sold.
Who would have guessed that Circle was going to trade it 100 times EBITDA in the public markets and that stable coins in a year and a half were going to be the hottest sector in crypto?
You could not have predicted that.
So I'd imagine Yale probably did the same.
They probably underwrote that and they're like there's probably not a lot of juice left to squeeze here.
I have friends at Yale who I'm crying for, and I have friends at CalPERS who I'm crying for with happiness.
I'm sure Yale would do well.
It's a fantastic team with a great portfolio, but it just goes to show the risk of these fat tail outcomes in these funds.
Dude, 10% discount, I think, was the reported number.
How did you analyze that?
Higher than you thought?
Lower than you thought?
Much higher than I thought.
You thought it was higher?
Yeah.
Wow.
No, sorry.
Wait.
I think it's a good deal for them.
No, it's a great deal.
That's what I meant.
Yeah, sorry.
Yeah, so it's lower.
Fantastic deal.
I...
Not knowing the underlying GPs in that fund and not knowing the mix between buyouts real estate or venture I would have guessed.
Yale's got incredible management in their portfolio, so they'll have some pricing power.
I would have guessed 20%.
That would have been probably the number that I would have put on the board.
Do you think we will see many more of these large institutions doing strip sales with their venture portfolios?
I'm not sure.
Certain ones with real liquidity needs, I think they'll have to, right?
And so that'll be a forcing function.
But still, I mean, there's not a ton of secondary capital out there that's going to be able to swallow all of that NAV right?
So if every billion dollar down comes out and says we're selling 10 of our venture book, I mean the pricing there.
It's a supply demand market right.
There's only so many buyers.
You said about kind of the liquidity problem and that kind of being a driver in terms of the brutality of the fundraising market.
Scale, Dream Games Figma Revolut Secondaries Circle CoreWeave, Hinge Health, which IPO'd Chime.
Are you just drowning in distributions now?
We are thankful to say that we're now self-funding in our venture book this year, which is give us a round of applause.
I mean, it's the first time since 2021.
So that's a positive.
But on the flip side there's still a lot of liquidity.
That sure it's been announced.
But the Wiz deal, that's going to be a Q1 2026 event.
That's got to go through FTC approval.
Figma hasn't gone public yet.
Dream Games said in the article they've got to get European approval for that deal.
Do you think 2026 will be a year where that liquidity really hits?
Yes.
And what's exciting me is, and this is a crazy statement, right?
So it's not that I agree with the statement, but- Don't mind, it's just me and you.
Yeah, exactly.
For the longest period of time, private market capital was cheaper than public market capital, which is the most mind boggling statement, as like a fundamental investor ever.
It's hard to fathom that, right?
But that was the case.
That is why the best companies in the world didn't go public because you could get a cheaper cost of capital.
You didn't have to do quarterly earnings calls.
You didn't have to go through all the hoops to go public.
Why would you go public?
We speak to founders.
We understand why they don't want to go public.
But the public markets are now pricing risk very differently than they have over the last three years.
You look at Circle, you look at Nebius, you look at CoreWeave, you look at Palantir, you look at Cloudflare.
These are all businesses trading at extremely healthy multiple.
So my message here to all venture capitalists, now is the time.
Please take your companies public.
My question to you on the back of that is, Rory O'Driscoll from Scale always laughs at me.
He says, my favorite thing about Harry, he goes, yes, so what about me?
And I specialize in that.
So what about me?
If we have this liquidity dropping in 26 the year, does that mean 27?
You'll have a load of LPs flush with cash coming back to the venture asset class going.
Let's fund some more funds.
I mean, inherently, it will help, clearly.
And particularly as maybe folks take back.
But it's needle moving on that already.
I mean, it's been such a dearth of liquidity over the past three years that, like one year is not going to solve the industry's problem right.
So we're going to need like multiple years of really good liquidity to get back to a normal state.
So like there's still a lot of wood to chop here, but it'll help, right?
Undoubtedly.
Absolutely.
Do you love thematic funds like every other LP does?
We are agnostic.
We do not have a mandate or a rule saying we're only going to do thematic funds or we're only going to do generalist funds.
We're a best athlete.
So when we find really great partners aligned with us for the long term, who we think have an incredible skill set that aligns with what they're trying to do in the fund whether that's a generalist fund, whether that's a sector focused fund we'll do it.
And so I mean inherently, we've done one new sector focus fund over the past three and a half years.
And so it hasn't been a huge part of our portfolio, but we are absolutely open to it.
What was the best ever performing fund you've been a part of?
We had a fund out of China that produced over a 20X net return to LPs.
Wow.
I hope you sent them a Christmas card.
We did, yeah.
How do you think about China?
It's a very high bar for us today and a very hard place to invest.
I mean, there's a couple really big headwinds.
One is the US executive order mandating US dollars can't go into artificial intelligence or semiconductor related companies or defense companies there, which we completely understand and align with.
But the big problem, what's so unique about the China venture capital market that maybe a lot of founders or maybe LPs who haven't spent time there don't know is that in China, these GPs raise USD and RMB funds alongside each other.
And these RMB funds are from local governments and municipalities.
And most of the time for the past 15 years since the China venture industry has been around.
Those funds were pair pursuit.
They mostly invested in the same securities.
That isn't the case today, especially now that US dollars cannot go into these AI companies, which I think the last time I checked, 70 of these deals in the US are AI companies.
I mean, it's everything.
And so that's a big alignment issue, right?
What are we getting exposure to in that fund?
That's a big worry.
Totally agree and share that.
Super interesting.
I'm actually more bullish on China than most people give credit for.
Yeah, I mean we have incredible partners there that we've had for a long period of time that are extremely hardworking, extremely smart and have been great partners to us.
It's a hard market today.
And frankly, a lot of the best Chinese founders have chosen to raise elsewhere, whether in the US or Singapore or London.
It's a tough place.
We mentioned the liquidity.
The thing that's also kind of weird and paradoxical to think through is you mentioned the public markets players just having absolutely ripped.
You see Meta throwing out $14.9 billion for scale.
It's like 45 to 50 days of free cash flow.
It's really not very much for them.
Your Google's buying Windsurf.
It's like a coffee.
They put $3.5 billion into Ray-Ban at the same time and no one paid any attention.
My point being we have these kind of opposing worlds of liquidity, starvation or drought, and then the glut of these public markets players who just are playing with market caps that are 2 trillion.
How do you think about that?
If Wiz gets approved, every other large Mag7 company is going to see a green light in regards to making big, splashy acquisitions again, which is a good thing.
You look at Google, Microsoft, Amazon, and Meta combined.
I mean they're doing 600 billion of operating cash flow just cash coming off the company every single year.
And I think they would much rather make very strategic acquisitions than buy back 50 basis points of the company.
The big worry that I think those companies see today from our purview is that the AI landscape is changing so rapidly that the 12 month time period it could take to go through a review to get that acquisition done that company could be obsolete in 12 months.
Dude, you saw this with Windsurf.
It changed a lot in a couple of months.
Yeah.
Lots of great hot AI companies have been very hot and they're not hot.
Stability AI, lots of companies have gone through these waves and there will be many more.
That chance.
And you look at the Wiz deal, there's a 10% breakup fee there.
Largest breakup fee ever for an M&A transaction.
So say that someone else wants to do a 30 billion acquisition of Perplexity and Perplexity says oh, we have to wait 12 months.
Our board's going to recommend a 15% breakup fee.
Now, will those big funds, will those big companies risk a four, 5 billion breakup fee and 12 months where this company might not be what it was 12 months ago?
I think that's what is the reason these folks are acting in such a fast way in regards to take the top talent license, the IP license, the tech.
Get these people building within our company now, day one.
I think it's the most smart maneuver around it.
But it only works when the people and the tech are the assets and not the revenue and the customers.
In Wiz's case, the revenue and the customers are the asset.
Don't get me wrong, the team and the technology is too.
But it also helps it's not an AI company.
Sure.
But without the revenue and customers, it's not worth $31 billion.
I do want to ask, you said to me before, open AI could still be a zero.
When you think about that, what did you mean by that?
The way we think about it is we very much spend time on unit economics.
And from what we see with OpenAI, unit economics are improving rapidly, which is great to see.
But still, when you take into account CapEx, why has OpenAI raised two of the largest venture capital rounds ever in a span of 12 months?
Not because they want interest income from the cash on the balance sheets, because they're burning 5 to 10 billion a year.
In my opinion, the music will stop eventually.
This would be the ultimate anomaly if a bubble did not pop in AI.
You look at past historic, incredible technological moments.
You think of the railroad, you think of cars, you think of electricity, you think of steamboats, you think of the internet.
Every single one of those.
There was a bubble that popped, every single one that impacted the equity markets at that time.
Inherently for the long term, it's a good thing, right?
It shows that this AI thing is real and people are going to overinvest.
And so I would find it extremely anomalous if there was not a bubble that popped here.
And so if folks align with, a bubble will pop eventually.
If you do not have control of your own destiny and if you're sitting like open AI and your pref stack, what's their pref stack today?
70 or 80 billion.
You know, stuff hits the fan and no one's willing to write you a 40 billion equity check anymore because the capital markets have completely gotten smoked.
Like what happens?
Do you think there is a chance that happens, that honestly, like when you look at like SpaceX, like I have so many?
SpaceX is self-funding.
They don't need cash.
That's what I mean.
And you look at Google and Meta, right?
When they went public, Google and Meta had like 30% to 40% gap operating margins.
These were the most profitable companies ever.
They had complete control of their own destiny.
So capital markets, whatever happened, it didn't matter.
They could not be killed.
SpaceX cannot be killed.
Starlink has reached escape velocity.
That's a very high margin product.
They do not need cash.
They're doing secondary tender offers.
OpenAI needs cash.
Will OpenAI and Anthropic be independent companies in five years' time?
To say like slam dunk, these are going to be trillion dollar companies five years from now, like there is a lot that can happen within that you know, five year period.
Right.
And so we would say there's still a good amount of risk in both of those businesses.
If AI can, Massa's kind of talked about this before about kind of AI's impact on global GDP.
And if it hits 10 GDP productivity growth, then it's about 107 trillion of 107 trillion labor kind of a segment.
Do you think AI will have that global impact on GDP within the next 10 years at that scale?
10 years gets closer to, I thought you were going to maybe say three or five, which I'd say no right.
I think these technological transitions take a pretty long time historically to bleed into GDP, creating industries.
And OpenAI is obviously an incredible company, but Like they burned up all their GPUs in April because people were making like emojis, right?
They were making like cartoon figures on the app, right?
Like that's not like a GDP boosting product.
And, you know, clearly like they're making inroads, right?
But like all these things take time.
But I think the problem is time is not your friend.
When you look at the hyperscalers, just take them, for example.
You look at 2024 to 2027 estimates, it's a trillion dollars of CapEx they're putting into the ground.
And then you add on venture as an industry investing say, the run rate's a hundred billion dollars here in the US and 80 of that's going into AI companies.
Now, sure, not all of those are going to be CapEx intensive.
Maybe some of those will be application companies, but that's a lot of money to invest that sum.
If this does not come true for 10 years, there will be a lot of pain.
We spoke about Nvidia.
This is why I would push back on your thoughts on Nvidia, which you said that that's too highly priced.
If you believe AI, you buy Nvidia.
I do not think that it's too highly priced for the business today.
One of the benefits of our roles, we're generalists.
We get to invest across buyout, hedge funds, real estate, public equities.
We get to witness some of the best investors in the world, across the world.
A man from your hometown, Chris Hone, this guy's one of the most incredible investors of all time.
And he thinks a lot about peak earnings and peak multiple, which is a common theme obviously in the public equity industry.
But Nvidia is a cyclical business at the end of the day.
You look at their historical financials over the past 20 years, essentially like every three years, they've had extreme negative year over year revenue growth.
Now it rebounds, right?
But this is a hardware inventory cyclical business.
And so back to my question.
Amazon is now a very large income revenue line of advertising.
And advertising, which is also a cyclical business, and you have a global downturn, there is a really plausible scenario that revenue drops 20.
I think that would be conservative, 20% to 30%.
And so then earnings, if they don't react on their OPEX quick enough, maybe earnings drop 40%.
I looked this morning, they're trading at like 38 times earnings forward.
Maybe it drops to a trough multiple of 24 times, which has been a trough multiple for Nvidia.
You just blinked and you just had a 70% drawdown.
So to think that that's not a possibility in the future, I wouldn't say that.
I'm not going to guarantee you that's going to happen in one year, two years or three years, but I think it's a possibility.
One final thing I want to touch on before we do a quick fire is founder friendly.
Everyone loves to say how founder friendly they are, how founder friendly their GPs are.
How do you think about the founder friendly tagging that's in venture today?
My background comes from a sports background, right?
So I played football growing up and in college, and I was used to hard coaching.
Hard coaching, you don't love it in the moment.
You don't love a coach MFing you and screaming you and telling you you're playing terrible and you need to do this better.
You need to do that better, but it's better for you.
And you know it's coming from that coach wants the best for you.
They don't want you to fail.
They are incentivized for you to do the best work possible.
And so I love getting coached hard.
I told our CIO, Chuck Kennedy, when I first joined, he shouldn't have hired me to begin with.
And so I told him when I joined in my mind I had a pretty good thought in my mind there's probably a good chance I don't make it six months, but I'm going to try my best.
And so I told Chuck, I was like, Chuck, I need you to criticize me.
Like, I need you to coach me hard.
And he looked at me with like crazy eyes.
Like, I've never heard anyone say this to me in my life.
But like, I love hard coaching.
No founder is going to be perfect, right?
Founders are going to have weak spots.
And if you can have, you know, people that are, from a loving perspective, close to the business and can supplement certain weak spots and can bend the trajectory on a company even a bit, why wouldn't you?
Why wouldn't you push for that?
Those are going to be tough conversations, right?
But tough conversations aren't bad things, right?
When we're sourcing and we're doing reference work, that is not something we try to dig out.
We want the most founder-friendly GPs.
That's not something we source for.
I'm so glad.
Thank God.
I'm sure mine would not say I'm the most founder-friendly.
Harry says $9.96.
I'm so tired.
I want to go to sleep.
Dude, I want to do a quick fire with you.
So I say a short statement.
You give me your immediate thoughts.
Which venture firm charges $3.30 and shouldn't?
Any fund that raises over $4 billion.
I think that's a pretty easy answer.
There's firms that do over $4 billion.
No, no, no.
Excuse me.
On their growth funds, right?
So the early stage funds.
But they do $3.30 on growth funds?
No. they're charging two and 20.
I don't think they should charge that.
I think, a core early stage fund.
If they have produced incredible returns over the past 15, 20 years, they deserve three and 30.
What's the biggest lie GPs tell LPs during fundraising?
Oh, that's a great question.
I would say, Miles, this is the perfect fund size for us.
We want to be a union square.
We want to be a benchmark, 300 to 400 million.
This is the perfect size.
We're never going to raise a bigger fund.
I hear that.
I kid you not.
At least every other, every other intro meeting I take with a firm.
And it's 99% bullshit?
99.9% bullshit.
Yeah.
What's one red flag in a GP that others keep ignoring?
I would go back to alignment.
I think you know we talked about kind of I hope he's looking the other way but alignment is- GP commit is one form of alignment.
It is.
How do you guys feel about that?
It's a very important data point for us.
The nominal number is not important for us as what does that number mean to that person?
Very important to us, right?
Frankly, we have two quantitative data points outside of fund size and past returns that are the best forward-looking indicator for future returns of our funds.
And one of them is GP commitment.
It is an important factor for us.
Who is the most underrated emerging manager today?
He'll probably raise a bigger fund, but I'll say, I think Kevin Hart's in A-stars.
I think they've done fabulously well as a partner.
What do you think makes him so good?
Kevin, please, if you're listening to this, do not use this to raise a billion dollar fund.
I think what's interesting about that team you've got Kevin Hart's multiple-time founder, took in his company's public, been through a lot, seen a lot.
You've got Gotham, who was COO, CFO of Uber.
You've got Bennett, who did some incredible deals at Cotu.
I think it's a very heavy team, a very powerful team for a right-sized fund.
I don't think there's many of those funds around, frankly.
And so I think their ability to have really premier access that traditionally a multistage fund is going to have 99 of, I think is pretty rare.
When you think about a fund investment decision.
That was a mistake.
What did you not see that you wish you'd seen?
Key thing we go back to is people.
Really trying to understand who are the people driving the returns at that fund.
Do you think you get accurate attribution?
That we've gotten much more sophisticated on our reference work.
We build our own attribution tables, right?
So that is another huge red flag and lie that we get from... It's not an outright lie, right?
But they will give us attribution and you have one partner leave who retires or goes to another firm, and you're getting this attribution from this new person who clearly we know was not the partner on this home run deal.
We understand why they do it.
They have to assign somebody to it, but...
It could be very misleading to a new LP coming into that fund and saying oh, these incredible partners who led these incredible deals are all still here.
And so we, through reference work and through longevity, we build our own partner attribution.
Would you rather back a 25-year-old first-time manager or a 55-year-old unicorn founder?
If it's hairy, you know, that makes the decision a little bit tougher.
Uh, i i'd say in general we would lean to someone that has has been through multiple cycles and has the the scar tissue of that, and so i'd say we'd probably lean to the 55 year old, but we're open to everything.
What did you believe about fund investing that you've changed your mind on?
So like, for me in investing it was like there's people, there's market and there's products say, And I used to kind of weigh them equally and I've completely changed my mind around that.
Markets change, products change, and this is for seed.
I just massively over-index on people.
Really.
When I first started from a first principles perspective, I was drawn to the data which we laid out here in the beginning.
And you can't over-index that data too hard, similar to what we've talked about.
And so I would go back to, at the end of the day, this is a people-driven business.
You can do all the data work you want, which is important clearly, as we've stated, really leaning on the qualitative reference and people work to really, and in speaking to founders, like we don't take a lot of founders time right.
So they have a lot of better things to do than speak to.
You know measly LPs, like us, but really understanding like why did you choose that partner?
Why did that partner choose you?
What's that relationship been like?
And understanding that dynamic is critical for us.
What fund are you not in that you wish you were in?
Union Square.
Easy one.
Yeah.
Yeah.
What's the wildest GP behavior you've seen in a fundraising process?
Oh, I've got one good and one bad.
Oh, go on.
Okay.
What do you want first?
Start with the good.
Okay.
The good you know Long Journey Ventures, which an incredible partnership between Lee Jacobs, Zion Bannister and Ariel Zuckerberg.
We had a celebratory dinner out in San Francisco and we get towards the end of the dinner and somehow we got started talking about ping pong.
I'm a pretty good ping pong player.
And I brought up that when I was in college, I won the Pennsylvania state ping pong championship, which is true.
I did.
Lee immediately was like, there's no way you're a better ping pong player than me.
I am a really good ping pong player.
So Cyan was like, well, we need to settle this.
And I'm like, it's like 9 PM.
Like we had just finished dinner.
And I'm like, yeah, I mean, I don't know how we do this.
She's like, I'll find a ping pong bar.
Sign gets on her phone, finds a ping pong bar.
We all go to a ping pong bar at 930 p.m. in San Francisco.
And Lee and I play ping pong for about an hour.
You won.
I won.
And then you wrote the check.
Exactly.
And we got a discount on management fees.
Yeah.
If he beat you, check cancelled.
Yeah.
That is unbelievable.
I love, I also love the Americans.
So you're like nine o'clock.
Yeah.
Dinner was finished.
Yeah.
So in Europe, it's like, that's when you start drinks.
Yeah.
That's so funny.
Yeah.
The bad one I mean this one forever stands out was we underwrote a manager in 2023 that was holding OpenSea at 13 billion which that one was like- And you questioned them on it.
Yeah, obviously.
And they came back?
They said, we're going to revise our valuation policy and we're going to revise that mark.
That was a crazy one.
Yeah.
Dude, that is absolutely wild.
Listen, I so appreciate having you in the studio.
I so appreciate the friendship.
This has been so much fun to do.
So thank you so much for joining me, man.
Thanks for having me.
This has been a blast.
We could talk about it all day.
The best podcasts are when you hear from people who never go on podcasts and you hear something truly unique.
Inside Carnegie Mellon's incredible endowment deployment there.
So appreciate you listening.
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