The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:16:05 · Harry Stebbings, Scott Wilson
[00:16:05] S1: I 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? [00:16:17] S0: Yeah. 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 we look at a lot of potential investments. And I would say we do... It's probably more like point 1% of those investments than 1%. [00:16:57] S1: Is it challenging as you've scaled? Because now you're close to $20,000,000,000 and just something that moves the needle. I mean, writing a $20,000,000 check into a growth round at 20 to $50,000,000,000, even if it 20 x's, it doesn't move the needle in any meaningful way.
00:16:57 · Harry Stebbings, Scott Wilson
[00:16:57] S1: Is it challenging as you've scaled? Because now you're close to $20,000,000,000 and just something that moves the needle. I mean, writing a $20,000,000 check into a growth round at 20 to $50,000,000,000, even if it 20 x's, it doesn't move the needle in any meaningful way. [00:17:13] S0: Yeah. 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 comp... Concentration even as we double in size from here. [00:18:00] S1: You say you're potentially overdiversified. What's the right amount of managers to have in a book, you think?
00:18:00 · Harry Stebbings, Scott Wilson
[00:18:00] S1: You say you're potentially overdiversified. What's the right amount of managers to have in a book, you think? [00:18:06] S0: Well, 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, 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, you look at a diversified hedge fund, typically they have the bulk of their capital in their top 15, 20 names. [00:18:58] S1: So just so I understand, we have 50% of privates and directs. In the venture funds allocation, how much do you allocate towards those 20 to 30 names?
00:18:58 · Harry Stebbings, Scott Wilson
[00:18:58] S1: So just so I understand, we have 50% of privates and directs. In the venture funds allocation, how much do you allocate towards those 20 to 30 names? [00:19:09] S0: At cost, you know, 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 $200,000,000 and we just don't... We don't have capacity. So, you know, we have to continue to back the companies that we have high conviction in over time. So we might start off with a $50,000,000 check-in a co investment and then scale that up over [00:19:36] S1: investment, will you do a $20,000,000 fund check if it's completely irrelevant from a returns perspective? [00:19:41] S0: You 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 because it's just not scalable. [00:19:57] S1: You have 20 to 30 funds. How many do you add a year? [00:20:01] S0: I think last year, we added one. We have one that we're gonna add. We know we're gonna add next year. But if we add one or two funds, it's kinda one in, one out. It's not a hard hard line, but but we don't add partners very often.
00:20:01 · Scott Wilson, Harry Stebbings
[00:20:01] S0: I think last year, we added one. We have one that we're gonna add. We know we're gonna add next year. But if we add one or two funds, it's kinda one in, one out. It's not a hard hard line, but but we don't add partners very often. [00:20:14] S1: You said before about mega funds that, like, maybe instead of just growing, they should be more judicious about where they invest is... I'm kinda paraphrasing you. And it seems like the the world has moved in favor of mega funds. Capital is a moat now for many startups. Computing CapEx is a very real cost that maybe wasn't there before. Have you reflected on that and changed your mind or not? [00:20:38] S0: No. I I mean, 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 I think these mega funds, it's gonna be very hard. We'll see. It's gonna be very hard to kinda generate the historic multiples of invested capital that they have on those much smaller funds. With respect...
00:20:38 · Scott Wilson, Harry Stebbings
[00:20:38] S0: No. I I mean, 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 I think these mega funds, it's gonna be very hard. We'll see. It's gonna be very hard to kinda generate the historic multiples of invested capital that they have on those much smaller funds. With respect... [00:21:02] S1: 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 mega funds if in those outcomes.