The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:10:28 · Scott Wilson, Harry Stebbings
[00:10:28] S0: 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. [00:10:43] S1: So if we take the 70 to 80% that could be in privates, how do we think about structuring the private space 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 about how private should be structured for you? [00:11:00] S0: The way we do it... So roughly half of our private portfolio is in, maybe more than half right now, is in kinda 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. [00:11:23] S1: Do you have a separate direct team? [00:11:25] S0: No. No. Everybody on my team is a generalist. [00:11:27] S1: What would you advise another CI? I I... You know, obviously, I'm 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?
00:11:27 · Harry Stebbings, Scott Wilson
[00:11:27] S1: What would you advise another CI? I I... You know, obviously, I'm 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? [00:11:46] S0: Yeah. You kinda 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, and we still meet with a lot of external partners, but but upwards of, you know, 80, 90% of our time is just out meeting individual companies. And and that's very different than probably how most of your LPs spend their time. [00:12:06] S1: Very different. Most of them spend 70 to 90% of their time with managers, and then 10% of their time with directs, I'd say. [00:12:13] S0: But 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 we're at the top, if not the very top of our peer group over the last decade. [00:12:26] S1: So were 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.
00:12:26 · Harry Stebbings, Scott Wilson
[00:12:26] S1: So were 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. [00:12:38] S0: Yeah. 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 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 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. [00:13:17] S1: Tell me, how much will you have in one company? We have a mutual friend in mister Lee Fixel, 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?
00:13:17 · Harry Stebbings, Scott Wilson
[00:13:17] S1: Tell me, how much will you have in one company? We have a mutual friend in mister Lee Fixel, 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? [00:13:31] S0: Well, 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% of the portfolio was in SpaceX. And at that point it become 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 onto 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 gonna put more than two or 3% of the portfolio in, in a single name, we probably, we would need to notify the board. I think it's 4%. We need their approval, But we have a lot of leeway to concentrate the portfolio quite a bit. [00:14:19] S1: You'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 returns?
00:14:19 · Harry Stebbings, Scott Wilson
[00:14:19] S1: You'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 returns? [00:14:27] S0: I do. They're mostly artificial. You know? If you think over the course of, like, say you're gonna do five funds, that's, you know, x amount of capital and and to have a 10% concentration limit in any individual fund, I don't think it makes sense. I think, like, 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 if you're 1% of our portfolio or 2% of our portfolio and you have a 50% position, that's only a 100 basis points for us. [00:14:56] S1: Have you had a position with a lot of capital concentration that hasn't worked out? [00:15:01] S0: Oh, yeah. For sure. What did you learn from it? Well, 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 but certainly it's painful. It's painful when the... Those don't work out. [00:15:27] S1: Do you think 50% of your private book being in directs is the right allocation? [00:15:32] S0: I I would take it to 80%. You know, when we started, it was it was just a tiny fraction.
00:15:32 · Scott Wilson, Harry Stebbings
[00:15:32] S0: I I would take it to 80%. You know, when we started, it was it was just a tiny fraction. [00:15:37] S1: Could you have it as 80% given that you are fed by the managers you back? [00:15:42] S0: Yeah. 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. [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?