Uncapped #14 | Dan Feder from the University of Michigan

[00:00] In the phraseology that Donald Rumsfeld made popular, there are known knowns, unknown knowns, known unknowns, and unknown unknowns. And things that are not known are not knowable, is the realm of uncertainty. And that is where I think venture capital has its real power. All right. Today, I'm here with Dan Fader from the University of Michigan. And this is the first time that we've ever gotten to have an LP on the podcast. And you're one of the [00:30] thoughtful people that I've gotten to learn from in this industry. And so I'm really excited to get to do this with you today. Well, thanks for having me. But first of all, you have to get out more then. I need to get out more. That's a problem for me. My listeners probably are going to be less versed in sort of LP land than sort of VCs or founders. So could you start by just giving a little background? It doesn't have to be long, but just kind of orient us to sort of a little bit about you and how you've gotten to where you are. Well, it's a long story, so I'll keep it really, really short. I started out my career as a lawyer. [00:58] So I had no idea about... [01:01] being an investor, and certainly had no idea about what an endowment was or endowment management. And I got to endowment management really by accident. I was having lunch with a private equity manager who took a liking to me, and he said, I think you'd like endowment management. This is in the year 2000. And I said, that's fantastic. What's that? And he, like I said, super kind, private equity manager, great investor named Paul Levy, introduced me to

[01:31] And that happened to be Dave Swenson. And Dave was also really, really kind. And he didn't have anything... [01:39] at Yale, and he introduced me to Andy Golden at Princeton. And at that time, Andy was the CIO at Princeton and was bringing all of the non-marketable asset classes back in-house. They had been outsourced. And we just got to know each other over a period of months. I had zero experience doing what he wanted to [01:56] someone to do. And at the end of getting to know him and him getting to know me, he brought me in to lead venture and private equity at Princeton. And that in and of itself informs a lot of how I think about [02:10] Hiring people. [02:12] working with fund managers and investing because when we got – [02:18] Toward the end of the process, I just said, look, you know, I don't fit the spec of what you're looking for. I'm happy to... [02:25] come in at a lower level and see if I'm right for you and this is right for me. And he said, it's fine. I'd rather hire somebody with a fast processor than a full hard drive. And [02:38] That has stuck with me ever since then, and it informs a lot of my thinking and a lot of what I learned. [02:45] There, in terms of thinking about investing, has informed me. [02:49] everything that I've done from Princeton to Wash U, where I was in a similar role, and now at the University of Michigan, and then a couple of stops along the way. You called it endowment management. Obviously, there's a sort of a broader bucket of just being an LP, generally speaking. But talking about endowment specifically, can you talk about what are the

[03:12] building blocks of the way that an endowment thinks about constructing itself. So like, let's say you zeroed out and, you know, Michigan went, [03:20] fully liquid and you had to rebuild all the way from there, what would be the considerations? What are sort of the requirements? What are the must avoids? Like, how does a endowment build its portfolio from, you know, the bottom up? So I think the starting point that you described in particular around going fully liquid is a great place to start. So endowments have to do a few things. First of all, one, one clarifying point, an endowment is not a single endowment. It's an [03:50] So at the University of Michigan, the endowment, [03:53] is comprised of over 13,000 separate endowments. [03:56] That each have their own sort of mandates? Think of it as a mutual fund, and each endowment has a certain number of shares or units in the [04:04] in the fund. And so the scholarship to support first gen students will have [04:11] Some number of units, depending on the size relative to the overall endowment pool. But it is its own separate endowment. And that's something that gets lost in a lot of the conversation about endowment. What the endowment pool is intended to do for those endowments is really three things. [04:27] One, support spending, and spending is typically defined as [04:32] sort of four to five percent of overall value over some [04:37] period of time. So averaging over three, four, five or so years, keep up with inflation. And for endowments, it's higher edge inflation, which is a little bit higher than CPI to preserve spending power. And then if possible,

[04:50] make a return above that. But really, it's to keep up with spending and inflation and support those programs in a way that supports them with intergenerational equity, so not too much ups and downs. And your starting point of going fully liquid is probably the right starting point, because if you're going to do that, which kind of solves out to an 8-ish percent nominal return for a period of forever without too much volatility, there aren't too many ways to do that or probably [05:20] So the logical starting point is, [05:23] Fully liquid. [05:25] public equities and you start with the deepest and most efficient markets. And then that might be, that might not be enough in terms of volatility or dampening volatility. So you add other asset classes or other assets into the mix and take advantage of the framework around modern portfolio theory, which says that if you properly diversify, [05:47] a portfolio, you can actually get less risk to find this volatility for [05:51] by unit of return or vice versa. So a lot of it is preservation of capital, access to free cash flow. Those things are... [06:00] very important constraints beyond just driving good returns. Right. It's a pretty modest liquidity requirement. So you have four to 5% a year. [06:09] is something that's pretty manageable. So that's what enables endowments and pools like this. [06:15] to be able to go into asset classes like venture and private real estate and private equity and and other liquid or semi-liquid and illiquid areas. So from this like zero based budget hypothetical where you're in some mix of, let's just say, like the S&P 500 and bonds, and now you're deciding to peel out of that into illiquid stuff like venture capital, private equity, I don't know, commodities, whatever else. What is the driver that gets more dollars allocated there?

[06:45] sort of without taking aside all of the sort of natural momentum that we all know has happened, what from a theoretical standpoint gets you to wanting to put X number of dollars in these different buckets? Well, there's pretty well-traveled math around how you do that optimization. So it's the most simple form of that is a mean variance optimization among some specified asset classes. And [07:09] When you look at the correlations and the volatilities of each of those asset classes, come up with a mix that meets a return objective at a level of risk that is tolerable. Yeah. So then inside a bucket, so like private equity eventually gets whatever bucket it's going to get. There's sort of this concept of like allocating, I guess, which is like this decision of like. [07:29] what slice of the pie should go into this whole thing, which is separate from investing, which I think of as like what you're picking inside that slice of pie. Is that the right way to think about allocating investing? I think so because I agree. But there really is a difference in my mind between investing [07:44] allocation and investing. There's overlap for sure, but that asset allocation process is really a risk-based process. So in deriving what a model portfolio would look like, what you would do is look at return streams and correlations around those asset classes and arrive at that mix. But everything that you're looking at is risk-based in the sense of you're looking at the [08:10] what it would look like, you think, in the next several years. And so that is investing of a type, but it is, it's a risk-based framework and it's,

[08:19] It is a great framework for how to direct people [08:23] assets to different areas. It's also a super important behavioral framework. So we'll get to that later. But in an asset class like venture capital, you can have a lot of confidence or overconfidence in whether you're good at something. And so setting some parameters around how much or even how little of something to do, you take away some of these behavioral problems of doing too much or too little and guiding the portfolio into this state where the idea of that state, [08:53] if you were dropped in from outer space after being away for... [08:57] a year or two and told put together a portfolio to do these things. [09:02] This is more or less the portfolio you would put together knowing nothing else. So behaviorally, that's what you should sort of gravitate toward. I guess like trying to make an analog here to venture. [09:14] like, you know, from the GP's perspective, the way I kind of think about allocation would be as though I were to go into a new fund and say, I'm going to have this percent at C, this percent at A, and this percent for later follow-ons. I'm going to do this percent in B2B, this percent in hard tech. I'm going to do this much in US, et cetera. When I think about that for myself, I imagine it to be very hard for that to be where I got, or at least that I would, I feel like I would need to do unnatural things to make that end

[09:44] thinking about the equivalents and there's just some difference between, you know, the two ways that investing happens or maybe the constraints are in fact good, but like, how would you react to the equivalent sort of allocation for a venture manager? I think venture is an extreme case among all the asset classes. And so therefore it's a good case to talk about. Venture is really not, in my mind, that amenable to an allocation in and of itself and then allocations within it based on [10:14] allocation in itself, meaning from an LP? From an LP in terms of the allocation to the area. I think that's fine for the reasons we talked about, which is [10:22] you want to direct the capital to places where you think it makes sense on this risk-based system. [10:27] But in terms of what one should invest in, risk-based [10:31] investing or risk-based systems really don't align in my mind with what venture capital really is or what it ought to be thought of as being. [10:40] So there's an economist named Frank Knight, who when I read his work, it kind of changed a lot of the way I thought, whose central thesis is that there is a very big difference between economics. [10:52] concepts of risk and uncertainty. [10:55] And in the phraseology that Donald Rumsfeld made sort of popular, there are known knowns, unknown knowns, known unknowns, and unknown unknowns. [11:05] And things that are not known are not knowable. It's the realm of uncertainty. And that is where... [11:12] I think venture capital has its real power. And if you set up a system that's risk-based, so around these knowns or

[11:20] knowable things, you're not going to know how to deal with or incorporate those unknown unknowns into your portfolio in a sensible way. So what does an unknown unknown look like? It looks like an entrepreneur working on a problem that only he or she knows about, and therefore, it's not known to other people, and the project itself is not knowable. And if you [11:43] can invest with that founder or in that founder based on information that others don't have, you would have an ability to make decisions. [11:50] in a sustainable way. [11:52] real economic profit over time. Whereas risk-based investing that... [11:59] Alpha or trade or advantage around trade gets absorbed by the market over time. It's not durable over time. So when I think of venture capital or illiquid investments in the context of a [12:10] of an endowment portfolio, the active or illiquid end of that spectrum really ought to be [12:16] push to [12:18] investments that have aspects of uncertainty to them, because that is where, if you can traffic in that well, [12:25] you can make durable economic profit. First of all, I love the framework and I want to talk about that more. But does this also work when you're thinking about what venture managers you're going to invest with? Is there some equivalence here where investing in uncertainty is a good framework as an endowment? Or is this really only applied to VCs investing in founders? The founders are where it all, where the rubber meets the road. And so the VCs,

[12:50] or business partners with whom we invest, whether it's in a fund or outside of fund, in my view, have to have some – [12:56] ability to access opportunities in a way that is advantageous. So information about who these people are, access to who they are, and some legal inside information about the opportunity. A lot of these types of investments, I think, don't get made because they look weird for a long time. And it seems to me that there's sort of like a cascading herd thing that happens where the things that are clear and sort of in that risk area that you talked about, people know those will keep [13:26] keep getting marks, they'll always have capital available, et cetera. And I'd imagine that for LPs also, there's some thing here too, where certain things are going to look better for longer periods of time. And I'm curious just to hear your take on the incentives, structures inside LPs and the short and long-term orientations and all the rest of it. There's something that's been bugging me quite a bit and I haven't really thought it through completely. [13:52] fully, or even if I did, I'm not sure that it would be any better than what I'm going to tell you. The notion that venture capital is an asset class in the first place bothers me because I don't think it is, and it just violates the characteristics of what an asset class is. But more broadly, [14:06] to the point is that [14:08] Where we started with venture capital, [14:11] years and years ago is very different from where we are today. So in 1946, Ben O. Schmidt Sr., who was one of the founders of J.H. Whitney, one of the first venture and private equity firms, came up with the term venture capital, but it was a shortening of the word adventure.

[14:28] And so... [14:30] I think if we went back to a construct and we said, look, let's just [14:33] Put venture capital as a term. [14:35] off to the side. And let's look at two categories of investing within it. Adventure capital, [14:42] and then capital for ventures. And it could clarify, I think, what it is we're talking about. Things that are uncertain, where the founder is doing something hard and ambitious, where it's really risky, where the future is not known, not really knowable, and requires going out on an adventure. And that takes away also the idea that we look at things through the lens of seed early, [15:11] at a later stage, can still be doing things that are adventurous, highly ambitious, and new. And then it also can clarify that a lot of what goes on in venture capital is, [15:24] is what I think a lot of VCs just don't want to admit, which is that, and this is why you and I [15:29] or you especially, you know, dress like this is because you don't, you don't want to be confused with their dress. It's like no, no, no jacket. Well, you don't want to be confused with the cufflink crowd in the sense that, [15:40] This is about financing companies. [15:43] And [15:45] doing finance is not a bad thing. It's a good thing. And, [15:50] It's I think it's OK for VCs. It's more than OK to admit that what they're doing for companies that have gotten past the stage of being truly adventurous is that those companies need capital and there's still opportunity to do value add with those companies. But it's different. And where we because it really does align better with our portfolio.

[16:12] Shine Our Spotlight is more on the end of... [16:15] adventure end. And I can go into that, but that aligns better with our time horizon, our networks of information and opportunity, and sometimes our ability to influence outcomes, even as an LP. How do you set up the team? [16:30] culturally or with incentives or structurally to have the, what I assume is a longer term orientation, [16:39] to do the uncertain bucket versus the risk bucket. It's really hard because the practice of endowment management has changed [16:47] quite a bit over the last... [16:50] over the time I've observed it, which has been the last 25 years. And so endowment management was a place where people found themselves in it [16:59] Without really knowing what it was, it really wasn't a known career path. And there really was not a career path. [17:07] to get to endowment management. So people who came to endowment management came from oddball places and were in those seats because they have a sense of alignment of mission and a view that this is where they wanted to be. And I think there's also a really powerful intellectual draw to doing investing in the context of an endowment where you have a long time horizon. [17:29] at least for the time being, [17:31] No, we're very little tax efficiency to work at. But and more importantly, an alignment of interests in terms of governance that is not available in many other places.

[17:43] all the way from trustees to... [17:46] boards to people, you know, [17:49] in the investment offices and so forth. And so it was much easier in that context. So I think one of the insidious things that crept into the system is that endowments got larger, asset classes got more popular, more capital flowed in. And now there's a career path in endowment management, which is good. It's nice that there's a career path, but it's also, it comes with a downside. And the downside is that [18:14] Now that there's a career path, there's more of a premium on demonstrating a track record to move from one place to another. Can you talk quickly? What is that career path? Like, what are the things that you need to prove? Let's say you graduated from school and you joined an endowment for the first time. What are the central unlocks to get from there to where you are? A way to do it is to go from... [18:40] as it is the case in... [18:42] any other financial enterprise or fund or what have you. Go from analyst to associate to principal to director to MD to CIO or head of an organization. And a lot of times that will involve moving from place to place to create your own promotions. And it is mostly, aside from organizational things, is the way to get promoted to, is it to be in good names? Is it to get markups? Is it to find a good thing early? Is it to support your managing director on a great [19:12] It's like a...

[19:13] probably all of those things, but it's to demonstrate relevance, I think, at the end of the day. And I think this is also the case within VC firms and other institutions. But when you start looking at metrics that are visible in relatively short timeframes, you are focused more on the outcomes of every decision or everything that you've been involved in. So you're more outcome-focused and less input-focused. If you're [19:40] much more long horizon than your thinking. [19:44] you're going to tend to be more input oriented. [19:48] So what will that look like in venture? A way that we do... [19:52] or that I look at venture investing is just to spend a lot of time listening to people who I think are smart and who are going to tell me, [19:59] coming next. And what we'll do is put in motion... [20:03] a number of ideas. [20:05] with people. It's not like spray and pray. There's some areas where we'll start paying attention and [20:12] put some conversations in motion, and it might take years for those to percolate to the surface. And when they do, it seems like... [20:20] It's fairly obvious that they were good ideas, but those ideas themselves may take years to mature into something that looks good. That's what I mean by sort of input versus outcome or output focus. That is the way that I think we really compound on our knowledge and our networks and what our advantages are with time horizon. But if we are looking at even single or... [20:42] multi-year periods, we're going to tend to be more focused on what does that look like

[20:46] in a year from now. And VCs are here to help. They spin up fantastic narratives and... [20:54] They themselves are incentivized, I think, internally to fund high momentum trends. [21:02] and it all aligns so that there's a sort of [21:06] a self-feeding process where the provider of the product is producing something that provides outcomes. Yeah, we've kind of talked about this, that like I felt this a little bit as a founder. Now that I'm in an investor seat, I can really sort of see even more of the dynamics of how it's more of like a craps table than a poker table. Like everybody in some levels kind of like winning together and losing together. And there's a lot of incentives where everybody just [21:36] moments collectively. You know, we obviously have, you know, in the last [21:40] 10 years gone through a bunch of these moments and and then it kind of goes down all together but everybody's in on the conspiracy in their own ways and it's like nobody's fault but all the incentives seem to be driven towards you know acceleration up and down i like the the poker versus craps table we we [21:57] We like to play cards in the sense that when we're putting together these ideas or we're following them for a period of time, what we're doing is basically we're building our hand. And then when things come together, we start playing that hand and playing. [22:13] We're playing from a different position. We already have relationships with people with whom we trust. They'll start guiding us to things that we should invest in and not to other things. And that just works really well. When you're backing managers, obviously you're backing a lot of venture managers.

[22:30] firms and individuals who think really different things from each other. And, you know, most venture investors have like their own internally consistent set of ideas, whether it's I'm early stage, I'm late stage, I'm concentrated, I'm broad, I'm cyber, I'm B2B, I'm heart, whatever. And you're listening to that, you know, individually and thinking this is really good. But then you're backing other people who are thinking sort of embedding in a different way, or perhaps even the opposite way. [23:00] And so I'm curious, what's the mindset as an LP sort of thinking in general about how you're going to work with people, given that these strategies that you're backing can like simultaneously be at odds? Yeah, you're describing my own sort of mindset. [23:15] tortured life, basically. It sounds like it could be like a chaotic headspace. Yes. Most of the time I'm walking around, maybe all the time I'm walking around in a state of cognitive dissonance. And I'm trying to make sense of that and also trying to determine whether I'm actually just completely undisciplined and have no point of view and just investing in everything. And it's just one big mess. But the cognitive dissonance is exactly that, which is, [23:40] We're constantly investing in... [23:43] with people [23:44] who have very different views of the world. We have specialists and generalists. We have [23:49] sole GPs, we have firms, we have larger firms. And the passion is, [23:54] And the drives that these people have, and they're super smart and really accomplished. They believe this is the right way, and in many cases, the only way, and the other ways are wrong.

[24:05] But yeah, we're back. [24:07] The people who we think are smart think are wrong and vice versa. [24:11] You know, each of them thinks the other's wrong. And... [24:14] A great thing about investing, at least it's a great luxury for... [24:18] for us, I think, is that in investing, you don't have to be right about everything. You just have to be right enough about the things that matter in terms of being right about them. And it [24:29] can be the case and is the case that there are approaches that are different among individuals. [24:34] among groups [24:35] And it's also part of what we need to do as an investor in a portfolio that's supposed to be resilient over time. And, [24:43] The way that I look at our portfolio construction is pretty concentrated. So we have across venture and private equity, 36 active relationships. Only nine of those are in private equity, 27 in venture. And it's a large scale portfolio. So it's a concentrated roster of projects. [25:03] firms or people. And one of the advantages of intentionally constraining the number of relationships is that it forces people [25:11] you to pick among groups that do something specific. So instead of [25:18] taking the approach of we're going to do a diversified allocation and select [25:24] five groups that basically do the same thing in the hopes that we catch the one that is the exceptional one and the other ones will be good. We focus on [25:32] picking the one. And then since we're picking the one in that area, that means that each other area, what we're looking for,

[25:40] are people in groups that do something that is different. [25:44] They'll overlap a bit, but that will be complementary or distinct in terms of where the returns come from and how they're derived. And it's an uncomfortable position, but it also really forces that sort of tortured existence of now you have to really concentrate into a few dozen returns. [26:03] Groups. [26:04] that disagree with each other. I'm curious your view on just like venture as an asset class overall and [26:10] Like, you know, you're going through all this torture. You could just buy QQQ and call it a day. Like what what's your opinion on this whole asset class and why? [26:20] You're putting it in your overall portfolio. Well, we're supposed to. Yeah. That's an honest answer. So. Yeah. [26:27] What else? I think that's why most people do it. Do you think that is really the reason? [26:31] You don't think it's that people think that they can outpick or something like that? I think that if you were to go out on the street and ask 100 people whether they're an above average driver, [26:41] 98 of them would say that they are. [26:43] And I think that that sort of dynamic applies in venture. The dispersions of returns, even though they've narrowed considerably, are still pretty broad. And it is a pretty lousy area to invest unless you are investing or getting exposure to the underlying companies that really matter. In which case, it's obviously very good. It's very, very, very good. Yeah. Yeah. [27:03] But this isn't like Wobegon and not all the children are above average. But all the parents think they are. It's probably also the thing you mentioned about like GPs are, you know, good at narratives and firms have learned over long periods of time how to tell the right narrative. It's one of those magical things. I mean, yeah. LPs love a good story and GPs love to tell a good story. Yeah. How do you think about like you're investing in Michigan? You know, you said. I didn't mean to sound that mean. No, of course. No, it's no.

[27:33] is that there are narratives, you know, drive a lot of, you know, capital movement. But given that, you know, you're not just sort of at a place in your career now where you're investing because you have to, you are doing, you know, you're setting strategy. Like what is the overall framework for how you think about investing at Michigan? I mean, you talked about the manager's, you know, breakdown and, you know, the concentrated portfolio approach, but can you click a little bit more into sort of what it looks like specifically for you all in terms of how you're [28:03] Well, we're set up in a fairly conventional way, which makes a ton of sense. So we have the five basic areas of investment classes, cash and fixed income, public equities, absolute return, real assets and venture and private equity. What's under the hood, I think, really is. [28:19] is going to have to change or the model of how we think about doing endowment management, when we look back five or 10 years from now, will be very different in terms of best practices than what it has been for the past, call it three decades. And the things that have [28:36] changed have been [28:38] There aren't just a small handful of endowments doing this sort of investing. The alternative asset classes that [28:45] prove the point of multi-asset class investing for endowments. [28:51] are no longer really alternative. These are very well-traveled. [28:54] Very highly capitalized. The number of really smart and accomplished people who are on the LP or the allocator side – [29:03] It's just gone way, way up. The sophistication has gone way up. You know, the whole thing has just gotten bigger and more sophisticated. You're saying the average LP is better than it used to be?

[29:11] Well, I think in terms of [29:13] if we're looking sort of at objective measures of [29:17] How sophisticated are these people who are managing these pools? [29:21] The office, their investment offices now that are well staffed, well run, well organized. And that wasn't the case 20 years ago. So it's no longer the case that you can be a large endowment. [29:33] have unfair access to a small corner of the market that produces high returns and call it a day. And [29:41] There's more to it than that, but that's no longer going to be the way to win. The way I look at it is that the positioning of being an allocator has been pretty comfortable for a while. [29:54] and that allocating among asset classes is not the same thing as investing. So what do I mean by investing in that context? What I mean is that there is not one model [30:06] that's going to work. [30:08] and [30:09] Each institution, whether it's an endowment, a foundation, a pension fund, or a fund of funds, [30:15] will need to look at its own portfolio. And its own portfolio is... [30:20] How much capital they have, what's their positioning, what sort of access to opportunity do they have and invest in a way, especially in this part of the portfolio, maybe the illiquid or the uncertain part of the portfolio that plays to those advantages and not do things. [30:36] that don't. So at the University of Michigan, for instance, [30:40] We're a very large university with a deep and broad research function with an alumni network that is numbers in the many hundreds of thousands with a lot of loyalty to the institution. And so when we look at investing into those areas of uncertainty, the lens I look at it through is, does that investment, whether it's a fund investment or something that we're doing in a more direct sense,

[31:06] align with one or more of our three advantages. So our three advantages are [31:11] So we have access to information, people, and opportunities. [31:15] We have a long time horizon. If we want to make good use of it, it's there for us. And then every once in a while, we can do something that, [31:24] that might change the outcome of an investment or there might be an opportunity to do that. And I don't want to overstate it because it's not that we're trying to be [31:33] value-add venture capitalists, but it's that every once in a while there might be an introduction, [31:39] or a phone call, or a connection that can have high, high marginal impact and change the outcome of an investment. So if... [31:47] If all three of those things are at play, then that's starting to enter our strike zone. [31:52] a small liberal arts college. [31:53] is not going to have that same portfolio of advantages, but it'll have other things. [31:59] And so it's less neat and tidy in the sense that each of those institutions to really do this thing, which is very hard. [32:07] that 8% nominal return with limited volatility forever. [32:11] is not going to be able to look at a recipe book and say, this is how it's done. They will need to look at the institution's own positioning and see to what extent should it be active or passive. And maybe the answer is, and it could be in many cases, [32:27] just [32:27] take the passive exposure. So maybe this is a good time to go to manager selection and how you think about who you partner with. Maybe a starting point is how you think about individuals and firms and the person versus the...

[32:41] the chair they're sitting in. And I'm just interested to hear your perspective after, you know, a lot of time investing across different cycles and individuals, small funds, big funds, super established firms. Where's your mindset now on how to think about that in particular? The objective that we're trying to get to [33:01] is not to invest with firms or with business partners. That's what we do. [33:06] Um, [33:06] I enjoy doing that. But what we are really trying to do is... [33:11] have exposure to underlying companies? How do we do that in an operationally efficient way around the world, across all sorts of things that are super hard? And the way we do that is we find really great people to do the work for us and we draft off them. [33:24] Does that mean that we're [33:27] committed to only investing in big firms or [33:29] only to individuals. Is there a right answer, wrong answer? And for us, it's how do we get the [33:35] the best fidelity in terms of [33:37] capital going in, reaching those companies and those assets in a way that will [33:43] be meaningful to the endowment. [33:46] And the thing you said around the seat of people and where they sit, it's important in sort of looking at that is like, well, where does the seat end and the person begin? Because it's hard to pull those things apart a lot of times. So there are great firms with great people. And some of those great people would not be as great without the firm. Right. There are people who are great in a context of a firm and wouldn't be good independently. I think vice versa is true. [34:10] Also, like, you know, particularly in some of those people who are meant to be investing in those uncertain buckets. I think it's like way harder to do that type of investing at certain firms. I think there's some big firms that are great at both, but there's probably also pulling that apart to the large, you know, established, really good firms. They see everything. They can win most things. And the hope, I guess, is that their picking process makes I mean, what you hope for is that it makes people better pickers, not worse pickers. I think of the three, that's the one I'm the least sure about. But I'm sure it helps them see and win more stuff.

[34:40] to be partners there. For sure. So that is certainly important. A thing that I've changed my mind about a bit over the past years [34:50] couple of years or so, is that in the context of [34:55] Well, we were really trying to get as much concentrated exposure as we reasonably can into the best companies and assets across the portfolio. And the shorthand for that has been, well, let's keep the number of fund relationships or partnerships low. [35:12] And by doing that, we'll therefore have fewer underlying or invest the companies in the portfolio. And therefore, we have more exposure to the companies that matter. The thing I've changed my mind about a bit is in that area where it's not really clear where the seat ends and the person begins or the firm's franchise ends and the individual's franchise begins. It may make more sense. [35:33] to [35:34] back. [35:36] more groups with fewer people. So for instance, if you take a firm that has, call it six [35:42] capital P partners. There are two partners in that firm. [35:46] that we would back independently and think that their own productivity – [35:51] is, uh, [35:53] either independent of the firm or a big part of that whole franchise. And then there are the other four who could be very good, but we wouldn't, [36:01] back independently. What we get if we back that firm [36:05] is the productivity of all sex. Yep. [36:08] And we really want the productivity of those too. And where I've modified my thinking a bit is...

[36:15] Instead of backing that firm, maybe we should be backing... [36:19] two or three firms of a couple of people or one or single practitioners. Because again, what we're trying to do is get the most exposure to that productivity. And then I guess the calculation is if those two out of six are really generationally productive investors, you know, maybe that's just the cost of doing business and it's worth it anyway. Could be. Yeah. Another topic that has come up around manager selection or firm selection in general [36:49] sort of hotter, more popular topic, I think, as funds just have gotten much bigger than they've ever been. Josh Koppelman talked about this with me on the podcast and put it in this very succinct way around venture arrogance score and what the math is going to need to be to get the outcomes. Obviously, a lot of very smart people have articulated a different perspective. Maybe by the time I've posted this, we'll have posted sort of a contraview, which I'm not confident in [37:19] business so far, but I'm curious your own lens on this whole topic of fun size. And when you hear about, you know, a big fund, what do you think? [37:26] The problem is that [37:27] In the case of Josh Koppelman, he laid out a fantastic case and he believes it wholeheartedly. And this is exactly the problem I was talking about. It's the conundrum. I feel it. [37:35] Josh, you're like, yeah, that's right. Exactly. You know, we go do other things. So the, you know, [37:40] The question I have when somebody says something along the lines of,

[37:45] Fund size is the enemy of return. [37:48] I ask in all seriousness, do you mean too big or too small? [37:53] Because the fund size is really... [37:56] a symptom or an outcome of an approach. And it could be that [38:01] for an ambitious... [38:03] venture capital approach, actually, you need a lot more capital. [38:07] And that'll drive better returns. And that'll be better. Yeah. And in some cases, you know, funds get too big and... [38:13] water down what they're supposed to be doing in the first place or the fidelity in terms of the quality of underlying companies decreases as fund size goes up. So I don't think there's a [38:25] specific answer of, oh, [38:28] Big fun size, bad, small fun size, good. And we see it a lot around... [38:33] You see it in a very early stage where there's just a lot of frustration. [38:38] Fund size is too small to actually execute on getting the [38:43] the right level of exposure, investment into companies that are going to be important. I also think like being able to lead rounds of whatever size is like a big advantage, not just for the investor, but for the founder, which I guess then translates back to the investor. So if you're undersized to lead rounds in whatever your strategy is, I think that can make things hard sometimes too. Yeah. I mean, all these things are just these dialectics where the seeds of destruction are [39:13] invest in the later rounds, then you're just going to, you know, you have the potential to actually do the wrong thing. So when you're thinking about this fund size question and, you know, your kind of mindset is like, well, I don't know if it's big or small, better, depending.

[39:25] Are you trying to [39:27] figure out with and agree with the strategy on your own? Or are you just trying to get to confidence that this is a great manager and then I'm not going to think about it? What ideally we'd like to [39:38] be positioned or how we'd like to be positioned is to be in the conversation. I don't want my job to be to tell people what to do. [39:46] But what I really... [39:48] would like to be doing is to be in the conversation about how are you thinking about this? What's the strategy? And the reason that, [39:57] I think that can be helpful is that some of these things that really matter. [40:02] are just really uncomfortable and contrary to what the easy path would be. And if we can be in a position where we can say, okay, that makes sense, [40:14] Well, yeah, that's... [40:16] That's the approach you're taking. Go for it. If things don't go well... [40:21] He made a good decision and there was an unhappy outcome, but we were there because – [40:27] where the really great things happen is when [40:31] I think whether it's a founder or a fund manager or an LP, does something that is [40:40] uncomfortable. [40:41] but right. [40:42] And providing that kind of support through engagement, I think is just very, very important. How do you pick fund managers? Like VCs talk so much about what they're looking for in founders. And I think that's like all very well trod. You know, there's a lot of different opinions and maybe some people know how to do it better than others. But I think between LPs and VCs, I think there have been fewer words shared on sort of like, what is it that people look for aside from all the basics of just the strategy roughly makes sense? You know, is the setup good? Whatever.

[41:12] Like, what is it about people for you? Well, a few things on selection, whether it's VCP, just managers in general, have an orientation going into LPs or in whatever shape or form. I have an offering that's just on its own, you know, in isolation. [41:27] Great. [41:28] So I should win. So what is it that I need to do to win? And it's not how you sell something. [41:33] The way you sell something is by understanding what the buyer is looking for. So for us, what we're looking for are products. [41:41] investments. [41:43] that fit in the portfolio. [41:45] So if it's an opportunity that is excellent, [41:49] but overlaps or is redundant with something else in the portfolio. [41:53] It's just... [41:54] It's just not going to make it in. The way that we source opportunities is, [42:00] is, [42:02] It is only through [42:03] introductions and qualified referrals. There's just no other way. We do have advantages around networks and information networks around people. And we have a team of roughly eight people doing all this work. [42:16] if we [42:17] Tried to see the whole market. We couldn't, but we shouldn't. That's not where our advantage is. The way that we [42:23] Look at [42:25] manager selection, [42:26] Maybe there are five things that everyone has to do, whether you're whatever asset class, you have to source opportunities, transact them. [42:34] who own the investment well. [42:36] exit and then run your firm in a way that [42:40] doesn't detract from those first four. And so that's the framework, you know, being more precise than that. It's, it's,

[42:47] But finding opportunities that fit and are complementary and make sense in the overall portfolio. [42:53] through Advantage Networks. And when you're backing people, is there something about [42:58] particular people that [43:01] gets you, you know, to a place of wanting to be in business? Or is it each manager is a special snowflake? Is it, you know... [43:09] diligence work that you're doing. If somebody is coming to you, how are you deciding whether this person you think is equipped to get special returns or not? Well, the referencing of the [43:22] holds a lot of weight. And so we just try to listen. [43:27] to people we now trust. [43:28] pretty carefully and hear what they're saying. There are people in this world who are just special and I don't know how to put my finger on it other than to say there aren't a lot of them, almost by definition. They're super rare, but when you encounter somebody who is in that category [43:45] It's. [43:45] it is pretty glaringly obvious. [43:49] And [43:50] I wish I had a better way of articulating what that is, but there are so few that it's just a sort of rare thing. And it just comes down to taste, I suppose, at some point of your own taste. And that's what, you know, makes for a good, you know, LP manager. So there are two words that are in the lexicon right now that I think are getting overused a bit. Taste and existential. Why? I mean, why do you think it's too much? It seems to be a shortcut. Do you think taste is like a cop out that doesn't say something specific? Is that the issue? I think it's a cop out.

[44:20] I understand it's not. No, I like it. But I just think that it's too much. I could you could talk yourself into all sorts of silly stuff by just saying it's just about taste. I just feel it in my gut. This person's a moneymaker. Well, it's sort of a fallback to like when people can't explain why they're making a decision. I guess to steal man taste, it would be the hope is that your brain's doing a bunch of background calculations or having emotions around a person or an idea and that there's signal in that. That. [44:49] maybe models a couple things. So if we go to Daniel Kahneman's Thinking Fast and Thinking Slow, or the Type 1 and Type 2 Thinking, there is a place and a time for thinking, [44:59] That kind of taste, that kind of taste is like, oh, there's a ferocious looking dog on the street. I think I'll go to the other side of the street. I don't really need to figure out if that's a nice dog. But that I think is important in terms of kind of reflex or decisions you have to make in a very short period. [45:17] timeframe, but just saying it's taste for a relationship that's supposed to go on for years. I think you got to. [45:24] Do some slow thinking there. Yeah. What about existential? What's the issue with that? I don't know. It's just too dramatic. There are too many things that are existential now. It's all existential. We're just like doomed and we'll be done tomorrow and no one will see this. That's possible. This interview or maybe existential is being overused. If no one watches it, that's okay. I enjoyed it. Last topic that we hear about is there's a lot of herd mentality in venture. [45:46] And I think it leads to [45:49] I don't know for sure whether it leads to bad decision making. If the people who are following decisions are, in fact, people who wouldn't make good decisions on their own, you could argue it actually leads to better decision making. And it's, you know, the way in which capital gets efficiently allocated. That aside, I'm curious about her dynamics in LP land and what you've observed over your years doing it. Well, I don't want to discount the wisdom of the crowds.

[46:12] So there's something there. And just being... [46:16] An independent thinker doesn't mean that you disagree with the herd. It just means you should think independently. Sometimes that means... [46:24] The herd is correct. But I do think that there are... [46:29] some strong and independent thinkers around the periphery. [46:32] who really do when things are kind of stable and normal. [46:38] Keep. [46:38] Thank you. [46:39] And on the inside of that periphery are institutions or investors that for incentive or investment [46:45] practical or whatever reasons are happy to be within that herd and let the [46:51] out of the stronger perimeter, dictate where they go. The problem arises that when [46:57] Stuff happens and things start moving around. [47:01] then that structure gets broken. And, uh, [47:04] the kind of the weaker investors or the herd mentality investor. [47:10] becomes exposed and highly, highly vulnerable and doesn't know what to do, makes the wrong decisions at the wrong time. My aspiration is that we ought to be independent thinkers, willing to be on the outside of that space, [47:23] or on the perimeter of the herd. And when the time comes to leave, we can leave if we want to, but in any event, we'll be self-sufficient. Did you want to share the story about your dad and the animals? Well, my dad was a scientist and his research is around animal behavior, specifically around reproductive behavior. So for a very early age, I was learning about not the birds and the bees, but the ring doves and the guinea pigs. But I was on a safari trip and this exact dynamic played out with a herd of water buffalo and two lions that were attacking the herd. And

[47:53] It took hours and hours, but eventually the herd started moving. [47:57] Stuff went crazy. And then the lions ate. [48:01] And when I was watching that, observing that, the first thing that went through my mind was not [48:06] how do LPs behave? But thinking back on it, it seemed to be that way. Well, this is awesome, Dan. Thanks for taking all the time to share these thoughts. And I learned a ton and I always enjoy getting to talk to you. So really appreciate it. No, thanks for having me. It's been a ton of fun spending more time with you. It's great.