E386: Adams Street ($70B): Venture Capital Has a New Problem

What's really unique about this time is the big next wave of magnificent seven are all well known and massive value creation is accrued to the private shareholders rather than publisher holders. It's become a little bit more apparent to people which companies seem to be really breaking out. Clearly it did decades ago, even back in the dot com bubble. So Jeff your managing partner at Adam Street partners which has 70 billion dollars AUM. And last time we tried you said that you always say one very important thing to anyone looking to invest in venture. What is that? The most important thing you can do in venture is access top core talent managers. And then there's a sub point to that which is make sure you invest over time and get good time diversification. Do those two things well you're going to be in really good shape. And we were talking about this right before you best record. This is the professor Steve Kaplan the persistence of venture capital which is if you invest in top core top funds over the last 40 50 years. Highest amount of persistence in venture capital than any other S class in the world. Both dispersion of returns and persistence of returns are higher than any other asset class in the world very very unique. Give me some numbers on that. The statistics would show in venture capital that if you've produced a top core tile return. The chances that you're going to produce another top core tile fund or a top half fund range in the close to 50% and close to 85% probability. So lots of stickiness to this and that makes sense entrepreneurs who start companies want to work with the best people who could help them build value the most. And many of the entrepreneurs came from prior successful venture back companies work with the firm and work with some individual people. So success kind of feeds on itself in terms of the personal relationships. It's kind of a reverse asset class and most asset classes the LPs choose the GPs and the GPs pick the portfolio companies here. You actually have the founders picking the GPs and the GPs picking the LPs why because the best managers are access constrained and they have their pick of the litter when it comes to LPs. Yeah I always say like we're an investment firm but we really sell money to people who can choose their financial partners. And the constrained resource in this world is the brilliant entrepreneur and the terrific CEO who understands a problem really well and is a brilliant designer and thinker about product innovation and create something customers really want in a huge massive you know total addressable market. Great venture capital find those people and sell their money to those people instead of value and we try to do the same with fund managers and ultimately CEOs too is a co investor. Given that these funds are capacity constraint how do you go about differentiating yourself from the many prolific LPs out there. It's being consistent good partners over a long period of time. I think we're fortunate to have been investing in venture capital company since 1972 and funds since 1979 so we're sort of a known commodity as a stable long term good partner through thick and thin good times and bad and have very transparent relationships with some of the best actors in the business. So I think we were fortunate on timing but I also think being present over a long period of time and consistent good partners even when times don't go well helps build those relationships and strengthen them. That's the second part of the equation that you mentioned earlier which is you want to be in top courts all and you want to persist in terms of investing across many different years. And the reason for that is oftentimes some of the best ventages follow some of the worst ventages and when there is something like the dot com bust or 2008 oftentimes that's the one time that top VCs will need their LPs to re up and so many of the times these LPs just aren't there. Right after the dot com bubble collapse we held an event in Silicon Valley and invited all of our venture managers and sort of said we just wanted to thank you for all the hard work that you produce the great returns you produce and we know there are some lean times right now but things will come back. I think they were a little worried we invited them to the session that we were just going to come yell at them. Mass fire them. Yeah, mass fire them and yell at them. It turned out it was really a thank you for all the terrific returns and we understand it's a wildly cyclical business that tends to have 10 or 15 year cycles. And you know the best people need to continue to work hard through there and I think the key is when they make a lot of money they still motivated work hard. One of the key distinctions is the salesmanship versus track record and behavior of LPs. If I lined up 10 of the best LPs in the world they would have a very similar pitch which is wherever graying we're here through bad and good times. But the proof is in the pudding you have to look at the track record and how did they act during the last financial crisis which by the way is what most LPs do for GPs to figure out which GPs they want to invest in. When you've been in the business now for as long as we have people know that we're here through thick and thin and that we're here and good times and bad times and we'll actually tell people in the venture space if we think they're doing things that are pretty pro cyclical you may be raising too much money maybe trying to send their products we little too far stretch a little beyond what they're really good at that happened in the. Dot com bubble where people are raising funds every single year and investing in every single year that's a Cardinals in no time diversification so we will be frank with people but you know being around a long time helps you build that trust and confidence. One of the reasons I want to have you on the podcast in addition to you running one of the top limit partners in the world is that you now have 13,000 realizations in your portfolios dpi. What is that taught you about the nature of returns and venture we're probably up to close to 14,000 companies have been fully exited by managers since our inception first fund invested in 1979 in the venture space and our data shows that the top 7% of companies sorted by money multiple on cost have produced 100% of the net gains for our investors and the other 93% are winners and losers that offset each other about half the deals that have been realized don't return invested. Capital so this is a business of wild outliers someone once said hit the home run watch the ball balance and continue to roll and roll and roll for a very long period of time that's where real outcomes come from the adventure it's the Jeff base of principle investing in baseball you step up to the bat and in the best case scenario you hit a 4x so you have a grand slam. In venture capital you could step up the bat and you could hit a 10,000 home runs in a single swing that's right in order to make that top 7% club you have to generate a money multiple of 6.2 times or better the way you do that is you can get in the companies that can compound growth at very high rates over a long period of time hopefully you get in early and get a decent ownership stake in the company. You're going to have a higher loss rate at that stage but it's harder to generate the 6.2 times multiple if you come in pre IPO for example so that's why our strategy focuses on really stage managers and did you have a basket approach they don't know which company is going to work but they can good bets along the way will ultimately to good outcomes. The thesis which I call strategic ignorance which is how do you structure your venture capital investments in a way that you not exposed to single misses because venture capital at its best if you have enough diversification into the top deals you will do well as long as you have enough diversification you're going to do well where people get thrown off is though obviously be out of advocacy selected they're not in the top managers and on the top deals that's the main sin but the other sin is you don't do enough deals or you put it in the top deal. You're going to have a higher loss rate at the top of the deal or you put it into structures where now you're exposed in your IC is exposed to this one or two or three zeros which are inherent as part of venture capital investing you need to really be careful about the structure and how you're investing in venture capital. Portfolio construction is super important in venture capital you know when times get hot there's a lot of fear of missing out you'll see individuals making investments in single companies and the reality is in venture. You can lose all your money in a single company investment it's happened to a lot of us probably my most humble experiences when I've invested in a company and lost all our money. Portfolio construction time diversification making sure you're getting quality access to good managers but then not over diversifying really important to do that steadily over time and that's how you can generate good returns of venture. So you mentioned 7% drive all their returns 93% basically cancel them out what do you take from this lesson. It's a very small percentage of the companies that really matter very difficult to predict what those could be I'd love to cut off the ones that lose money but you're out easy to get the good with the bad. So you just need to put yourself in a position with managers that have access to the best entrepreneurs to make enough bets and be able to participate in those sort of outlier outcomes. And hopefully you're in a position to be able to double down through some co investments or some secondary activities to get more exposure to those breakout companies once it looks like they're really starting to move the needle. So you're not only investing in funds you're also investing companies talking about the process in the venture space we invest in early stage venture funds principally we'd like to figure out a way to find those companies that are starting to break out and need additional capital and find ways in through co investment activity as well. So we are active co investors in the venture space not usually at the earliest stage of the company's life but as it starts to demonstrate the sort of traction you can do some more media diligence on the business. We also participate in the venture secondary market where as companies stay private longer there's more investors early employees that are looking to try to create some liquidity since they're not public companies and we can serve as a participant in the secondary market to buy either individual company interest or baskets of companies that might be in a LP fund or or a GP led situation. How much of this is driven by your GP relationships literally 100% of it we rely upon the information that we have. about the underlying companies and how they're doing, 'cause at the end of the day, it's an asset selection business. If seven percent of the companies are gonna drive 100% of the gains, you really wanna get more exposure to those seven percent of the companies and avoid the ones that aren't gonna produce those outlier returns. So without a very good LP investing business adventure, it's pretty difficult to do venture secondaries and venture co-investment right. >> And is venture capital becoming consensus as a class today? In other words, are all the winners known at the early stage? >> It's a good question. I mean, obviously there's a lot more visibility into the breakout companies in the press than there used to be. If you think about the magnificent seven, they were all venture back companies. They probably weren't very well known when they went public. They were much smaller market caps. And all the value creation has occurred since they become public companies. What's really unique about this time is the big next wave of magnificent seven are all pretty well known. And massive value creation has accrued to the private shareholders, rather than public shareholders. I think it's become a little bit more apparent to people which companies seem to be really breaking out than decades ago, even back in the.com bubble. >> I just interviewed Matt Wildhire from Wellington and they did analysis on public tech companies and only four of them had four casts of more than 30% growth. All the growth is now going into the private markets. And he actually mentioned that he has pension funds that are now investing into the private fund because they see that as the new way to get small cap public companies. >> I've invested personally in 25 to 30 called venture growth stage companies. A couple of those were fortunate to have gone public. Having sat on public company boards in situations where you're less than $10 billion in market cap, it's pretty miserable. You can't get in next funds, you can't get the attention of anybody. Your company could be doing great, but you lose out on 40% of the buyers. So the best advertisement ever for why you should be private if you're less than $10 billion in market cap. And so really if you want to capture that sort of company growth profile, that doesn't really exist in the public markets anymore, and it really isn't much incentive for CEOs to be public at those levels of market cap. So I think absolutely if you want to capture growth, you've got to be in the private markets. >> Irrefectively running Adam Street, both at the CIO and CEO level. Have you gone about building out your team? >> Look, when I was asked to take over 11 years ago, my resume did not scream CEO or CIO of an asset management firm. Frankly, I had been an investor directly in companies, these code of venture growth stage companies. So I'd say there was a lot of learning on the job when I first took over. And I was fortunate that my predecessor didn't go anywhere quickly. It was a really good mentor to me as I kind of built through my career. Team building is a process that takes a very long time. I'd say if you look around the table today at the leadership team, there's some very similar faces, but there's some new faces. So I think it's always important to understand like what level is a business scaling and people continue to scale with it. And obviously have really good succession plans in place when people are ready to retire and go down with the next chapter of their life. So I think it's a constant journey. >> Succession plan is really important because you keep people from leaving. You basically de-risk their career path at the firm. >> We always wanna have a path for people to retire gracefully. Our firm is 100% employee on firm. I'm the largest shareholder between six and seven percent. Since I joined 90% of our ownership has changed hands without any outside capital coming in. So we've got a built-in way to generation of the transition ownership and succession. So succession's really important, not just for opportunities for individuals coming up through the system, but our clients are trusting us with managing private capital for a very long period of time. So they care a lot about how do we manage through succession gracefully and professionally over time. >> Expert calls have always been one of the most powerful ways to build conviction. But today, investors are asked to cover more companies, move faster and do it with leaner teams. With AlphaSense AI-led expert calls, their teachers call service team sources, experts, based on your research criteria, and let's say AI interviewer get to work. The magic is in the AI interviewer, purpose-built, and knowledgeable-based information to conduct high-quality context-stretch conversations on your behalf, acting as a trusted extension of your team. Then they take it one step further. 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All of it lives inside the AlphaSense platform, trusted by 75% of the world's top hedge funds, alongside filings, broker research, news, and more than 240,000 expert call transcripts, turning raw conversations into comparable, auditable insight. Take advantage of AlphaSense AI-led expert calls now. The first to see wins, the rest follow. Learn more at alphat-sense.com/howiinvest. Succession and venture capital is so notoriously bad that you could literally count the firms that have been able to do it, not the firms that have not been able to do it. Sequoia and Benchmark, of course, the most famous versions. Why do you think succession is so poor in venture capital? It's really hard for so many different reasons. One of them is gauging whether someone's gonna be a good investor is really tricky. Feedback loop, sorry. The feedback loop are so long. Obviously there's a partner ethos and a way to think about investments that meet the bar and you can see what people are bringing in, who they're bringing in. But the feedback loop can be incredibly long and Frick, there's a lot of luck involved in the success in the business, right? I mean, for every wild success story, if you went back in time, they've all had a near-death experience. I've had an anthropic space text, open AI. Every company has multiple near-death experiences. So there's also some luck involved here and every venture capitalist will tell you, it's very humbling. One of those challenges is getting some signal there. Everyone who's gonna come into the industry is gonna be super smart, have great educational pedigree. But it's really difficult to forecast that. And then of course. >> How I invest is celebrating 400 episodes, join me live in San Francisco on Wednesday, June 17th for an evening of drinks, aderves and a toast to the smile stone. The event is free and space is limited, so don't wait. Go to waspurdcapital.com/events right now to register. That's W-E-I-S-B-U-R-D capital.com/events. How I invest is celebrating 400 episodes, join me live in San Francisco on Wednesday, June 17th for an evening of drinks, aderves and a toast to the smile stone. >> Of course, you got the cultural fit and the way people get along and work collaboratively together and help each other. Those things are just really quite a lot of nurturing over time. And you got to build layer cake of generations, because the entrepreneurs aren't getting any older, they're getting younger. And so you want people who can relate to those entrepreneurs at the same level of age and vintage in stage. >> Yeah, people age out of their networks. They may have known somebody from business school or from their engineering program at Stanford. And now those people are in their 40s. They're no longer starting the next company. >> They've heard a great start one time. I don't think we've ever done this analysis, but after the age of 45, there's very few home run successes that adventure capitals will produce. I think some of that goes to the counter parties that they're trying to interact with and how many of those people at their age and stage are starting companies. Maybe a little outsized in the analysis there, but do you think there's some truth? It's a young person's game. >> I think as a 45 year old or a 50 year old, it's hard to invest into somebody putting air mattresses into their bedroom or somebody driving in random cars. Your mental plasticity decreases significantly and you're no longer able to think like a teenager or somebody in their 20s. >> Yeah, that's right. So there's a lot of tricks to be able to generation to do succession well. And of course, you always run into, are people hanging around the hoop even after they've kind of made the money for the LPs because they're still eager to capture economics. Are they sharing economics with other younger professionals? How's that working? So you're right. I think there's a fewer list of firms who've done it incredibly well. And a lot of firms that have not done it well. >> I want to double click more on this governance and these incentives because every CIO, especially the ones that I've retired side, like Larry Cochard, who was at McKenna and also Georgetown UVA, had Britt Harris who's become an advisor of us who is at UTIMCO. And I love to interview these CIOs after they retire because then you could really get the real deal. And they all convert on the same idea that it all comes down to culture, governance, and incentives and everything else is essentially noise. >> I think those are all very true. For us, we have one investment strategy across five different teams, so it makes it pretty easy. And also being in private markets only. There's really the edge comes from your relationships with sponsors and ultimately CEOs, the companies, and the information that you have regarding the underlying companies and how they're doing. So there's a massive need to share that. So I would say the culture for us gets cemented by our employee ownership. because we all have shared economic interests, then we all think like owners. But then when you get down to the individual investment teams, you do need to think about how you share carry and performance fees. And we generally like to have sort of equal partnership models so that you don't have someone worrying of being jealous about what someone else has got more than them. We want to take all that economic thinking off the table and just focus on doing a great job for producing returns for our business. >> That's always the default, because people want their deal. They want that track record. They could think they may want to spin out. They want to own that individual track record. So that's always the defaults. You can only exacerbate that by also adding economics to it, where they're now incentivized to push their deal versus the best possible. >> We go off our way to talk about when someone's presenting a case for an investment. Don't think about the person presenting. Think about the argument that's being presented and the information that you have at hand, whether it's you're interacting with the CEO, you're reading documents and diligence. And then we want the debate to be about the merits of the investment. By the way, it doesn't always have to be consensus. Some of the most successful venture back deals were split houses in terms of people voting, saying we should absolutely not do this and we should absolutely do this. >> That's oftentimes a signal. >> It's oftentimes a signal. The most controversial deals can be the ones that end up being thinking differently and having it be a wild success. So you got to be careful about how you do your voting, your governance and decision making, in addition to making sure you got a culture that doesn't think about who's the person presenting this. It's all about the opportunity set. Not to be overly cynical, but is there even culture or behavior that's not downstream of incentives? In other words, can you really create a culture that's disconnected from the incentives? >> I think culture starts at the top of an organization. My predecessor had a focus that said, look, our clients' returns are the most important thing that we produce and we hammer on that all the time. That's the most important thing. They focused on that, everything else will take care of itself. But it has to start at the top and it has to filter its way down through the organization. I do think the cultural messaging and kind of walking the talk is super important, but it's been so intertwined at our firm in terms of the employee ownership model, broad-based. There's shared incentives and shared success and failure that it's intertwined. It's hard for me to really separate the two. There's no question that incentives and culture are very important when it comes to the investing business. You want to make sure entrepreneurs get a lot of skin in the game and can rally the employees with ownership that they do well if the company does well. But it's still, you can have a bad culture even with good incentives. >> I've had this, this will be roughly episode 390 and I have hundreds and hundreds and hundreds of episodes that didn't even air, which is pretty interviews. And one of the things that I found that subtle, but not subtle at all, is that the best organizations incentivize what they want. Other organizations, they all say similar things. They talk about partnership, they talk about collaboration, all these things, but incentives are not there. Sometimes those outcomes could be in order to magnitude different, 10X, 100X more assets or 10X, 100X better outcomes across the organization. >> I would agree with that. Obviously, a lot of time as a limited partner has spent understanding culture and the economics and how they're shared. What's interesting is we've seen success stories where economics are pretty concentrated into a single individual or a couple individuals. We'd obviously much prefer the egalitarian approach with equal partnership and we gotta kind of pay your way because we don't think there's any real tax in terms of people's jealousy or between each other. But there's lots of different models that you can succeed in the investment management business and private equity and venture capital. >> When it comes to venture capital firms and building team incentives, what are some best practices? >> I mean, I think the best model I've seen is everybody's an equal partner, everyone gets a benchmark model. >> Yeah, the benchmark model. I mean, I think it's a really terrific model. I think it's just scale, it becomes harder. If you create a bunch of different product suites, then it becomes a lot more complex. If you go to some of the largest multi-strategy, multi-product firms, they've got very complex systems and you have to think about who's really involved in origination and underwriting and winning deals and then working with the company investments after you've made them. And you really got to think through all that and how do you make sure that's all aligned? Generally, at Adam Street, you're an employee of the firm. We have performance fees, we split them with the teams and the house and the house is owned by all the people. So everybody gets to participate in the success of every other investment team, which is critically important. Since there's so much interconnected tissue in origination and underwriting and winning really interesting deals. >> When it comes to venture capital firms, you mentioned you look at the incentives of the management fee and carry, but there's also an underlying company that has value. How important is that underlying company to be shared with the entire team versus just the fund economics? >> Look, when it comes to the value of the GP, if you will, we love when managers don't think about that and are really thinking about how do I get rich off of the carry. I mean, in venture capital, that's really what you want. Now, we have seen an evolution of the space. I mean, you've seen firms become much bigger, you've seen firms start to product and first to high. Historically, scale has been the animated returns in venture capital private equity. We'll see how that plays out over the years. I think that's probably one of the biggest challenges an LP allocator is deciding who can still continue to do great things as they scale and grow. >> We haven't seen the type of GP stake sales in venture capital as what we've seen in the bio space, but that sort of thing is probably going to continue over time. >> Now, you have for the first time venture capital firms selling themselves. >> So, in the sales and shares of the firms. >> Yeah, so how important is alignment on that level? The bigger you become is a multi product firm. And you become more of an institution. You know, Adam Street would be considered institution. If one person retires or leaves, the firm's going to continue on and have success because we've built something that's really institutionalized. The smaller you go, the less clear that becomes. You have more single person or dual person key risks. So, sort of depends where you are in that ecosystem, but I don't think there's any question for larger multi product firms. There's probably more institutional value that could be monetized in their general partner economics that oversees all the various vehicles. One of the biggest things that I've observed over the years in the private ecosystem is I've been sort of shocked that now we have very large publicly listed private equity managers or private credit managers and now multi strategy all its managers. Unfortunately, when you start to have third party shareholders in your general partnership, they become the most important constituent versus your investors, whose returns that you're designed to produce over a long term. You have an extra layer of constituents. You do. And so, you know, it's a very difficult balance because your shareholders want you to grow your assets. They want you to grow your revenue. They want you to grow your fee earnings. And that is probably the exact opposite of what your investors want to do. So, you end up having two masters when you have third party shareholders. So, you've got to be a little careful about how you manage that balance. We're shielded from that. More than 100% employee on firm. So, we don't have any outside shareholders saying, look, you need to grow your assets at all costs. You've got to grow your revenue. We can do that in a very disciplined way and kind of protect the firm's reputation and keep the clients first. But I think once you start to sell stakes, there can be more pressure to do that. In particular, if you become a public company, as a private, you see, a 5%-10% stake, it probably doesn't really affect the partnership all that much. But sort of question is, why are you selling a stake? At some point, the generational transition will happen and the younger people are going to be like, why do we have this outside owner that owns a piece of our GP? Why are we giving carry to them? I haven't got any benefit from that. So, you always worry that at some point, that's just going to reverse itself. We have seen some GPs buy back their minority stakes from people who bought them previously. It's well known that size could be the enemy of returns in venture capital. But today, you could also argue the opposite, which is right now, all the capital is emalgamating in these top 10 firms. I think something like 75% of capital went to something like five firms. Can size also be a moat in venture capital? This is a great question, and it's the great unknown right now. It'll be interesting to see where we land in five years. I think there's people on the side of getting to some serious scale, being able to corral the best entrepreneurs, and Andrew Sinorowicz's launch, they basically changed the model and said, we really want to become a service provider to the underlying entrepreneur and help them with infrastructure to be able to increase the probability success. I think it was a very successful strategy. But now you're looking at again, firms that have gotten to be multi-product, huge firms. And so the question is, will they be able to continue to replicate those returns? Will that create edge? Will it be more challenging? The venture system's so fluid with people get frustrated with a place getting too big. They leave and they start their own venture fund. They're great people inside of a larger place. And I think we're going to always see a constant innovation of new venture funds getting formed. And our job is to make sure we're staying close to those people when they decide to do that. And do you think that it's going to be bar belt in the future where you have some elite first-check investors and these large multi-stays firms? Very difficult to predict. I hesitate to make a forecast. There will always be some great early stage venture funds. They might be the same ones that exist today or 20 years ago. Our job is just to make sure that we're in front of the really special people. Every venture fund is going to have a collection of people that you might-- if they decided to spin out a certain group, you might be more excited about that than the whole platform that you're being presented. But you don't have that choice. So I hesitate to sort of predict what will happen. But I do think there'll be some great early stage venture funds. And there may be some very successful platform firms that are trying to get into the companies at all stages. A lot of limited partners tell me that there's one or two managers at some of these firms that are driving all the alpha and all the returns. Is there power law when it comes to people with it. and venture capital firms. - If you say, well, only 7% of the companies produce all the returns, the question is, many of those people inside the firm is everyone getting their share of that 7% or is it tend to be concentrated in individuals? And I think the key is to keep the ecosystem in balance. Each partner's got to be able to contribute to that over a long period of time in various funds. But I don't know if there's any question that we look at individual track records and you're gonna see outlier track records based on who got into the great companies. - We have this tale of two cities where you have SpaceX now going public after being a private company for over 20 years. And you have reportedly anthropic, might be going public four year into its existence. What do you see as the future of companies? Are they gonna stay private longer or is there gonna be this increased timeline to going public? - The current wave of, I'll call it next generation, mag seven companies are really building off the success of previous innovation waves. So you have the PC, mobile devices, mobile apps, App Store, the speed at which you can create a company and get reach to customers and create revenue is so much faster than it used to be. If you think about the speed at which anthropic got to just a massive number of users in a massive amount of revenue, you could have done that back before the internet with it had been invented or before mobile devices were available. I think companies will get bigger faster, which then allows them to access the public markets quicker. But it's also true that they've got plenty of capital sources available to them in the private markets. Once you become a public company, the game changes. You've got to think about producing quarterly results, you've got analysts covering you, it can be a miserable existence to be a public company CEO. There's a lot of reasons to stay private, but you do need to think about earlier shareholders and employees who you see more employee tenders. I think there's availability to be private companies for longer, but you can also build companies quicker today. So there's kind of that dual tension happening right now. I think all things being equal, companies want to say private longer, but ironically they could become a victim of their own success. So if you take a company like anthropic, reportedly raising at $900 billion, so they continue to just imagine that they compound. In three years, they might be $2, $3, $5 trillion in market cap. The entire private markets in a year deploys $2 trillion. The public market is over $100 trillion. At some point you become a victim of your own success. And if you're out there raising a 50 or 100, or it's name your number around, you just run out of private capital. I don't know, it seems like a lot of public capital, prior allocations have migrated their way into private capital. I think it's just been a big shift. If you look at the number of public, listed companies, that's come down dramatically over the last 20 years. So I say, if you're not a $10 billion market cap company, it could be a miserable existence because you're not getting any next fund buyers of scale into your company. And if you're over $10 billion, 40% of your shareholder basis index buyers that have to buy you based on market cap. And for the first time, really in my memory, we're gonna have at least three companies, probably more that will be immediately entered into the index upon their IPO. I mean, that's astounding. That will create massive amount of structural, technical demand for the shares of those companies. Usually it waited 'til the six month lockup was up. It's gonna happen on the immediate index entry 'cause you got two exchanges competing each other for the business and they can relax their rules. - Yeah, it's such a good point that you make. If my thesis comes true, which now the $2 trillion company, now it's a $5 trillion company, what does that mean? That means the entire private markets is now delivering five 10X returns. At some point, the LPs that were investing in public markets see that, they're like, holy crap, we should be more in private markets. And now they start deploying. So it's like this equilibrium. - If you look at the clients that we have, and have had for decades, over time they have marched down their public equity exposure. Used to be 6040, was kind of standard model asset allocation. They've marched down their public exposure and marched up their private exposure. And the same thing happens in, like, would fix income. It's marched down and moved into the private markets. So private markets just become a lot bigger. They're the place where you get a lot of the growth. And so I think it's just shifting asset allocation. So if there's a bigger opportunity, more money will shift. I mean, capitalism does move capital to places that generate the highest return. I think it's very good at that. And I think that will continue. What keeps you up at night today? - I'm really excited about the future of private investing. It's a terrific space to be in. You're constantly around innovation and disruption. I mean, the whole private market ecosystem exists because creative destruction exists. There's the innovators, the lemma, big companies. They get market share. They get bloated. They're a public that worry about quarterly earnings reports. They have a board that understands the industry less than the board that was a private company. The whole innovator's dilemma is the thesis behind private markets. So I'm incredibly bullish. I love creative destruction. I love being around innovation. We don't worry too much. If we just stay what we're doing, I don't worry too much about the broader macro of stuff around us. - So what we were talking about earlier, you focus on portfolio construction, not on individual outcomes, individual trends. - That's right. If you do two things really well in our asset class, I don't care if it's venture capital, buy out private credit, you pick managers well and you time to diversify, you're gonna perform incredibly well for a long period of time. And by producing top core tower returns, even upper second core tower returns in most of these asset classes. If you do that consistently over a long period of time, you're gonna have explosive ending multiple compared to what the median return will be. I mean, if you look at Warren Buffett's report, he shows his compounded return versus the S&P over a long period of time. There's a staggering multiple that sits at the bottom of that page that very few people appreciate. If you just put it in a line chart, it's pretty impressive. So that's the same promise of what we're trying to do. And I think good actors in our system are trying to do it. - Warren Buffett was at once asked, what's the key to success? And he said, I started early and I'm still investing into my 90s. And it was kind of discarded as this overly humble interpretation, but then when you actually look at a net worth, I've looked at this. He was only at 25 million at 40 and he just kept on compounding. - Yeah. - It's like this thought experiment, this compounding exercise thought experiment, people put into their retirement account. He actually played that out in real life. - The human brain does not comprehend compounding over a long period of time. So if you just took the median private equity return, which has been very high with low interest rates for a long time and said over 50 years, just get that median return. Let's say you're gonna produce a 400 X on your money over those 50 years. If you can produce that by 5 percentage points per year, it turns into 45,000 X. I mean, it's just an over a magnitude that is hard for the human brain to comprehend, but that's the promise of compounding the high rates. And to do that, you've got to get in consistently to companies that can compound their revenue growth over a long period of time. And gotta get the best managers to do that. - Jeff, if you could go back to 2000, you first start out at Adam Street. What is one piece of time as advice you'd give a younger Jeff that would have either accelerated your career helped you avoid constant mistakes? - I think there's no substitute in making your own mistakes for learning, in particular in the investment business. The best learning experience I had is where I made an investment and lost all my money. I still keep a t-shirt that I walk around with. People say, "Was that one of your successful investments?" I said, "Actually, no, that's a $12 million t-shirt." It was the most expensive thing. It's the only thing I got left in that investment. But it helps me remember to be humble about the mistakes that I made and the diligence things that I missed. So I don't get any question. There's the best learning experiences making mistakes. The problem is if you make too many of them right away, you probably don't have a career in the investment business. - Survivor should bias. - The survivor should bias. Someone told me, "You get a punch card of five, you get five investments, "you get a hope at least a couple work out "to offset the ones that don't." And we don't want a new person to come in and have wild success for their first five deals 'cause then there's a lot of hubris and there's very little learning. And so I would say, "You gotta be able to make your own mistakes, "but do your best to surround yourself with mentors." And ask them as many questions you can to absorb as much life lessons and knowledge lessons for whatever career path you're gonna choose. And just be constantly curious and have a really good recall on that curiosity once you learn it to hopefully help you make fewer mistakes. But have some humility when you come into the business 'cause investing, you're gonna be humbled and you gotta be okay with it. You gotta be able to dust yourself off and get back up and proceed on. - Famous philosopher Carl Popper and he had this concept of, "How do you get better? "How do you get closer to ground truth?" And it's actually through falsification, which is you go out with your ideas, you get feedback from it, you get feedback on why it's wrong and you keep on improving that idea until you get closer and closer to ground truth. And by the way, the opposite is true as well, which is if you never test your ideas or even worse, if you're always surrounded by yes men and yes women, you're gonna get worse and worse feedback, you're gonna get farther and farther away from ground truth. - Yeah, I think the best partnerships have a dynamic where people are willing to challenge each other on their assumptions and press them. And I think they end up performing incredibly well. Charlie Munger made this great statement. He's like, "You know the reason where it's been good "and we have for such a long time, "'cause we're willing to call our younger self stupid." And that's a humility that shows you that they're constantly willing to learn and develop. That's critical to being a good investor. I don't care if it's venture capital or biode constantly absorb lessons from mistakes and be willing to ask for feedback on your thesis and actually be interested in it. - Jeff, this has been an absolute master class. Thanks so much for jumping on and looking forward to doing this many times over. - Great, thanks David. It was a thrill to be here.