What the Best Family Offices Do Differently

0:00 So you founded Endurance which is a family office for three serial entrepreneurs. Tell me about the story of how you were created. >> So um my two founding partners uh are were GSP classmates uh Stanford business school classmates. Uh we had all been investors before going to business school and then drank the Kool-Aid that they offer in Palo Alto about building startups. And so we decided to sort of put our lots in together and we wanted to work together and help each other in building businesses, but we were candidly a little afraid of the success rate of startups knowing the statistics and so there was a little bit of an insurance aspect to you know us uh forming a holding company as the launch pad for that. Uh additionally we put some some kind of shared resources around it and launched a series of companies and and fortunately we had a higher success rate than we thought we would where five of the six companies we launched uh ended up being successful. I started along with my partner Sam Hodgeges a company called Funding Circle which is became the largest small business lending marketplace globally.

0:54 We merged with the UK company and then took the company public in 2018 and then my partner Chris Clump started a company called collective medical which provided hospital collaboration software for emergency departments. He sold that company in 2019 to a larger firm called pointclick care and then there were a few others which which had also been successful. Unfortunately, as we started having liquidity from those, I think we faced the decision a lot of entrepreneurs have, which is, you know, what do you do with the money once you once you start selling companies? And we looked around at the commercially available options and decided that it was too expensive uh to engage a third party uh and we felt like we had very differentiated access to uh opportunities and so we started investing together. What I mean by too expensive is not it is the fees but more so than the fees. It is the fact that or we saw that many of the commercially available options were sort of beta trackers or you know a safe pair of hands uh if so that you didn't have to think about managing your money and and that wasn't our perspective. Our our view is that uh even a few percentage points uh compounded over time of of success end up creating a great deal of difference in in how much your money does for you. And so we built our own uh investment office structure uh alongside our company building efforts. So today uh we still incubate businesses though now we play more of a founding uh chairman role in each of the businesses that we create uh generally incubating one or two companies a year and then the investment office has become quite active where uh over the last 10 years we've uh invested in about 200 different private funds uh and also uh have a wide ranging direct investment uh effort as well.

2:22 >> Five out of six companies are successful. Obviously incredible track record. It's one of the best success rates for for half dozen companies I've ever heard. You took that entrepreneurial lens into creating the family office structure. How did you use first principles to decide how to create this family office? >> It's a great question and and the answer is uh it was entirely unintentional. uh and so we uh but I think that's the version of you know pure product market fit in a way is that we just started building things that we needed and it just so happens that that need uh was scaled for us and then over time we've started to have collaborators who have joined us because they also have a similar need started making investments in things and then we realized that it was really hard to have um a fixed uh ownership structure when all of us had you know sort of different preferences for how much we liked either a deal or an asset class and so weeded started creating these sort of annual uh vintage funds for ourselves. Once we started creating these funds that created infrastructure needs related you know some of it is kind of traditional tax and estate admin needs but then we started having admin needs around our the funds that we were creating for ourselves and then so we started adding team uh to build that and eventually it just made sense to continue uh building the infrastructure where you know today we think it's evolved to a place that's very scalable because it was just uh in response to what we needed. Ever since I interviewed Ryan Hoover a couple months ago, he always solves his problems with products. So he would look at your admin need and say, "What product do I build versus how do I create products or people?" Have you created any products around your problems and how do you look at that as an entrepreneur? Are you are you solving these things at scale or are you just throwing bodies at it?

3:55 >> I would say we've created investment products uh in response to the problem. So we now operate 25 different funds that we created for ourselves that are civic mandate investment products that I I sometimes call the Lego blocks of our asset allocation strategy. What that looks like exactly is a annual private equity venture capital real estate fund. Those are sort of the core private asset allocation pieces and then we've had some opportunistic individual funds for blockchain for digital currency for um private credit that we you know build a Lego block uh each time and that's become a systematized process and so those are our products in in-house you know I think a lot of people would malign the fact that we use you know more traditional you know spreadsheet based uh you know fund admin products I wouldn't even call them products I'd say we created a process that works very well for us and as we've understood and evaluated the third party ecosystem uh I have yet to see something that does it better than how we do it in house. And so we have this conversation a lot with other family offices about like what do you do and everybody seems to have a pain point around how do you do the admin well uh we have not found a better solution than just have really great people to run it uh and have them build systems internally.

4:57 >> You don't have this principal agent problem. It's your own money and knowing that it's your own money. How do you think about portfolio construction and how do you think that would also differ from if somebody else was managing your money >> in portfolio construction and asset selection in every decision we make each of the partners and and this is probably a good time to say that you know while we are an affiliated entity you know it's not like we manage a pocket of capital for external people that's not to say we don't have external investors it's that the partners' personal balance sheets are the thing that matters and it is encouraged in our investment committee for partners to pound the table and say I do not want this in my personal asset like I do not want my money going into this and so that is the the sort of underpinning of every decision. That's what we say to third parties is, you know, that's a good thing that we're not thinking about how it will look to you when we make an investment. We make an investment because we want our personal money into it or not. But at the same time, I I should also say because I'm I'm sure I'm going to make a number of statements about some of our practices. You know, these are my views and our partners often will differ on these things. And the the the another secret to our success is having people who are deeply engaged arguing on behalf of our own balance sheets. Um I think gets us to better answers. when uh investment committees can be maligned for sort of group think type behavior. You know this this in some ways has been the antidote to group think for us. Your question was about you know portfolio construction.

6:04 So we we think of the two sides of the house as you know sort of the wealth building side which is the you know new company creation work that we do and then the sort of wealth management side uh meaning for our own wealth where uh we have an endowment style approach to uh how we you know manage the money. And so uh our our pie just to you know call out what we're talking about is 40% publics almost entirely uh beta 12 a.5% each to uh private equity real estate and venture 5% to sort of idiosyncratic opportunities which is where a lot of the company building uh work is done and 6% to digital assets of which 1% is specifically for altcoins and then 10% to private credit which we divide into we we actually think the distinction between opportunistic credit and private fixed income is an important one and so that's how we think about the pie that's how our family office uh you know puts together an asset allocation recommendation that the partners then draft off of and make their own choices about.

6:56 >> And how has that evolved since you started Endurance? >> Every year we we evaluate the capital market assumptions that go into that which is both uh an understanding of where we think them what is going to be market beta and then what do we think our capabilities are and so uh over time we've grown uh more confident in our capabilities in certain areas. we've also grown a better understanding of the markets. And so I'd say that our our lens comes more into focus on what the assumptions that go into that portfolio construction are. And then ultimately, you know, what hasn't changed is that we're we are targeting, you know, the highest possible expected return with the, you know, highest possible sharp ratio. Managing towards the efficient frontier is the I would say the underpinning of of every decision that we make.

7:35 >> And you've been running Endurance now for over 16 years. Do you see this negative correlation between assets that are hot and assets that end up returning the best? In other words, this kind of supply and demand dynamic and that the best time to invest in an asset as a general principle, there's many exceptions which which we can point out, but as a general principle, is that directionally true that the time to invest is actually when the asset is quote unquote cold?

7:58 >> What I would say is there's a lot of different ways to make money and there are people who make money on momentum investing well and my personal approach to investing has uh agrees with your statement, right? So, I get very wary whenever something becomes uh you know too hot, right? So in today's market I am you know wondering why nobody seems to be talking about the risks of to open AI and anthropic and and all the other models and uh and so you know we take a skeptical lens when uh the money seems to be piling into something. I guess this is another thing that we you know have why we chose to build our own uh vehicle is because by the time the sort of thirdparty advisor community is hearing about something and then distributing it to the end user. My worry is that we are too late in the cycle you know you know you're sort of you know the last person to hear about it you know last the party first to leave uh type of situation that feels like bad investor psychology or bad investor principle to me. So yes we tend to have many uh contrarian views to you know what the moment is. I also think it's almost absurd where people talk about asset classes as if the pricing is fixed. They say early stage is cold or early stage is is is hot, but really you could have startups that are at a $4 million valuation at a 20 million or 60 million which are fundamentally different economic value propositions.

9:10 And when everybody else exits that space, now you're coming in at 4 million. It becomes a whole another riskreward and people talk about it as if it's fixed, as if you're always investing at the same valuation. That's entirely true. It's an and. I'm a big fan of the Jim Collins and, right? You know, the genius of the and versus the tyranny of the or uh many things can be true at the same time. And so I agree with that. And we try not to be market timers. And I'm probably the the the worst market timer uh of our partnership. And so I I try to insulate the reason for these annual fund approaches is because one of the most uh predictive factors of of success in private investing is vintage. And so, uh, we're trying to create the structures that that that force vintage discipline. Now, we can we can change how much we put into each vintage. I tend not to because of this market timer phenomenon. But you're right that, you know, where I can make tilts. And sometimes I use a thermostat analogy where I say, "Hey, let's move the thermostat from 70 to 68, right?" You know, you wouldn't move a thermostat from 70 to 60, right? Uh, and and so when I'm feeling like, let's say Venture is overheating, I tend to start turning the thermostat down. That doesn't mean no allocation. It just means, you know, we're we're we're we're we're getting a little cooler on on how much we're willing to do. And that was, you know, when we're talking about venture, that is how we were uh behaving in 2021. We were sort of turning the thermostat down, particularly on the mid and late stage stuff. Now, we are also uh a good example of being contrarian is that we're we're just we're not buying into the the thesis that people are talking about about companies are staying private longer, therefore everybody should be piling into the preipo stage.

10:38 It's not that we have zero of it. uh it's that the bar for us to make an investment in a preIPO stage manager is very very high. Uh it's a very small percentage of the portfolio and so it's a tilt you know it's a it's a thermostat tilt. >> Given that it is mostly the partner's own money do you find opportunities for high IRRa low mo trades where you could pile in money into something that an institutional investor might find is is a waste of his or time. I generally experience it as the opposite. Uh where I when I talk to some larger institutions, they feel more irrra focused because they think they have better ways to manage the cash than others. While I actually think we do a good job of short-term cash management, maybe better than most, I'm not eager to uh trade IRRa for or to to take IRRa over MO even in a uh and I mentioned, you know, we have 200 private investments, right? um the even in the context of we we have a very wide portfolio, it still takes a lot of work to get to a yes. And so um the amount of work that take that goes into making an investment decision I I getting the money back and then having to make a new investment decision I think uh constricts our ability to do uh diversification well uh because we you know uh you know the more decisions that you're forced to make the less quality are in those decisions. In that case, it's not a principal agent problem in that both the principal and agent has a finite amount of time to create the most economic value and even as a principal, it's a waste of time.

12:00 >> It might be a penny wise and pound foolish choice for us. Um, now that's not to say that, you know, a group that had a much bigger uh cash man, you know, much bigger diligence team and a much bigger, you know, uh, admin ops team that could, you know, recycle the cash well might not have a different trade-off. But for us, you know, we the o if you looked at the overall portfolio, I think we would have a lower return if we uh uh you know, took a took a short-term IRRa benefit that then brought us cash back faster that we then had to figure out a way to redeploy effectively because uh where where I guess what I'm saying is I'd rather have a 15% IRRa over 10 years than I would a 20% IRRa over four years. Um, and I'm making numbers, you know, picking numbers out of the sky because um, uh, that's still above our, uh, our threshold and target and compounding over time, uh, you know, we find is the way that, you know, we're more focused on on multiplying the capital base as long as it's above a certain level, right? And I I shared with you earlier what, you know, I don't think I said that our um, our portfolio, uh, expected return is a 14.7 and then each asset class has its own expected return thresholds and so they're quite high and ambitious as they are. So, um, uh, I think it might be a different story if we were talking about single- digit returns. Um, you know, then we might make the trade in the other direction.

13:15 >> A lot of the most elite endowments, they target roughly 7 to 8%. Why is it that you believe you guys could get a 14 15% return on your portfolio? >> It's interesting. Um and I sit on an endowment committee that is uh uh managed by one of the leading endowment adviserss and um you know recently uh had a heated discussion in the in the investment committee room about this very topic where I think that there are are principal agent issues in rooms uh like that. I think there's a group think issue. So I think there's a personal incentive and motivation issue uh from the people who are contributing to in investment committee discussions even in in in well in wellresourced endowments that have you know full-time professional managers those people are compensated in certain ways that don't uh incent them to take uh to move out on the efficient frontier. They need to make the fensible choices that they can explain easier to to that that will land with a wider audience of less sophisticated people. And so when I look at the capital markets assumptions that go into making those choices, people well one I say a lot of people are not as focused on what their efficient frontier looks like. So you know we take it as kind of a first principle approach to you know well this is this is how you should you know start the portfolio. I think others may, you know, may do the exercise, may not even do the exercise, and it becomes more of a a political conversation about who likes privates, who likes publics, and then, you know, is is VC a real thing or is it not? And then the committee argues about IRRa versus not. Um, and uh ultimately there's C and then there's cash hoarding. And so one idea I've heard from institutional investors that I really disagree with is that, you know, well, for an institutional endowment, you have to manage it in a certain way.

14:48 And I uh you know I'll retort to that that you know I care a lot about this institution that I helped manage the endowment of and at the same time uh I care a heck of a lot more about my kids trust funds uh than I do uh the school's uh endowment right and a good example of this is um you know I think institutions are just starting to add uh a digital currency allocation but they haven't even put it at the Swenson sort of 5% minimum level or not even close uh they're just sort of dabbling in it and you know it's something that I would advocate obviously by our asset allocation policy and I think institution will get there over a long period of time. Um, but I hear people say, "Oh, well, I would do that personally, but that's not appropriate for the institution." And I'm thinking to myself, what, you know, why is that appropriate? Why would you do it with your own money, but not not for an institution? And I I could go on a rant here, and I probably already have to some extent, but there are behavioral factors that I think make uh institutional decision-m uh candidly worse, right? That that make it uh lower return seeking with less uh safety in in the way that uh in the way that those choices are made. There there's two closely related factors at play here.

15:49 One is principal agent in that you care about your own money more than necessarily investing somebody else's money. Everybody the the the proverbial uh you. And then also if an asset has even a 5% chance to get a zero or could go down 90%. You could just torpedo your career. You're not willing to get that extra 2 to 3% per year with that risk factor. be there's this almost it's a negative asymmetric curve. >> It's a hoder decision. So um you know I've seen institutional portfolios that um will have a uh absolute return bucket with a north of two sharp ratio right um uh no leverage on the portfolio. That's one that's begging for leverage but okay you know I actually don't understand the argument for why you wouldn't use leverage. Um but uh and that but okay uh if you're not using leverage so then that's a license to take risk elsewhere but instead you've got a huge chunk of money stuffed under the mattress uh and it's great that it's producing a sharp ratio but to to what end right you have to use that risk elsewhere otherwise you're just going to have like a really safe low return that's you know under you know under the efficient frontier.

16:54 Those are examples of of uh uh you know how I why I think that um these endowments uh you know have modest expectation and modest returns over time and uh you know candidly ours are are are much better and and and reliably much better we think. Um now granted I I don't get to run this as a 10,000 iteration uh game right you know we only have the 15 years that we've been doing it. Um so you know maybe at some point we'll be we'll be we'll be wrong. were proven wrong. But you know, I believe in the the free lunch of diversification.

17:23 Uh and uh that's why we um why we target uh higher risk assets because we think that they uh you know, if measured properly and and uh and and done in appropriate quantities, you can um you can have that free lunch of of the high expected return of 14.7. And what we have I don't think I don't know if I mentioned our sharp is uh and I think we could do better than that. I think we, you know, that we're making some uh lazy choices in doing that uh that, you know, we could be pushing it out further.

17:52 >> I think there's these paradoxical beliefs in asset management that you simply cannot challenge. Cliff Assess when I interviewed him, he said the idea that zero leverage is the right answer to every single situation is absurd. That it's literally it should be zero in every single situation makes makes no sense. You talked about about crypto, investing in crypto. I have this whole soap box about the virtue of illquidity. I think all things being equal, many asset classes should are better served illquid. I interviewed several top desile venture funds in crypto. So if you think about millions of crypto investors, a couple thousand of them have been beholden to other people's money. So they're like the top of the top and then top desk all of them. And most of them will secretly admit that their best returns have been in their most illquid buckets. So even the cream of the crop, the NBA players of crypto actually believe liquidity is good for them. So why does it not apply to the non-NBA players? Uh and of course that's also paradoxical and you just you literally cannot have these discussions.

18:48 It's not even that you can even have these beliefs. You can't actually bring these things up or you'll get the equivalent of canceled within within the investment office. >> I agree with many of the things that you said there and I thought uh it was eloquently done so I I don't have more to add to it. >> You have invested 200 funds. Nobody bats 100. What have been some of the mistakes and where have you really evolved your strategy over the last 16 years? The mistakes question is uh it's you know this gets back to the institutional mindset versus the principal mindset.

19:16 You know we always were cool on a thermostat towards big brands and uh uh but when we first started out we gathered comfort from uh you know there was there was some like do we do we know what we're doing here? uh and uh there was comfort that we afforded to the fact that we would have uh you know some very institutionally known brands and we made a few choices that would be extraordinarily defensible. Our biggest mistakes have come when we you know sort of had fear of missing out uh because you know we felt lucky to get into a big brand that had a big fund and a big toll and a and they were doing you know sort of hot latestage investing in venture or you know kind of mega lbo stuff um that uh you know I think conventional wisdom would tell you you can't go wrong buying IDM type I don't want to call it any one specific firm but and so then we started realizing and sort of digging into these you know larger brand returners it became so obvious to us that as AUM rises uh returns are inverse correlated to that. And so, uh, you know, the the the trick that we have found is that, you know, how do we get in early enough, um, or how do we gain enough conviction to get in early enough at high enough conviction? That last part is the thing that we're working on. Um, uh, to to benefit from these these, uh, firms as they grow and then how do we have the the conviction to sort of down start downgrading people as their AUM rises uh, and they start harvesting their market position. And so um you know your question about the mistakes you know have largely been in you know in these big brands and and large funds and so uh over time the thermostat has gone from 68 to 66 to 64 and it's not that we never do it now. Um and there are certain situations and we think some are better than others and we think some are taking really unique strategies but we've been able to really focus on um you know what matters about a market leading brand and are they you know are they still truly a market leader uh if they're presenting their product in a certain way that you know seems highly unlikely to succeed in the future. So I'd say that's that's kind of in the the biggest mistake category um of uh you know how our fund investing strategy has evolved. The way that I look at these brands that grow is a what is a growth of the asset class. So maybe an asset class itself is growing and opportunity might be growing three times then on average that fund should be three times larger even though that's obviously quite the step up. Two is are there's economies of scale of brand for example in venture you might argue at certain stages brand is really important as you get all these portfolio services signal all these things which we could talk about. And then three is are there are there other things within the organization that are growing? Are they growing their talent GP? Are they getting top GPS and and all these other things? In other words, is their alpha growing alongside their fund size? And to the proportion of that alpha growth over their fund growth is what you really want to be identifying. And sometimes you have such some parts of the market that are growing so fast that actually the alpha might be outgrowing the fund size even though the fund has grown two, three times.

22:07 >> That's an interesting way to put it. you know, I would enjoy sitting with a whiteboard with you and like, you know, charting that. The way I I cut through it is to say, uh, I'll talk about it in venture, but I think this applies to private equity as well. We roughly target a third, a third, a third, what we call market leaders, uh, established brands, you know, a third growing funds or breakout funds that are on sort of, you know, call it fund three to six and then, you know, emerging managers, which are on fund one to one to three. And we think at each stage there's an advantage you know in your parliament like there's an alpha uh you know there's a curve and if you plotted all the firms on you know what their unique advantage was that would generate alpha for them uh versus not and and they're going to have different things at each stage. So for a market leader to be success so you know of course brand and venture is really important and so some of those market leaders have that um but many of them are hampered by how much money they have to put to work. I'm thinking of one market leader in particular who's just known for showing up at, you know, some of our companies that were, you know, one of our companies that we're building now had one of these big brand market leaders come in and say, you know, we'll triple your, you know, we'll triple your latest term sheet, right? And and it's like, is that a good investing strategy to just like pay up for for everything?

23:13 Uh because you have so much money that you need to deploy? Is that likely to generate, you know, the the top decile of returns? And so just because they have that great market leadership position, you know, I don't know that that's a good thing. um other market leaders that have amazing brands are requiring you to be 3, 4:1 into their preipo stage round, right? Um which is a form of toll. People are requiring uh 2 and a half and 25 with ratchets up to 30 and and and even more in some cases. And so you know all these tolls of the market leaders where you know there are some brands out there right now and in fact we have turned down some of the brands that you know if you talk to uh you know your casual LP they would say they would fall over themselves to get access to these brands. um and like the conventional rule of thumb is well there's only 10 firms in the valley that make any kind of money and you've got to be in one of them. I don't think that that is true. When we think about like what we define as a market leader there, you know, we're kind of measuring how much of those tolls are there. What is their right to win today? Uh things like fund size matters. Invest in a firm that's probably like a 1A brand. Uh you know, clearly not the one that everybody would fall over themselves to get in, but certainly in the conversation of uh uh of big brands. And they've recently um you know uh made a hard pivot into being AI native. and they've done deals uh with a couple of the major uh you know sort of uh infrastructure model companies that um uh you know have really made them authentic in the AI community where we're seeing and hearing from people on the ground that they're you know able to you know play in the top game but they have a normal fee structure they have a fund size that's under 500 million uh we're not required to dump money into some other fund that has a different expected return and and standard deviations and so we look at that and say hey you know if I look at all the things that we could invest in the market lead meter category that's actually probably better than one of these brands that people would fall over themselves in. Right. So that that is, you know, a version of like charting the alpha as I heard you describe it uh in that market leader category for us. The same goes in each in each other category. And so like in a breakout uh in the breakout category, we have a couple of firms that we think exhibit first choice behavior. Meaning, you know, everybody wants, you know, all the all the entrepreneurs are falling over themselves to work with this firm, but they they have not grown so big yet that they're able to charge these kinds of tolls. uh the LP community doesn't quite realize it yet. So that to us is a great, you know, it's a pile into that, you know, pile into those. And so that's what we're looking for in the breakout category. Um and I and that's sort of how I see the sort of alpha to each each stage comment that you made.

25:32 >> I've had Professor Steve Gaplin, Professor Gregory Brown from UNC, Steve Goblin from Booth, and all the data points to venture being an asset class where the founder picks the VC and buyout being where the buyout firm picks the company. And that's that's where the alpha is. So knowing ground truth, knowing who the next wave of founders is picking is really the source of diligence. That's that's the ground truth for who will be the next great fund.

25:58 >> There's a lot to that. Uh for sure. I haven't done the research. Uh and so I don't I I'd be interested to read their research. I think it's one of many important factors. Uh for short, >> what's something you've changed your mind on past year? So, interestingly, we uh uh we just changed uh one of the most important held beliefs in our firm, which is that um uh until this year, we have done no uh proactive conversations with outside capital. Um so, we've had close collaborators join us. Um and it gets to some of this, you know, sort of religious description I had earlier of, you know, why we think principal based investing is important. Um, and so you would say, well then how Alice, how could you possibly uh, you know, make the choice to to to do that when we think about, you know, why we're doing that, we see opportunities to be more excellent and and sort of the northstar of investing for us. And I guess I say our northstar is that our mission statement is we chase meaningful problems with people we care about. You have to remember that we're entrepreneurs, you know, uh, and we build things as well as as the investing side. But within the investing side, the north star is making our own investing more excellent. And so we're now because of our market position being in these 200 different vehicles and having invested in dozens and dozens of fund ones and and and seeing what works there. We believe that we are very well suited to be anchor investing in many of these funds and and being a true partner uh to those businesses and building them. Um but it requires a bigger chip stack uh in order to do it while maintaining the diversification principle that we have. And so uh you know having more money in that case actually you know allows us to enhance the efficient frontier. That's very important. separately and I think you know I'm guessing this is on the mind of many you know family office investors or or principal investors that may listen to your podcast. We do a lot with a lean team. I think there's a behavioral psychology thing that if if normally when I'm running a company I I need to have a 12 to1 decision in order to make a new hire. When you're making when you're running a company or when I'm running within endurance I feel like we need to have a 50 to1 decision to make a new hire because uh there's this conservatism around your own money and you know kind of pouring into into new resources that uh I don't think is on the efficient frontier of choices. I think most people would say that alignment is very important and I I agree that it is obviously um but I think it can also get to be orthodox. We uh you know we struggle with getting to higher levels of conviction uh as evidenced by the you know we we have this great uh pool of investments that we've made. Um but we very rarely get to a very large check. Uh and having more team will allow us to do that.

28:18 >> I'm sure you've thought about this and I want you to be explicit. What is this the golden check size? What is the ideal check size per asset class that's not too big to have to go to these brand name firms that you know just sound good on paper but they don't return and not too small not to get the attention of the funds you want to get in. What's that ideal check size? >> You mean the check size that a that an a manager a GP would uh >> what's the what's the ideal check size for an LP? What is the checkbook you would want to be walking around to maximize your returns while not having too much money where it's hard to deploy? You know, I I'm not going to give you a specific number because I haven't thought deeply about it, right?

28:54 And I and I I think that that deserves a deeper thought. I I guess I look at on a marginal basis. You know, right now, uh our again I'll talk about our VC pocket, but it applies to the PE pocket and the real estate pocket as well. Um you know, our VC pocket makes 8 to 15 fund investments per year. Um and probably 20 or so direct investments per year. I am confident that the expected return and the uh and the standard deviation of that fund and our portfolio therefore would be greatly enhanced if we got to uh you know if we showed up and wrote a $25 to $50 million check and put someone in business and anchored their uh uh and anchored their fund. Uh we in a couple of cases sort of unintentionally did that with uh some of our collaborators where you know we picked our head up at final close and realized that we represented you know 20 to 40% of their capital base and said huh you know maybe we should be more thoughtful about this and be able to participate in the economics of you know we we we've done something you know we made the decision obviously because we would never make a decision because that we didn't think was going to return well but we should also benefit in you know what we've done in creating this firm here and doing that you know just materially really enhances the economics of that choice.

30:08 So um uh it's an interesting thing because in mo and I just articulated earlier that in most investing contexts more money is bad. Um in this case uh we see opportunities that we can't access unless we have more money. And so uh on a marginal basis that's going to be true for quite some time. One of the top institutional investors that anchors and seeds managers they actually said that the biggest benefit for them is they were on the other side of the table with the GPS when it came to new opportunities, new funds and they had just a higher quality flow of information. They also obviously had had superior economics but they actually benefited more from the deal flow and the information flow than they did from the actual underlying investment on in that one seat seating.

30:51 >> I believe that there's value certainly there's value to that to be true. I mean, it's part of the reason why, you know, we do the two, you know, why we do, you know, you say 200 investments and like that's such a big number, right? But when you think about it, it's like, well, it's 10 years and it's seven asset classes, right? And and we have all these vectors of diversification that matter to us, you know, manager stage, uh, you know, uh, when like what type of thing they're investing in, geography, etc. And so, if you're trying to get a truly diversified approach, you know, that's how you end up at at 200 pretty quickly. Doing more diligence doesn't enhance the expected return, it just decreases the volatility. And so uh if you you know the the extra the amount of work utils per volatility uh confidence uh is immense but when you do the 200 investments you get uh a synthetic benefit of the information flow that's coming back and so what you were describing as you know being at the table with the GP I think that would be another version of that synthetic benefit of uh of being in market and you know I guess you know taking it to our entrepreneurial side as well. We have found so much that you know you can sit in a room and think uh yourself into you know uh around the table but you know there is a magic to just putting yourself in the market and feeling what's going on in the market and so right now we do that with the you know lightly with the passive investments that we make and I suspect if we were you know when we get into bed with a GP that we're going to you know uh uh build a business with I suspect that will lead to another set of insights that will make us even better and and is a better form of diligence.

32:15 It's interesting because beta and alpha are not commonly understood in that alpha is taking the same amount of risk but getting a higher return, same amount of market risk. So an efficient portfolio would actually have a bunch of these highly asymmetric investments that that you could diversify away. So the presumption in modern portfolio theory is that you should be able to diversify away a lot of those factors. So to your point, it's not actually about picking the investment that you know for sure won't go down. It's about which one has the highest expected return and then building a portfolio around it that lowers the volatility across the entire portfolio. That's like elite portfolio management.

32:52 >> That's exactly right. And and taking it back to some of the institutional conversations I've had and what's you know I get asked to advise on things and they say oh you're the venture guy and by the way we do all these other things and I I think we're good at them as well but you know there what's the one bullet you know who's the one emerging manager that you should invest in? say well we invest in six to eight venture and three to five PE a year right because you know there isn't one bullet right and I think that's part of the institutional decision-m that ends up with the least common denominator answer where there's you know you'll pick an emerging manager who is not objectionable you know or like doesn't you know technically doesn't trip one of the trip wires but is not likely to be excellent when really what what a portfolio construction should be is exactly what you just described with you know a lot of really spiky managers where one of them is is you know not going to work out and as a poor choice but because you've got the collection of them as a group that they will they will perform better the free lunch as as uh I said earlier >> set another way you should never have to defend any one manager selection that should be almost a maxim meaning if your entire portfolio is delivering 15% for 15 years no one should have even the right to question that one manager because that might be the that might have been an alpha in another simulation of that same strategy so it should be it should that should be the paradoxical thing it's exact opposite of what is paradoxical >> that's one of the problems of committee based decisionmaking right is that you know everybody ultimately is like who wants to pound the table and and you know hang their name on one one choice.

34:13 The psychology of committees I think is interesting. >> I remain unnamed the university endowment but there's a university endowment that's struggles to bring in a top CIO because of the board and because of how vocal some of the board members are about certain things they feel like they would not be able to execute their strategy. So ironically even the entire governance and not even governance in terms of levers but the individual people on a committee can adversely select the CIO process in that endowment that then flows down to return. So the behavioral psychology behind these these investment vehicles are insane and the only way to really if you want to completely collapse that you have to manage your own money which I guess is to go full circle what you came to.

34:53 Brian was saying, you know, the big change we made this year was saying, "Hey, we're gonna we're going to start telling people about it, which I'm not even sure is a good choice because I'm immediately feeling the tension of, you know, uh, of the conflict of interest that comes from doing that." >> You said, you said that one fund was great, that one fund didn't do well, you're an idiot. >> Yeah. >> Versus versus like, look at my returns versus you're corrupting in in many ways your own thinking.

35:14 >> Totally. And and um, you know, and then the other the other parts of it are a lot of people wonder how we you know, we do so much. you know, saying, "Oh, well, you know, you're incubating one or two companies a year, and how do you, you know, spend your time?" And what I realized was, you know, when I was a sitting, you know, uh, CEO, uh, you know, half my job was fundraising and talking to outsiders.

35:32 And then, you know, now, you know, for the last seven years or eight years or whatever it's been, uh, I haven't had that job, right? And so in in a sense I'm I'm able to you know I've been able to focus just on building new companies and making good investments and and so now I've you know kind of added a third job of talking to outsiders which we're still doing a lot less than we're trying to you know back to the thermostat analogy we're trying to turn the thermostat up one or two degrees on on the talking to outsiders piece but the the the immediate feeling of conflict of interest is there and so we're start we're trying to put in things that insulate the investment committee from those outside choices. So you know as an example we banned the concept of you know some somebody made the mistake of saying I think people really appreciate that we included this you know uh this company and you know that we really that we put that investment and that that will land well with outsiders and that is the the biggest taboo statement you can make in our investment committee and almost you know makes it uh hard for us to make the investment because it would it would tell us that maybe we have these other motivations around why we're putting it in the portfolio. the antidote to that a couple Mike Maples a while back and he he talked about his fundraising strategy which is to look for people that align with his with his mission. Jeff Bezos t Jeff Bezos on the public side for a decade told his investors we're not going to be profitable for a decade we're building and a lot of people were turned off by that and the people that weren't turned off also known as as his investors. So, if you're willing to make that trade-off in the short term between who you bring on board, you could actually bring kind of create this cult of your your investment principles. Obviously, Warren Buffett and Charlie Mer did that as well, but uh it it compounds slower, but it it is a way to to build kind of a more isolated strategy from from outside perspectives.

37:12 >> Or worse, um we're heavily influenced. You mentioned a bunch of legendary investors. our first uh investors in one of our companies uh was this firm uh Investment Group of Santa Barbara uh IGSB and these are uh you know they're so low-key they have no website um they uh you know their office is above a shopping center in Santa Barbara and they've compounded their own capital at an amazing you know it's now I I shouldn't speculate how big it is but you know they're these sort of if you know you know type investors and uh we were so influenced by that uh that we you know I think we built a lot of religion around not bringing outsiders.

37:47 And so for for better and worse, you know, we have built that, you know, sort of religious like uh approach to what matters to us uh conviction in our approach and ability to uh you know, avoid the noise. And sometimes we get caught up in FOMO, but you know, I think in general we're better at it than most people uh uh of of not following the herds. But that's come at a cost. And so uh we we probably have been too conservative in that respect and and you know are now thinking as a firm about how we evolved uh and you know do it without throwing the you know baby out with the bath water.

38:19 >> One of the things I always reserve the right to do is to contradict myself even within the same sentence. I always reserve that right. I think that's that's the mark of a a good thinker. You're so purposeful about who you surround with the different things that you consume. What's your information diet look like and how have you improved that over your career? >> Uh, this is funny. Um, I'm a big I I take a lot from um, uh, Tim Ferrris's 4-hour work week. And one of the things that I took very early on uh, from him was don't read news. So, I don't read news. Um, now you might hear that and and think I'm a lite. uh you know and you don't know me that well and and others don't but I think most people would would characterize me as somebody in the high end of of you know the information flow what uh Ferris um you know talks about is that the important things will get to you and I think that's been that's that's been how I consume information is that the important things get to me I don't feel uninformed uh you know there's maybe a half dozen times over 15 years that I have really not known something that I probably should have known um and you know at the end of the day that wasn't that big of a deal and and it actually filters out a lot of the bad news and and the noise um uh from uh from from having that low information diet. I also do things like um very controversially uh especially amongst the people in my community. I don't use text messages.

39:40 I'm not on X. I'm not on you know any of these. I mean I have a Facebook account but I rarely use it, right? And so um I'm not on Instagram. Uh and so uh I I try to insulate myself from uh information and um that's been a working formula for me. One of the things that I've been talking a lot about is this concept of negative alpha. It's been around for many years and not many people talk about, but you actually have negative alpha, which is same same risk but lower return than than beta. It's a real thing. And a big component of that is negative information. People think either somebody's good information or they're neutral. No. Some of the worst things that you'll ever do, and this goes to investing life, anything is by getting bad advice from people. It is certainly does not it's certainly not positive or neutral. Some of the worst investments that I've made that I took full responsibility for came from this negative information and having certain people in my life that are just feeding me negative information that are so subconscious that I didn't even realize until years later why I had been thinking that way.

40:41 >> Yes. And it occurs to me I also, you know, when I'm in the same breath as I'm saying I I don't read news. One thing I do do is I have a number of podcasts that I generally listen to a lot and I've now added how I invest to that uh list uh because it is so you know a curated thoughtful group of discussions right and so um yeah I I you know over the last five to seven years you know sort of integrated you know podcasts as uh my downtime and and way of filtering you know for things that uh you know are going to be very high likelihood of being high quality. Uh and that's one of the ways that the right information gets to me. I like you. I I I am on X. I try to spend as as little time on there. I think it it has a negative more negative effect on me than positive for for a lot of the reasons around the algorithm. I think podcasting and interview style long form podcasting is one of the most positive developments we've had in the last decade of mostly negative information, negative social media and those things. So on that note, if you could go back 16 years ago when you first started investing your own money via endurance, what is one piece of timeless advice you would have given yourself at that point that would have either accelerated your success or helped you avoid costing mistakes?

41:49 >> I knew it at the time, but I'm the biggest Well, I'll share with you like the biggest mistake I've made investing. At the beginning of COVID, I started watching CNBC pretty closely and uh and thought, you know, we were in some, you know, disruptive moment and I'm like, well, this is the moment where like a lot of stuff is going to change. I got to pay really close attention to the daily market movements and and so uh I started market timing uh and I didn't understand the maximum don't fight the Fed, right? And so that was just something I missed in my, you know, I thought I was all over all the details.

42:15 And then, you know, of course, there's this detail that overrode everything. And so I was saying to myself, I don't see how the market doesn't drop by x% and I had a whole model for, you know, like I was going short uh uh short the market. And so, you know, the the the maximum of, you know, market timing is really hard. Uh, you know, was something I knew and every time I forget it, I I get burned. Um, and so, uh, vintage discipline is deeply built into our structures because it's such a natural human emotion to think that you know something. Um, but I think very rarely do, um, uh, you know, very rarely can people do market timing well. And, um, I think the ones that do are doing it a part of it in an aspect that they really know well, where they have a unique advantage and they're finding ways to put up blinders so that they aren't influenced by the other things that are going on. So yeah, uh don't try to mark the time is the sort of true advice that I would uh give myself.

43:06 >> That's great advice. Well, Alex, thanks so much for jumping on the podcast and uh looking forward to the whiteboarding session soon. >> Awesome. Thank you, David.