Speaker 1we had 36, 37 hedge funds in the portfolio. And when we got rid of them all, you know, 80, 90% of our time is just out meeting individual companies. And that's very different than probably how most of your LPs spend their time. You know, at one point north of 20% of the portfolio is in SpaceX. Half of our portfolio is in our top 50 look through positions. Our model doesn't really work with the mega funds. They don't need our capital. We hardly ever talk about like fund performance. We only really talk about the underlying exposures in the portfolio. Price is what you pay, value is what you get.
Speaker 2This is 20VC with me, Harry Stebbings. Now, how often do you hear one of the biggest allocators in the world reveal how they make incredible investment decisions? Very rare. This CIO today has taken their institution from $8 billion to close to $20 billion today. I'm so excited to welcome an OG of the endowment fund space, Scott Wilson at WashU. Now, the incredible. The incredible fact about this institution is that at one point, SpaceX was over 20% of their portfolio. It has done incredibly well for them. And today, we discuss the journey from $8 billion to $20 billion in AUM, the biggest lessons, what they did that they wish they hadn't done, and what they didn't do that they wish they had done. This was an incredible show to do. But before we dive into the show today, today, I want to tell you about how the first AI law fund, Crosby, helped us close a big sponsor. As you know, some of the biggest companies in the world have been closed. And some of the biggest companies in the world advertise on 20VC. My British dulcet tones clearly convert well. I was working to close this big sponsor, and they wanted to get through legal review quite quickly to close the deal. Crosby turned red lines around in three hours and caught major issues that would have caused us serious problems in the future. Crosby combines AI, some of the best engineers in the world, from companies like Ramp and Stripe, and some of the best attorneys in the world from top 10 law firms. Customers get the best of both worlds, an elite attorney, reviews every contract, but they move incredibly quickly, returning red lines in under four hours. They help the fastest growing companies like Cognition, Ramp, and Clay close deals in hours, not weeks. Learn more at Crosby.ai forward slash 20VC. If you want to redline NDAs, MSAs, DPAs, and any other procurement contracts faster, go to Crosby.ai forward slash 20VC. It's speed that you can really trust. While Crosby keeps your numbers, sharp, OneMind keeps your customer conversation sharper. Our friends over at OneMind have a hot take. The B2B GTM model we've been using for the last 20 years, it's collapsing. Predictable revenue isn't so predictable, and buyers are just tired of explaining themselves at every handoff between SDRs, AEs, CSMs, and support. You feel it in your board reporting. Your sellers feel it in their coverage. Your buyers feel it as they wait for answers. Well, enter OneMind and their GTM superhumans, HubSpot, Alteryx, and ZoomInfo are just three of the tech companies using OneMind's superhumans to qualify buyers, ride along with sales reps, and coach customers. Whether you're ahead of target or under pressure to increase bookings ahead of hiring or behind on target even and need every rep to hit quota, OneMind is the solution. See for yourself at OneMind.com. That's OneMind, M-I-N-D dot com. While OneMind is the solution, OneMind is the solution. OneMind helps you sell smarter. Framer helps you build faster. When a new landing page turns into a pile of tickets and handoffs, Framer helps your team move faster. Framer is the AI website builder that helps creators, teams, and businesses ship production-ready sites faster than ever while getting every detail right. Prompt, inspect, edit, and publish in one place at a whole new pace. Agents and humans work in tandem. Agents bring speed and scale. You bring taste, judgment, and control. The world is yours. OneMind is the solution. Work lands on the canvas and stays editable. Build custom code components, manage CMS content, optimize SEO, and audit for issues all in one place. Enterprise-grade hosting, security, and 99.99% uptime SLAs trusted by leading brands like Perplexity and Miro. Learn how you can get more out of your site from a Framer specialist or get started building for free today at framer.com slash 20VC for 30% off a Framer Pro annual plan. That's framer.com slash 20VC. Rules and restrictions may apply. You have now arrived at your destination. Scott, I'm so excited for this. One of the most respected in the industry. Thank you so much for joining me today. Yeah, well, thanks for having me. Not at all, but I'd love to start with a couple of lessons from the past. You obviously had roots with Grinnell, spent several years there building out an incredible book. What are some lessons for you from Grinnell that really stuck with you and you took with you to WashU and impacted how you think about building out your book with WashU?
Speaker 1Yeah, I think we ran a similar strategy at Grinnell. So I was fortunate to work for this guy, David Clay, who hired me at Grinnell. Grinnell had a long history of kind of a mix of direct co-investments and external partners that managed the portfolio. It was a pretty concentrated portfolio. I think it was super concentrated relative to the peer group. And we do a lot of the same things, but David was a great guy to learn from because when I first landed at Grinnell, I really had no idea what an endowment actually did, you know, on a day-to-day basis. And I think our strategies evolved over time, but we still fundamentally do the exact same things we
Speaker 2were doing at Grinnell here at WashU. Which is concentrated managers, concentrated positions in Dire Ice as well.
Speaker 1Yeah. I mean, if you really want to dumb it down, there's nothing particularly clever about it. You know, we try and find really good external partners. When they find something that we think is really unique, we try and double, triple, quadruple down on it and then hopefully let that compound over long periods of time.
Speaker 2That's it. If we go forward to WashU, I heard, and this was, I can't, I can't remember who told me, but they said that the first week in the job, most people have a bit of time, get used to the new environment. Nope. Scott did a fire sale, sold 75% plus of the WashU portfolio.
Speaker 1Yeah. I saw that stat. I'm not sure that it was 75%, but we put in redemptions for over half the portfolio in the first week. But I also had the portfolio for a couple months before I actually landed in the seat. So there was a lot of, there was a lot of, there was a lot of, there was a lot of preliminary work that went into those decisions. It wasn't a complete, like we're just fire sailing everything. Were you worried about doing too much too soon? That is a very large shift. Yeah. I mean, it was a mix. There was this kind of obvious tension that performance hadn't been great for quite some time and that the board, you know, wanted to see results quickly. And they had kind of given me and the team three years to really make performance, show some real performance improvements. And I was like, I'm not going to do that. I'm not going to do that. And to do that, you know, we had to really restructure the portfolio relatively quickly, you know, and then changing around an endowment portfolio is more like turning around an aircraft carrier than a speed bro. So we knew that was going to take a decent amount of time. And then the private side, luckily the private side was in better shape, I think, than the public side of the portfolio. But we, we had 36, 37 hedge funds in the portfolio. And when we got rid of them all, so we certainly weren't popular in certain parts of Manhattan. Ultimately we turned over more than 75% of the portfolio. And then we had to, you know, we had to, you know, we had to, you know, we had to, you know, we had to, you know, we had to turn over more than 75% of the portfolio through secondary sales on the private side. That is a fire sale.
Speaker 2That would constitute, yeah, I'll take that. A fire sale over 18 months. Oh, fine. And just don't go to Manhattan for a while. You won't be the most popular dude on Wall Street. Okay. And the endowment then is $8 billion?
Speaker 1Yeah, it was just under $8 billion when I started.
Speaker 2Okay. And today is how much? The total managed pool is probably just under $20 billion today. I hope you have a 20% take rate personally. No, unfortunately, that's not the way it works. Unfortunately not. That would be a $2.4 billion take. So well done. So you have that restructuring of the portfolio and you then have the freedom to bluntly reallocate and start a little bit more afresh. How did you approach it then going, okay, this is how much I want publics, privates. What did the portfolio construction look like when you had that flexibility?
Speaker 1I mean, I always say we're pretty much indifferent between publics and privates. And I would tell my board, like, you know, the only difference between those two asset classes is how often they're marked to market. So if you have like a 10, 20 year timeframe, do you, should you really care that something is marked every day or something is marked once a quarter? Within that we have obvious liquidity constraints. So our big broad target, I would say is half publics, half privates. We're definitely out over our skis and privates, but that's reversing quickly.
Speaker 2With the greatest of respects, I get you on the markets. The biggest difference is, as you said, liquidity. No, I mean the extended period that funds are now in. In terms of being 12 to 15 year funds and the time it takes to get cash back. The fundamental difference is available liquid, no?
Speaker 1Yeah. I mean, we obviously have liquidity constraints and that drives that ratio between public and privates, but it's not like if Stripe goes public tomorrow, it should be in a different asset class.
Speaker 2In terms of the capital requirements, you have net outflows a year of like 5%. Roughly 5%. It's smoothed out over kind of rolling five-year average. If you didn't have the required net outflows, would you do. Do you do anything differently in terms of capital allocation? Oh, for sure. We would probably have 70, 80% targeted privates. Wow. Can you walk me through that thinking and just like, I'm the board, rationalize that for me, Scott?
Speaker 1Yeah. Well, your payout is a function of your liquid assets, right? Because you can't always convert your private portfolio and the payout is not guaranteed, right? In theory, some percentage of your private portfolio should become liquid every year, but you can never count on it when you actually need it. So if you have a 5% of your portfolio, you can never count on it when you to pay out on and half your portfolio is liquid. that's 10% of your liquid portfolio that you're paying out every year. If you're paying out zero, well, you really don't have that constraint. And if you look at the relative performance, you know, over the last decade, we've probably compounded our privates by in the low to mid 20s. And we've compounded, you know, our public equities and 10%.
Speaker 2Did you always have this belief in privates being the value driver of a portfolio?
Speaker 1No, but I do think like the markets are less efficient. What do you mean by that? I mean, like you can get access to investments that are less picked over. Like there's always natural buyers and sellers. And I think it's much harder to create alpha in public markets than it is private markets. And I think this is, you know, well documented over the course of time.
Speaker 2So if we take the 70 to 80% that could be in privates, how do we think about structuring the privates book today? Obviously, privates is a very large allocation in itself. You've got directs, you've got funds, you've got credit, you've got debt. How do you think? How private should be structured for you?
Speaker 1The way we do it. So roughly half of our private portfolio is in maybe more than half right now is in kind of co-investments and direct investments. So we manage it the same way we manage the public portfolio. So we, you know, find good partners. And to the extent we can, when they find something that's really interesting, we try and co-invest or add capital directly to that single name.
Speaker 2Do you have a separate direct team? No, no, everybody on my team is a generalist. What would you advise another CIO? Obviously, I'm a manager. I have many LPs and they all say to me, you know, oh, we'd really like to do more directs, but we don't feel like we're equipped to do so. We don't have the time to really do the work. What would you say to them? And how would you advise a CIO who doesn't really do directs today, but maybe should and could?
Speaker 1Yeah, you kind of have to build that muscle. You have to have that internal skill set on the team. So if you look at how my team allocates their time, we still meet with a lot of external partners, but, but, upwards of 80, 90% of our time is just out meeting individual companies. Very different. Most
Speaker 2of them spend 70 to 90% of their time with managers and then 10% of that time with directs, I'd say.
Speaker 1But if you look at our performance over the last decade, if we didn't have any direct or co-investments, we would have been right at the average of our peer group. You know, as it is, I think we're at the top, if not the very top of our peer group over the last decade.
Speaker 2So are you just. Better company pickers then? Because what you just told me is that actually you'd be average if it were just funds only. And if that were the case, you must just be better company pickers than everyone else.
Speaker 1Yeah. It's not us though. Like we're not doing what you're doing. You know, I think you have to be humble. Like I think, you know, we're trying to identify what we think is a really unique thesis or really unique company, but we're not sourcing that from scratch. And so I think we're starting on second or third base because, you know, we're already invested with Harry and we think Harry's a really smart guy and he really likes this investment. And we'll do our own work to kind of independently verify the thesis. And sometimes we don't agree with the thesis and we have certain partners that we think, you know, is high signal and lower signal. But but that's where we start our process. Hey, somebody we think is really smart already thinks this is a great investment.
Speaker 2Tell me, how much will you have in one company? We have a mutual friend in Mr. Lee Fixall, who I happen to think is wonderful. And he told me that I had to ask about concentration limits. How do you think about concentration on a per company basis?
Speaker 1Well, I would separate cost versus, you know, NAB and Lee and the board and Adam should get a lot of credit for for the big win in SpaceX. You know, I think that became such a large position for the portfolio, you know, at one point north of 20 percent of the portfolio is in SpaceX. And at that point, it becomes like we had conviction as a team and we had many chances to take lots of liquidity in that name, but we advocated for holding it and letting that compound. And we did several kind of continuation vehicles that allowed us to hold on to that stock up and through through the IPO. But you can't do that without the right government structure. So at cost, you know, if we were going to put more than two or three percent of the portfolio in a single name, we probably we would need to notify the board. I think it's four percent. We need their approval, but we have a lot of leeway to concentrate the portfolio quite a bit.
Speaker 2You've also worked with some of the best funds and we have capital concentration limits on a per company basis. Do you think those are inhibitors of great venture? I do. They're mostly artificial.
Speaker 1You know, if you think over the course of like, say, you're going to do five funds, that's, you know, X amount of capital and to have a 10 percent concentration limit in any individual fund. I don't think it makes sense. I think we have lots of funds, actually, that where we have a mandate where it's like two or three stocks. And we certainly wouldn't have a problem with if you think about it, if you're one percent of our portfolio or two percent of our portfolio and you have a 50 percent position, that's only 100 basis points for us.
Speaker 2I think it's a good thing that we've had a position with a lot of capital concentration that hasn't worked out.
Speaker 1Oh, yeah, for sure.
Speaker 2What did you learn from it?
Speaker 1Well, a lot. There's a couple that come to mind where we, you know, we had super high conviction going in. One was an automated manufacturing company and another was an additive manufacturing company. Maybe we're just poor at underwriting manufacturing companies where, you know, we have substantial investments. I don't think the story's completely been written on either company, but certainly it's painful. It's painful when those don't work.
Speaker 2Do you think 50 percent of your private book being in directs is the right allocation?
Speaker 1I would take it to 80 percent.
Speaker 2You know, when we started, it was it was just a tiny fraction. Could you have it as 80 percent given that you are fed by the managers you back?
Speaker 1Yeah, there's a natural equilibrium there. And that'll ebb and flow over time. You know, as you do get some of these bigger positions become liquid. There's no kind of artificial limit on it. And it's somewhat of an organic process when you, you know, if you're right on the underlying. Thesis and it can compound for a decade or more and it massively outperforms the rest of the portfolio. Like you get natural high concentration in that portfolio.
Speaker 2I think investment decision making processes are the product that we sell our LPs. I'm intrigued by your investment decision making process on the direct side. What does that look like? How do you decide on directs?
Speaker 1Yeah, I mean, we have to agree with the thesis and we also have to underwrite it. So there's a ton of stuff that people bring to us that, you know, for whatever reason, the team is not smart enough. We just don't have the right skill set or it's impossible for us to differentiate between this company and five of its competitors. And there we just don't play. So we have to be able to independently verify the thesis, understand the thesis, have the ability to underwrite the company, ability to monitor it going forward. And we have to think it's our best marginal use of capital. So we look at a lot of potential investments and I would say we do, it's probably more like 0.1% of those investments than.
Speaker 2Is it challenging as you've scaled because now you're close to $20 billion and just something that moves the needle. I mean, writing a $20 million check into a growth round at $20 to $50 billion, even if it 20 Xs, it doesn't move the needle in any meaningful way.
Speaker 1Yeah. And I think if I look back, the biggest mistake that I've made since I've been at WashU is not adding capital to our winners just because, you know, they became a relatively sizable position early on. You know, so we had lots of opportunity to add capital to some of the names you would know that have done extremely well. And we, we didn't do that when we could have just because they were already north of, you know, one or 2% of the portfolio. But I still think our model probably scales better than the traditional fund to funds model because it's hard to scale with managers as well. And what you end up doing is you just have to add more managers and then, you know, each manager means less and less so we can maintain, I think better concentration. Now we're still probably over diversified. But we can hopefully maintain this concentration, even as we double in size from here.
Speaker 2You say you're potentially over diversified. What's the right amount of managers to have in a book, do you think?
Speaker 1Well, if you think about the underlying look through exposures, right, the quantitative benefits for diversification trail off really quickly when you get more than 20, 30 names in the portfolio. So if you have 20 or 30 investments, you know, Charlie Munger would say, if you have three, you're fine, but there's really no quantitative benefits beyond 30 for 30 underlying look through exposures. And, you know, really the way we think about diversification is we want the top 30 names to have a, be a significant driver of our performance and the way we target it, we actually target like, I would say half of our portfolio is in our top 50 look through positions and it's taken us a long time to get there. And that's probably a good target for us, a realistic target, but it's still very diversified. I mean, if you look at a diversified hedge fund. Typically they have the bulk of their capital in their top 15, 20 names.
Speaker 2So just so I understand, we have 50% of privates in directs. In the venture funds allocation, how much do you allocate towards those 20 to 30 names?
Speaker 1At costs, you know, I always tell, if we don't have enough conviction to do 1% of the portfolio, then we probably don't have enough conviction to do it at all. But typically we, you know, at this point that's close to $200 million and we just don't, we don't have capacity. So, you know, we have to. We have to continue to back the companies that we have high conviction in over time. So we might start off with a $50 million check in a co-investment and then scale that out over time.
Speaker 2With a fund investment, will you do a $20 million fund check if it's completely irrelevant from a returns perspective?
Speaker 1You know, it probably means it's a very small fund. And if it's a very small fund, that's doing like really interesting things and we would have an opportunity to write a bigger check into one of the underlying companies, then we would do it, but we don't do many of them. We don't do many of them, but we don't do many of them, because it's just not scalable.
Speaker 2You have 20 to 30 funds. How many do you have? do you add a year? I think last year we added one.
Speaker 1We have one that we're going to add. We know we're going to add next year. But if we had one or two funds, it's kind of one in, one out. It's not a hard line, but we don't add
Speaker 2partners very often. You said before about mega funds that like maybe instead of just growing, they should be more judicious about where they invest. I'm kind of paraphrasing you. And it seems like the world has moved in favor of mega funds. Capital is a moat now for many startups. Compute and CapEx is a very real cost that maybe wasn't there before. Have you reflected on that and changed your mind or not?
Speaker 1No, our model doesn't really work with the mega funds. They don't need our capital and they certainly don't really need us for co-investment unless it's some massive round and some massive company that we can probably go direct in anyway. You know, I think these mega funds, it's going to be very hard. We'll see. It's going to be very hard to kind of generate the historic multiples of invested capital that they have on those much smaller funds.
Speaker 2With respect, and I think this show is phenomenally successful because I do push back. So forgive me, because you are an OG and I'm a podcaster. But, you know, you see Thrive absolutely crush it with OpenAI and Cursor and positions in sizes of outcomes that are just previously never seen before. And we're seeing outcome expansion so real, as you've seen with SpaceX. With respect, that would suggest that you could get venture returns on. On mega funds, if in those outcomes.
Speaker 1Yeah, and certainly when you get these trillion dollar plus outcomes in private markets, even before the public, it's possible. You know, I think if you just think about the dynamics, when you double your fund size, right, you either have to double your check size in every company at the same valuation. And we know that doesn't happen, right? They end up paying. It's a much bigger check, but it's a much higher valuation. So the multiple money is probably not going to be as good going forward as it has been historically. Or you have to do twice as many investments. And, you know, your 50 bets investment is not as good as your top 10 investments. So you either have to do way more investments, double your check size. And typically, when they double the check size, it comes with a valuation that's commensurate.
Speaker 2I think they would say they double their check size, but the companies need so much more capital. AI is this exhaust of capital that venture needed. Finally, we have an avenue to deploy the billions of dollars that you very kindly give us.
Speaker 1Yeah. I mean, there's certainly massively CapEx intensive businesses, but it's not clear to me what the long-term returns on that CapEx is going to be.
Speaker 2With respect, given the size of checks that you need to write, are you able to not be in the mega funds? Just when you think about concentration on a per fund basis, if you have to write 50 to a hundred million dollars and you don't want to be more than 10% of the fund, I mean, you've got to be in billion dollar plus funds.
Speaker 1We're obviously in lots of funds that are north of a billion dollars. We're not in any that are north of 10 billion. Yeah. And we would certainly have a strong bias. I wouldn't say never, but we would have a strong bias that that's probably not the best use of our capital. And we have no problem getting concentrated positions. If you look through exposures, we have lots of significant capital allocated to a small handful of names that we've built up over time in really great companies that we don't need trillion dollar outcomes to have you know, SpaceX like outcomes. Yeah. It's just a completely different strategy. We would rather be at somebody who's small doing really interesting things in these companies early and we can partner closely enough with it that we know those companies, we can develop conviction early on and you know, we can essentially lead some of those
Speaker 2middle to late stage rounds. When is it interesting for you to get involved? Company valuations are soaring so far so quickly today. How do you think about like, when's the WashU insertion?
Speaker 1I mean, we come across at all stages, it's more driven by like our opportunity set at the time than any specific like strategy we're targeting this stage of company. But I'd say we're not good super early stage investors. That's a really tough skill set that I would say we don't have. So if we can't, you know, talk to customers, understand the product, you know, understand what we think unit economics look like, that's something that's going to be hard for us to build conviction in. So it tends not to be a lot of C or series A.
Speaker 2Does it become difficult as more and more of these funds have IR teams? And so the distance between you and the manager becomes more real, and your ability to get information get deals becomes more buffered?
Speaker 1Yeah, well, we've, I don't think many of our funds that we're real close to I even have IR teams, but some of them have somebody that functions like our guests. But the way we typically do it is more well, much more proactive, like we're not waiting for them to bring us a deal. You know, we're going out and saying, Harry, like, who are the five companies in your portfolio? Well, that you're most excited about, and then we'll just go out and meet those five companies. And if you know, if we find one that we think is really interesting, we'd be like, Hey, we would love to get involved with this company, if there's a chance for us to help lead the next round, or, you know, we've led employee tender offers, we've gotten direct on the cap table, we've done lots of things that help us get exposure, but that is more offensive than we're waiting for the your IR person to call us and say, Hey, we have and we're doing an SPV in this fund. And I actually think like, there's a huge negative selection bias, if you're just waiting for someone to give you a call and say, Hey, we have, you know, $500 million of open AI that we're syndicating out.
Speaker 2Can I ask you, when you review the venture book that you've built in terms of managers, what do you know now that you wish you'd known back when you're at $8 billion, when you were doing the fire sale?
Speaker 1We've definitely learned some hard lessons. I think maybe the biggest takeaway is like, you know, we've done much better on this like offensive strategy than defensive strategy. So we do way fewer of co investment opportunities than we do outbound. That's probably the biggest takeaway.
Speaker 2Are you concerned by where we are in the cycle? You're a very realist investor that to me really likes fundamentals. Today, a lot is detached from fundamentals, it would seem, especially from the private world, where you've got incredible exuberant pricing, real frothiness, juxtaposed by this very real public markets, reality. How do you think about that?
Speaker 1I mean, I think the markets have short memories. You know, if you look at the lessons from the original tech bubble in the 2000s, and the GFC in 2021, I from the crypto bubble, like, you know, we're seeing the same kind of stupidity that we saw in all those other cycles. And it's like every five years, particularly in private markets, you know, where I think the investors tend to be just less sophisticated, but it's clear to me that like, there's a valuation premium in the private markets, you know, I don't know where Anthropocene is going to go public. But it's clear to me, they could have raised capital in the private markets, if they stayed in the private markets at north of 2 trillion, if they wanted to. I'm not convinced that the public markets are going to give them that same valuation, maybe. Same with OpenAI, you know, Aura tried to go out, Cerebras tried to go, or has traded really poorly since the IPO. SpaceX is basically back to really close to its IPO price. There's just too much capital chasing these kind of late stage champions in the private markets. And the valuations are, I think that's why there's no DPI. It's not because the public markets aren't open. The public markets are pretty close to all time highs. It's just, you can't go out public at the valuation that
Speaker 2the private markets will give. Why would you go public? Is this a permanent transition in the financing landscape, where to your point that you could raise and stay private, the Collison's have proven that staying private and having a great business is very beneficial. You're still able to do amazing tender offers through Aura. You're able to do M&A and buy OpenRooter for $8 billion. How Scott, why are we going to go public?
Speaker 1There's a lot of rationale to stay private. I think ultimately like the public markets are obviously much deeper capital markets. I think, you know, when SpaceX raised 85 billion or whatever in the IPO, that's pretty tough to do. You know, the sovereign wealth funds and the big pension funds and SoftBank, like they can only write so many of those checks. And, you know, I think most of those capital sources have been exhausted and the public markets are still multiple the size of the private market. And I think there's 14 trillion or something globally in private markets.
Speaker 2Do you think we're seeing a massive sell-off now to make capacity for Anthropic?
Speaker 1Could be. We'd obviously be a lot of the same potential buyers, but I mean, I think that that's tough to kind of beta test.
Speaker 2You said about stupidity within private markets. What did you mean by stupidity? Like, what are you pointing to? Is it valuations? Is it deployment speeds?
Speaker 1Yeah, it's just valuations. I'm sure that half of these kind of, you know, I guess superintelligence is that, you know, they're not going to be able to do it. It's going to be, you know, it's going to take a lot of time, but it's going to be a lot of time. And I think, you know, it's going to be a lot of time. And I think, you know, these AI related companies, like probably half of these companies don't exist 10 years from now. And it's not clear how many have like a defensible mode around their business. It's not clear to me what the ultimate profit pools look like for these companies. I think it's a super strange dichotomy. If you take the top five kind of large language models and they all had the same user interface for 99% of problems or tasks, like you probably couldn't tell the difference, right? You wouldn't know which model you're using. Like, I can't describe another industry like that, that has a big kind of deep profit pool.
Speaker 2Do you have much exposure to OpenAI or Anthropic, the model providers? We have pretty decent exposure to Anthropic through a few of our partners. With the greatest of respects, as you said that the ability and willingness to switch, the commoditization, do you ascribe little value then to that model provider layer?
Speaker 1The way the business models are currently constructed, yeah. When there's a free alternative, customer willingness to pay drops very, very quickly. And I think everybody starts with the frontier model. And this is definitely true when I talk to our companies and our portfolio. You know, everybody starts with the frontier model. with the frontier model because if you're trying to implement ai like you know you're starting at spending at zero and you allocate some budget to it so i think everybody starts with the most expensive models and they use it they find it useful they ramp up spend and at some point they say like you know what for most of our tasks and certainly this is true on on my team like we don't really need a frontier model we're not solving millennial
Speaker 2prize problems why have you not sold then we've had very liquid secondary markets i completely hear and agree with you on everything but then why hold a position that could be sold yeah
Speaker 1for us it's relationship driven these aren't held in spvs where we could easily sell it's one exposure and a fund of 40 other investments so we wouldn't be selling just one thing in isolation those particular partners like they're they're great partners for us so we're happy to hold it and you know if it goes public we have the ability to hedge if we think the price is right how
Speaker 2do you think about the stock distribution lens we've seen several managers say actually we think we can manage your position once public and so we're going to create vehicles to do that others say we're going to distribute straight to you in stock how do you think about what is the right way and then what do you do once distributed with the stock yeah
Speaker 1i mean it depends on the the situation we have stuff that we owned as private companies and it went public five years ago like new bank it's in our 13 f we've owned that since it was a private company it was distributed and we still own it it almost five years later other companies that goes public and we have the ability to hedge exposures even pre pre-distribution we'll do that if we think the valuation is frothing so for us it's it's kind of valuation we we probably have some independent view on what we think the right value for the the stock is and so we'll partially edge or fully hedge
Speaker 2the position so you get stock you do a like scheduled sell down over an 18 month period it's totally ad hoc and it depends on a per name basis i agree i think new bank's amazing and david is a rock star i'm i'm a holder too but how do you do that for
Speaker 1something like spacex or a really big position that we think still has like a ton of potential upside over the next five ten years like we'll you know try and be as thoughtful as we can and it's you know i always say it's better to be not stupid than clever so it'd be stupid to not take some chips off the table because we have a fiduciary obligation to the university and the mission of the university so we'll take some chips but if it were a much smaller position we would just hold it for the next 10 years so we're to some extent just risk managing that position but we'll gradually sell out it over you know multi-year period
Speaker 2god i believe you were one well the only allocator to suggest to sequoia that maybe the eternal and evergreen funds were not optimal how do you think about and reflect on that and did you did you kind of sit back and go wow this is a bold move as you were doing it i mean it was controversial enough that we
Speaker 1discussed it with the board i mean they're great investors they're great people and they've obviously made lps a ton of money over long periods of time like it didn't fit super well into our kind of co-investment model so they weren't great partners for us at that point in time and you know it was probably detrimental to some lps when they switched that structure and we really haven't followed the firm as closely since then but hey those guys will do great over
Speaker 2long periods of time scott i'm so sorry to be so blunt you don't freaking turn down sequoia like you just you just don't do it i really like you because you're blunt you're honest you're just a good dude but like what are you doing even even if they 1x the point is you're you're close to the green leaf and goodness comes from being close it's like the genie in the lantern you know in the cartoons maybe don't rub it yeah no i'm sure
Speaker 1it was a mistake if you look at the returns that they've generated but we've done just fine did every lp just come to you and be like wow that was so bold you know it was funny there was a bunch of lps they called and we expressed you know our view and uh i think everybody complained about it but everybody did it at the
Speaker 2end of the day i have so many lps that cool us up because we have a lot of data on the managers we interview and they all say i can't believe it and they name a big mega platform they make me do the india fund the china fund the bio fund the crypto fund the games fund i can't believe it i can't believe it and i say so did you do them and they go oh yeah of course we did it oh yeah
Speaker 1yeah and we just want to do that we'll just we'll find some other place to put capital
Speaker 2is it a big decision for you to churn like do you agree with the three fund policy for fund commitments which is traditional in venture being lps will commit to three to give managers enough time and room to prove themselves or not yeah i
Speaker 1mean like we don't have a hard commitment like probably we're committing to more than three funds but we will as soon as like there's something for us to go and underwrite you know and we're fortunate that we don't have that many partners so we typically know their portfolio companies relatively well and we'll start making our own judgment calls on what we think the quality of the underlying portfolio is early on and if we if we think there's a big disconnect on you know between our view of the portfolio and a partner's view of the portfolio then you know we won't stick around but that's super rare i mean typically we have some view before we invest
Speaker 2when you review those decisions to not do a fund what is the dominant reason what's the number one most frequent reason why you will churn discipline around valuation wow that's bold but it's bold because you don't know with the greatest of respects and so the best companies often look expensive at the time but very cheap in hindsight and so for you to take a snapshot decision and say that company is overpriced is bold close to it
Speaker 1being done yeah i mean it's typically it's not just one example like we had one partner that i'm not sure he found a hundred times revenue deal that he was willing to turn down like it just didn't exist and for something to trade at a hundred times revenue it has to be you know an exciting company i get that but for us like that's not what we want our capital to be used for we want discipline around valuation you know and you mentioned leaf excel like you know i think he's super pragmatic he'll obviously you know pay up and he's participating in the market and he's going to be able to do that so i think that's a good thing and i think that's a good thing and i think that's a good thing in some of these great companies that are huge winners but he's also very pragmatic about you know when things get too frothy stepping away do
Speaker 2you think we should give managers forgiveness patience for deploying funds much faster than they said they would scott me and you are both old enough to know that every manager says three years and every manager right now is coming back 12 to 18 months later saying scott i'm so sorry i'm so sorry but it's the best time ever to be investing it's the best time ever new intelligence intelligence should we give them forgiveness
Speaker 1you know if we think that they're deploying capital at really high returns like we have no problem with really fast deployment and if we think if they're deploying capital at poor returns or poor expected value then we don't care how fast it's deployed is what i would say we have a bias for smaller funds like we'd much rather have someone who raises you know a billion dollar fund when they could raise 4 billion and and comes back every 18 months then then someone who raises 10 billion and comes back every 18 months and then someone who raises 10 billion and comes back every three years we we just think like the ability to write like a small check in a venture portfolio and have that be a super meaningful outcome for the whole portfolio you know a fund returner is is much easier on a billion dollar or less fund than it is in a 10 billion dollar fund
Speaker 2do you look at it through the look through perspective being if i have a billion dollar fund and i get 10 in every company that i invest in and you say well we're a hundred million dollar check of your billion dollar fund i'll look through obviously i'm just explaining it for everyone listening you've got this already is one percent in every underlying company is that how you think about it that's exactly how we think about it we hardly
Speaker 1ever talk about like fund of performance we we only really talk about the underlying exposures in the portfolio so we aggregate everything up and we know that we have x dollars of spacex or cerebros or anthropic in the portfolio and that's that's how we think about it can i ask you on your
Speaker 2like cerebrus how do you think about performance being challenged and i'm not saying to come in on cerebrus at all but when you have a company that is hit by bad tailwinds in the public markets how do you think about whether the stick and hold or actually a fiduciary duty to just cash your
Speaker 1chips in yeah i mean cerebros specifically like for us that that was a really big position at the ipo and so we took some chips off the table and put some hedges on even pre-distribution but we like andrew and the team so we'll continue to hold some of that and i think you know it's if you look at the current kind of kpis of the business relative to expectations going out the next four or five years it's tough to justify the valuation even at 25 30 billion wherever it's at today based on what they've done the last 12 months you're betting on the the come so to speak so that company has a lot to prove but it's clearly a great company and we have lots of confidence in in andrew and his team to produce good results over the next decade
Speaker 2scott if you could do anything without retribution from any stakeholders students board team what would you do differently you know i would
Speaker 1i would probably There's this natural tension between we're here to support the mission of the university and that's why we exist. But I also think a 5% payout in certain market environments is tough long-term, depending on gift flow. So I'd probably smooth the payout over a longer period of time. But I understand that tension and it's great to grow the endowment and be able to see the impact on the institution. So I think that's a natural tension. I don't think there's really much at WashU that, if it makes sense for the stakeholders and for the team, we've been able to accomplish everything we wanted to accomplish.
Speaker 2Scott, you've seen many cycles now. You're a pro. Does this have a shakeout or do we keep. keep going on the meteoric wave that is super intelligence and
Speaker 1ai yeah well i think there will be a shakeout i don't know what the timeline of that is like some of these industries that have just had massive runs like historically they were not great businesses you know and that was for like three decades they were businesses that probably barely returned their cost of capital and at some point they'll go back to being not great businesses but in the short term you know if you used to sell a chip or memory for three dollars and now you sell it for thirty dollars and all that excess just falls to the bottom line i mean i think you see that in the multiples like i think some of these industries right you you buy them at very rich multiples and you sell them at low multiples because that's how cyclical companies work but how long the cycle actually lasts i think that's anybody's guess can
Speaker 2i ask you given what we said earlier you mentioned like new bank or say i'm just choosing like like an uber or an nvidia of the world these are comparatively very cheap companies based on a fundamentals basis actually today and then the privates you mentioned like new bank or say i'm just choosing like like an uber or an nvidia of the are exorbitantly priced if one looks at fundamentals and then i look at your statement earlier of wanting to be 70 to 80 percent in privates and i just try and judge yeah for us
Speaker 1we are deploying all of this stuff that we're generating liquid back into public markets right now so like 70 or 80 percent i like if we didn't have any liquidity constraints i think over time privates would grow as a percent i mean we're at the end of our fiscal year we were 70 in privates but a bunch of that is become liquid so we're redeploying that and we think the opportunity set in publics particularly like non-ai ai infrastructure related publics is a really good time to be investing in in sectors completely that we think are relatively protected if not immune
Speaker 2from ai it's a bit of a blunt question but you've had such a meteor like 11 billion dollars is an incredible capital accrual value appreciation for for washu and it's it's an amazing journey you can't even imagine how much you could do anything now scott you could have every trillionaire billionaire in the world pay you an exorbitant amount of money to join you on their superyard and run their family office
Speaker 1with respect it's actually a lot so in the nine years i've been here we started with roughly say eight we've generated 17 billion dollars of profits on that original eight billion and we've paid out roughly five billion to the university all right
Speaker 2i mean that's just showing off scott okay but you but you could and obviously washu is an incredible institution amazing but like humans are humans yeah why do you stay in i'm
Speaker 1super happy here i've got a great board a great administration a great team you know and uh i make plenty i'm well compensated so it's a great place to be and i yeah i obviously had opportunities to go elsewhere but i'm very happy at washu if you if you spent time with my board and and the chancellor of the university like this is a great place to work and you know i think uh maybe more than half of your your fulfillment and enjoyment coming to work every day is who you get to work with and you know from that standpoint i'm just super fortunate and you've spent time with my team like that's it's a really great team
Speaker 2i know i have they're amazing listen i think before we do a quick fire you learn from sometimes mistakes we've talked about the amazing successes when you reflect back on the you know 11 billion dollars that we've added what did you not do in that journey that you wish you had done be it renewables be it more in privates be it you name it what did you not do that you wish you had
Speaker 1done yeah i think our biggest mistake was not adding to our winners just because whether you like get frame of reference bias so we invested in this company at two billion and now it's five billion so we didn't add to it and obviously like you know the position was twice the size at that point but you know we we had times where we could have invested in stuff that i think was still probably our highest conviction investment and we didn't do it either because you know it had grown in the portfolio or the price had just gone up and you know we didn't do it because you know it had grown in the portfolio or the price had just and that was a that was my mistake and it's cost us billions of dollars so that that's probably the biggest learning over that time frame what
Speaker 2did you do that you wish you hadn't done on the flip side
Speaker 1oh well i mean there's a there's a lot there's a lot of individual funds i wish we hadn't done obviously we made tons of mistakes on the co-investment you know it's an 80 20 rule where 20 of your investments have generated 80 plus of the profits we're not quite that bad but but yeah we've made tons of mistakes you know we've added capital to companies that you know probably we should have let die but we thought there was still a chance they could recover we've made every investing mistake you could you can think of is
Speaker 2there one that really
Speaker 1stands out yeah i mean our biggest mistake we had put in like mid 2020 we had put a huge a huge packet of kind of lp interest into the secondary market and the markets had this huge run at the end of 2020 going into 2021 and we decided to hold off because we knew that all those companies were going to have just massive write-ups in the next couple of years and we were waiting for the first quarter to basically you know maximize the value on the secondary sale of those assets and then you know that was a short-term bubble in venture markets so like we were just essentially being greedy and we had the chance to sell at really good prices and we we didn't take it you know pretty much by the like i think it was probably mid 2021 and so that 2021 period we we were up i think 65 and and obviously wrote a bunch of that back down over the subsequent year and so we were just essentially being greedy and we had the chance to sell it really good prices but we had a chance to get out of a bunch of that stuff at really good prices and we didn't do it and
Speaker 2so you wish you'd done it
Speaker 1yeah for sure yeah i mean we were probably taking like 80 90 cents on the dollar but we were pretty sure that the bubble wasn't going to last
Speaker 2forever and uh and so we should take chips off the table one of my dearest friends who's a very successful ambassador told me you must be be fearful when others are greedy and greedy when others are fearful and it sounds so obvious actually very difficult in hindsight yeah it's
Speaker 1i think we needed another three months or something and those of it was a big secondary sale do you
Speaker 2care about europe i had david moorhead on from baylor it was i mean he laughed at me in all honesty when i said about europe do
Speaker 1you care yeah it's mostly like idiosyncratic ideas but we like europe and we found lots of interesting stuff to do in europe and it's a super interesting market now we're recently investing in a fintech company in spain
Speaker 2and so wait pause scott europeans don't invest in fintech companies in spain yeah what what the what are you doing investing in a fintech company how does that one of
Speaker 1our partners um and we invested you know in another well i mean it's more of a global fintech company but based in london and singapore but we've done a lot in europe recently i mean the thing is like for the same quality of asset and there are good companies over there just because like the market as a whole has struggled we find that there are great companies and certainly non-tech related companies you know if they were based in the u.s and had the same kind of kpis growth and unit economics they would trade at huge revenue multiples and in europe they trade it you know small earnings multiples my question to you
Speaker 2on like some of these companies europe or asia is actually everyone's like oh the europe discount or the asia discount well if there's always a discount it's not a discount it's just the it's just the price well
Speaker 1there's uh there's price and value i think you got to separate the two right if you think companies are like you can buy it at 100 we think it's worth 300 and we think it's compounding value at a significant clip like we think that's a much better investment than in buying something in the u.s that trades at five times and multiple that's compounding value at the same rate does that make
Speaker 2sense it does so people understand how do you determine the difference between price and value value is what it's worth and price is what someone's willing to pay price
Speaker 1is what you pay value is what you get and it's very subjective and i think you have to be pragmatic about valuation but for the same quote quality of assets and you can think same growth rate and you know over long periods of time like what the core kpis of the business will drive returns more than the original entry multiple so if you get a much cheaper multiple on the entry price and you get the same growth over a decade you're going to do a lot better do you have much in china we don't we don't have a ton in china we have an office in shanghai so we we cover that region really well we have two guys there permanently and we certainly look at a lot of stuff in china we probably have more than our peers in china and we've been active you know since jamie diamond said china's uninvestable we've added a decent amount of capital and i think china was one of those markets you know the the geopolitical risk was always there the fact that it was a little bit more visible like if you spend enough time in asia you know you want to do stuff that you think is either under the radar or supported by the broader political parties so i think you have to be rational there but when you can find a good company that can actually return capital to shareholders and and you know has a pragmatic view on the world we think china is a great place to invest
Speaker 2why does everyone else not then i i know i again i i so enjoy this show dude why do people people often ask me like why do you love doing the show i'm like because i have conversations like this dude the world is saying no run they kill education overnight whole sectors get taken over xi jinping has like unlimited power and control and everyone's like get out respectfully you know you're not what do you see that others don't
Speaker 1well you see that but like we you know we've seen worse behavior on very developed markets like in the uk where there was like offshore like on the northern part of the uk where they had the offshore oil and whatever energy assets and they took the tax rate from 25 to 75 i mean that's basically confiscating half the company i've never seen that behavior in china and they more or less did the same thing in norway with certain types of assets like if they take the tax rate from 25 to 75 percent they're going to 75% to 75%. equivalent of confiscating half the company do you mind
Speaker 2that and i bet you weren't expecting to go here but my knowledge of investing in chinese funds is actually surprisingly solid yeah when you invest in a chinese fund there's a dollar denomination and there's like an rb denomination and now the average is one dollar to nine rb do you mind that split and if you're not allowed to invest in chips and some of the most exciting things with the dollar denominated fund does that not take out all the alpha of investing in china yeah i
Speaker 1mean i think there's a natural like some agency problems but i think for the most part the entrepreneurs prefer dollar and it's a way for them to get assets offshore if they're in the vie structure so you still get access to really good companies and that's a good good market and we don't have a ton of funds in china but we're certainly not afraid of it and we we've done more kind of co-investments and one-off stuff in china over the last five years but yeah it's a huge market is what i would say but you have to navigate it on the ground and and be realistic do you have to have a team on the ground to do china i don't know if you have to have a team on the ground but you certainly have to invest through local partners
Speaker 2listen dude i want to do a quick fire round with you so i say a short statement you give me your immediate thoughts what fund are you not in that you wish you were in benchmark probably you're not in benchmark we're
Speaker 1not no i mean i wish we had like a bigger allocation to the early stage founders fund as well how did you
Speaker 2get you got Cerebro through foundation we got Cerebro through a fund called eclipse oh yeah leo yeah you can put all of your money in only one fund which one do you choose private or public one each i will say
Speaker 1addition of our our core partners i think he's the best investor in our portfolio he's just very pragmatic he's disciplined around price but will pay up for super high quality assets and i think his underwriting process and and just the way he dissects companies and i think he's going to be one of the best investors in the world and i think he's going to be one of the best investors in the world and i think he's going to be one of the best investors in the world and i think he's going to be really impressive and so of the people i've spent a lot of a lot of time with i think he's the he's probably the most talented
Speaker 2investor in our portfolio are you ready for a hard one you have an amazing board who would you most like to have on your board who you don't have on your board today
Speaker 1probably it would be somebody with real industry expertise like uh elon musk or um thomas reardon somebody who i think has like real deep industry knowledge that we could use and could help us diligence a variety of investments i mean as it is my board is
Speaker 2is really great at that which other endowment fund do you most respect and why them there are several
Speaker 1um you know i think what eric's accomplished in michigan what robert's accomplished at virginia seth at mit jane now josh at brown like those those teams have just done unbelievably well over the last 20 years and i think that's uh you know ultimately that's what you're judged on is the you know multi-decade performance of the portfolio do
Speaker 2you have like a cio dinner party like all get together and shoot the shit
Speaker 1well i've been involved in like various little groups over time and a couple like one-off chat groups where i keep track with some of my peers and you know my daughter goes to school in boston so i'll meet some of the folks in boston when i go out there but but no there's there's not like an organized like regular cio dinner i think most of us spend enough time on the road that it's uh that'd be tough to organize you've worked with
Speaker 2incredible managers you've met and yeah worked with incredible founders final one when we think about the best advice that you've been given that sticks with you every day what would the best advice you've been given be the best advice
Speaker 1i told this to like kids all the time but and i think it's very true and it it stems from like i don't know who first said it but you should always try and be the best at things that require no talent so like showing up being curious working hard being asking good questions being respectful being kind like all those things that require no talent i think contribute a lot to success over time do you know
Speaker 2and i also think it's appalling when today you are equipped with tools that allow you to be so good at those things so easily you can go to chat gbt before an interview with scott for a job and say give me three things about scott that will show that i've done my work and really impress him and it'll tell me about an incredible investment you did at grinnell a quote that adam said about you and something else and if i say those in that meeting you'll be like wow how he did his work yeah no it
Speaker 1should be easier than ever to do those
Speaker 2things scott i do the show four shows like this i can't thank you enough for a agreeing to do it but b being so open transparent fantastic really this has been a joy
Speaker 1yeah well thanks for having me it was a lot
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