How I Invest with David Weisburd - E412: UPENN Endowment: Why AI Will Create a New Generation of PE & VC Firms

Episode Date: August 5, 2026

AI isn't just changing technology—it is reshaping how investment firms create value, evaluate managers, and generate alpha. David sits down with Thomas Scriven, Managing Director University of Pennsylvania Office of Investments, institutional investor with experience across private equity, endowment management, and investment banking, to discuss why AI-native investment firms may outperform traditional firms, how great LPs evaluate GPs, why concentrated portfolios often outperform diversification, and the investing frameworks that separate elite allocators from everyone else.

So how will AI affect investment firms? There's going to be a lot of organizational reworking that's needed. And I think investment firms that are learning organizations will do a lot better. As I think about AI and the changes to investment strategies, we should back the operational value at that private equity firms need to contribute. A lot looks quite different. And we just backed a new firm to very, very, very, smart investment partners, but a lot younger than we usually were back, but they're teaming

out with a team out of Palantir, three super experienced engineers that have between them over 30 years of sort of forward-deployed engineering capabilities. We think their playbook looks very, very different. Do you think the next generation of investment firms will be new firms that are AI native or old firms that are integrating AI? I think there's both. A lot of the old firms have some very, very smart people. And I think they're all very cognizant of the fact that the world is changing and the way you drive value in the future is going to look differently. Some are maybe adopting AI more reluctantly,

and others are really jumping in. For me, the question is more, is there a shift in where the most attractive opportunities are? You might do everything, you might be a larger buyout fund, and you might have the best operational value at playbook. but this might be table stakes because everyone else has it. And the gains you get through productivity enhancement through AI, you're giving back either in price or in competition. Whereas it may be in the middle market,

you can have a less sophisticated playbook, but it's a more unique playbook where you are. Driving value that you get to keep, that the portfolio company gets to keep, and you stand out, and the buyer is buying it at the end of your hold a scaled asset in a properly AI native mid-market business, and that might stand out a lot more than someone who's done a phenomenal job as a billion-dollar business. But that's just what you have

to do. And maybe the change there is for the ones that execute well is actually not as rewarding as it is on the smaller end. Going back to this firm that you backed with the Palantir engineers, how are they specifically integrating AI into their process? The core team of three engineers, that's what they were doing at Palantir for their clients. And so they are essentially going to be forward-deployed engineers for as long as they have to until they can build the skill sets within the operating teams, various portfolio companies, which doesn't sound so sophisticated on paper. It's actually just really hard to do, and it's really hard to find people who've been doing this for a long time.

So they make an investment and they go into these companies and integrate AI into the core of how the business operates. What's great is when you have a team like this and you're a mid-market owner of a private business, your business is doing well. But you know it's going to have to change. You know you're going to have to do something with AI. And you meet a team like this and this is the quality that usually only the very big buy-out firms can hire. This looks like a partnership more than a sale. You're like, I'm happy to sell you 60% of my business. If you can take my business into the next generation, I'll roll 40%.

And so it starts at the early engagement, which gives you better access, more due diligence. The nice thing about AI is you can prove some of the change management that you want to affect very, very quickly. So it's not a future partner or a founder who's selling to you or selling part of his business to you. you can put in some sweat equity and show them that you actually know what you're doing that you can actually affect change and that's how they got their first couple businesses and then you buy a business that you've already spent

you've had usually more access to because you're actually showing diligence is not a painful experience for the seller if he's intending to rule. It's actually a learning experience and so it gives you more access than you usually would get to due diligence. You have a pretty good understanding

of what you're going to do before you've even owned the business. You've probably, probably already run a few of maybe the easier lift AI applications. And then you can decide, is this the best use of your time? So what are you looking for? You're looking for a business and has a lot of data. You're looking for a business that has a lot of labor costs

that can really benefit from operational improvement or efficiency improvement. And ideally, you're looking for a business that would do just fine whether it went through a big AI role, I don't know, so it's sort of not in the immediate impact of AI. It's really, you're going off to the upside. And ideally, you're looking for business where the AI transformation is not about cost-cutting, but it's about labor force enhancement and driving top-line growth. Because then culturally, you don't get as much pushback. You're not asking people to adopt AI to make themselves redundant. You're asking

people to adopt AI to make the job more interesting. One of the businesses they have looked at is in the collection space, a niche collection space, and the workforce there spends an inordinate amount of time data processing, which is incredibly boring, just for lead generation. And with AI, you can take that 80% of their job and make the 20%, which was actually going after the collection side, which is where they get their money, 80% of their job.

And now you have higher retention within the workforce. People enjoy their job more. It's a higher margin business because each person can process a lot more claims. And you've just accelerated growth. So you're looking for businesses that are slightly orthogonal to the risks of AI but could then really, really benefit on the opposite case.

if you're willing to deeply embed AI. You need people who've done it before. This doesn't fall in the same playbook of you meet, you have a board meeting every month and you tell the management team what to do. This is, in most cases, especially in the mid-marked, the management team needs partners that help them on the project management front.

They go in, do that. And three six months, it could be a year, and they're ready to pull out because they've established a new workflows, new work streams, and then they go to the next one. So it is a more labor-intensive approach. It doesn't scale as well.

You can't run, except if you have a very big team, you can't run three or four deals in parallel. But I like it. I like it for the AI benefits, but I like it from a conviction investing point of view. It forces them to be very selective on the business models they choose and the number of deals they do

because they're going to run a highly concentrated portfolio. And so that would be an example. You mentioned this management, change management. It's a popular term today, which is how do organizations institute change? Because it's one thing integrating AI in a vacuum, but you really need to have your employee workforce integrating. And you said something very interesting, which is this investor looks for easy wins in their portfolio companies. What are some easy wins that investors are making in their portfolio companies to prove to those portfolio companies that it works? Last week I was talking to one of our

partners. It's been a roll-up. It's gone well, but it's not the big fund driver for them, so they were thinking of selling it. It was going to be sort of a 3X outcome perfectly fine. But a couple of months ago, they went in and said, look, dispatch management, the logistics of dispatch management in a business like this are incredibly complicated.

They were done manually. Let's see what our internal AI team in the day have a five-person AI team who can build AI products internally. Let's see what they can do. Took them six weeks. And they have now, for the last few weeks, been running dispatch management fully agentically, way more efficient.

They kept all the employees. This can be now run fully agentically. Now the view is, or maybe we shouldn't sell this business because we have real IP here. When you suddenly can do route management that takes into account that there is bad weather or someone had a punctured tire

and dynamically and immediately reroute there's just too many variables for a human dispatcher to do that. It took them six weeks to build this. If your average due diligence process is a three to six months process, you have plenty of time to run those type of experiments

alongside your traditional due diligence. So I think this is going back to helps potentially sell a future partner. But it also helps de-risk your own operational approach to, should we own this, asset and can we actually do what we want to do with this business? So that would be an example. What percentage of your managers are using AI for sourcing?

You should ask me this question in August. I'm having a conversation with every one of our active managers to actually go through what are they doing in AI because it's very hard at this moment to sort of separate fact from fiction. What's your intuition, tell you? Well, everyone's experimenting a lot. But when you really push, say, okay, where is it? This sounds great.

where is it showing up in the numbers? A lot of the conversations still go pretty quiet and it's like, not quite yet. And we think it will show up in the numbers in the next few quarters, but it is still rare to see AI application. That has gone deep enough and far enough where it is really showing up in the numbers. And that's okay. A lot of things that one can do it genetically today,

you couldn't even do six months ago. So we're very confident that this is a transitionary period and the purpose of the survey is not to conclusively find out who's great and what one can do, but it gives you sort of a baseline to judge people's efforts by over the coming six to 18 months. And I think that's the time frame where we really expect to see a separation between GPs who are in the forefront and GPs who are maybe lagging a bit. At this point in time, I think it's still quite hard to really differentiate. trade and I am quite wary of drawing two-minute conclusions.

A couple weeks ago, I had the co-head of Co2's growth team, Lucas Wisher, on. We talked about the narrative in the market where AI is replacing jobs and the actuality on the ground, which actually AI is creating jobs, specifically in the early adopters, which are the developers and the engineering firms. Within your portfolio companies like this industrial services company you referenced with the dispatch service, are there other cases where AI is actually creating jobs versus taking away jobs? My general view is it's going to be a mix of both. I actually think the more interesting AI play is going back to my earlier comment

is where they create jobs, where it really allows a business to grow more quickly and use their workforce more efficiently, which becomes sort of a virtuous cycle of why they become the winner in their category. I am not as negative, generally speaking, and just based on the anecdotal evidence, it is not clear to me that AI destroys jobs. I think it will create a lot of jobs.

Whenever we have big transitions, whether you go back to the automotive industry going from building cars individually to a factory line, there's definitely going to be friction. And will we do better this time on retraining employees who are impacted? I don't know. But I'm not in the camp where AI is going to destroy everybody's jobs. I actually think, and I'm being a little philosophical,

if you think about the 100-year challenge for the world, we're facing a declining population. More and more older people need to be supported by a smaller labor force. I think if we apply AI properly, that is the productivity enhancement that we need in our workforce to live in a world that has a declining population in the not-to-nitistant future. I see all the risks, I see the cybersecurity risks and all of those things.

But net, AI should be a winner for society. One of the reasons why people think AI will be so destructive, it's an availability bias. So you could only think of the jobs that are going to be cut. You can't think of the net new jobs. And one of the reasons why you can't think about the net new jobs is because people don't have the mental space, the time, the resources to think about how to grow their business. But human beings, if there's one thing that all human beings have in common, they want to self-actualize, they want to grow, they want to.

increase. So every business, in many ways, idiosyncratically, every business will come up with different ways to grow. That's extremely predictable. How exactly, and in what ways and what future jobs will be is hard to predict. But this fact about human nature is just something that's undefeated. I couldn't agree more. I think it dis unleashes a new form of creativity if it replaces some historic creativity. And I've seen it in my own life. One of the things that I realized a few months ago is that thinking time competes for the same brain resources as doing time. So if you're extremely busy, if you're in the weeds, literally on a neurobiological level, that part of your brain is not able to think.

And the way that I realize this is on the weekends, I would go biking outside. And I would always come up with new great ideas. And I started to isolate the variables. Maybe it's because I'm outside. Maybe it's because I'm on a bike. And maybe it's because it's the summer, all these different variables. And ultimately, I changed slots during the week. in order to say I have more thinking time, especially in the beginning of the day, I would go to the sauna.

I started magically coming up with new ideas because again, my brain was no longer competing with the doing. That makes total sense to me. If I have one complaint about my job, I find it's easy to be busy. It's really hard to find time to think. And if you went through a week, how many hours of the week are you thinking deeply? It's always a disappointingly small number. I was just talking to the president of NEPC, which is a consultant. I think they're one 1.9 trillion AUA. And he said that most limited partners, only 15% of their time is actually spent on the investing side and everything else is spent on internal policies, on dealing with investment committees, on corporate governance, all these other things that eat up into the investing

side. That doesn't surprise me. And going back to you, very first question, which organizations will do well in the, you know, I think we are in a big transitionary period, I think. It's always true that the way you are going to make money in the next 10 years is different than the last 10 years, but sometimes it's a little bit more true. And I think we're in one of those moments where it's a little bit more true. When your governance is set up that you need to go and pitch every single investment you make, you spend most of your time preparing for that pitch, right? You're spending time on due diligence and you're pairing time.

Which is actually rational. Which is rational because you need to get stuff done. You need to justify your existence. It's not good to try new things because you know what gets through your investment committee and whatnot. And it's a much higher bar trying something novel was your investment committee than something you've already. That rhymes with the last three things you've done. If your investment committee, though, you're not going to for investment sign off because that sits with you. You have to go to it or you're bored to explain why you're doing things and how you're doing things.

So it is purely there for you to justify your investment strategy. It does a couple things for you. One, it forces way more thinking time. You have to step back. In my view, it creates way more accountability. Because I can sell anything that I've done three months to do diligence on, and you haven't, I should be able to sell to you. I have such an information advantage, right?

But explaining to a well-qualified board why we are shifting, our buyout or our venture strategy or why we're staying true of it or why we're not giving up on every software strategy that we have at this moment in time is a much higher part to meet intellectually. And so this goes back to learning organizations and forced thinking time and everything. The setup really matters because then I think you avoid that 85% of your time is essentially preparing for the pitch and internal stuff that is not productive from an embedding. investment strategy evolution point of view. A lot of the problems it was investing or success

with investing has to do with your organizational setup. And I think that's another example of how you could bring more thinking time into your organization. Well, how your board works really matters on that front. Most investors don't lose because they lack information. They lose because they can't separate signal from noise. Every day, thousands of earnings calls, SEC filings, expert interviews, and market updates compete for your attention. The challenge is in finding more research. It's finding the few insights that actually change your investment decisions. That's exactly what I unpack in my conversation with Ryan Fenderty. Instead of talking about AI in theory, we discuss how leading investors are using it to surface differentiate research, move faster than competitors,

and make more informed investment decisions. If you're an investor looking to gain an edge through AI-enabled insights, I think you'll find this conversation valuable. You can access this limited release episode by going to alpha-sense.com slash how I invest. That's alpha-sense.com slash how I invest. To quote Charlie Munger, if you want to understand somebody's behavior, look at their incentives. Sometimes it's as easy as that. Some organizations think from first principles, how do we best incentivize our investment team to get us the best outcome?

That is definitely true. And when we partner with a new GP and we're usually fortunate that we end up being one of the, have very close relationships with our GPs and our thought partner. And they'll ask me often in the fundraising process, okay, we seem to have good demand. these are the LPs that are interested in partnering with us, how should we select and how should we construct our investor base? Do you know how to compensate it? Because that will tell you a lot of how they will behave.

Do you know who is compensated differently for a co-investment versus the fund investment? Do you know who's compensated based on annual numbers? Or maybe something that's more aligned with you have a long horizon investment strategy. You might have a deep J curve. Is their internal compensation model actually align? with the potential challenges and pitfalls of your strategy where you don't want to be judged on the quarterly basis or an annual basis.

And most GPs have no idea how their LPs are compensated. I think that's a mistake. Because you can only litigate so much in the documents. What you really want is a set of commercial partners that you know when whatever happens, you find the world has the next Lehman event when you need to sit around the table and make a commercial decision, should we extend the fund line, shall we expand the fund,

shall we do something that was not thought of in the legal documents? You want to know how they will act at that moment in time and what are their priorities because in the end, incentives do matter in human behavior. And I think a lot of GPs have no clue what their LPs will do in these situations based on their incentive models. incentives are a very sensitive topic. How should GPs go about figuring out the incentives from LPs?

Well, I asked them what their GP commitment is. I know everything about their incentives. I don't think this is a sensitive question. You're just about to enter a 10-plus year partnership. Why wouldn't you want to know that? And why wouldn't both sides want to know that there's good enough alignment, good enough understanding of what both people are getting? The problem was most private strategy is you have issues don't arise in year one, two, or three, right?

There's a slow feedback loop. Everything starts off well. It's in year 7, 8, 9, where the challenges come. And so I think it's in both parties' interest that everyone's eyes wide open on whose partnering with whom and what their incentives are and how they might behave. Staying on this thread of GP, LPs, incentives, you mentioned legal docs. Are legal docs really the draconian, the nuclear option, and 99% of things are figured out between GPs and LPs through constructive conversations? How would you categorize the relationship versus the legal docs if you had 100 points to split? Legal docs matter.

Very little. If you're one of the two thought partners to a GP, you're in very regular dialogue. I think the conversation and you always get disappointed on occasion, but across my relationships, I think I have partners. I can do things. I think they would say the same of me. And that's arguably one of the most important things when you enter these very long-term relationships. We're all professional.

We all have a fiduciary duty. Yes, you have to have legal docs that are workable. But if that's what you're relying on, maybe you shouldn't enter the partnership. goes back to the incentives. Maybe the incentives are misaligned if the legal docs need to crystallize some of the terms. It's a very complicated topic, very dysyncratic to the individual situation. I don't want to oversimplify it, but I do think in the end, I'm in the people's business. And I'm trying to find people where there's trusted relationships.

I'm trying to find people who find it if they're driven by wealth creation, but they're motivated by excellence, wanting their competitive juices are not just measured by their bank account, but being a world-class investor, being best in whatever the chosen strategy is. And Ethics Matter. My most interesting conversations that have gotten me over the line with new partners have nothing to do with the investment strategy or only indirectly.

I want to know what makes them stand tall in the room of peers 10 years from now. And it better not just be the size of their bank account. They must love their business enough that there are other things that inspire them about what they do. Is the way to ascertain that to see how they have been historically?

So that really Occam's raising. That helps. We do a ton of referencing, a lot of in-person time. So it's hard for me when something really interesting shows up and says, look, we're closing in two months' time. even if I can get the same whatever it is.

50 hours together across multiple years is much more valuable than 50 hours. You want to see that slope versus. So ideally, you always make exceptions. This goes back to frameworks versus rules-based. But then it raises the bar dramatically. Maybe you could double-click and explain this frameworks versus rule-based investing as an allocator.

Rules-based investing is you know exactly what you're looking for. you run around the world if it's a global remit trying to find things that take all these boxes, right? And it by definition is based on historic data. You come up with rules based on lived and observed experience. And it is your definition of like what is most likely to succeed to help support whatever remit you have, right? Framework-based is acknowledging that there's a lot of information. in the past, and that helps set the stage of what you filter for. But it acknowledges that some of the most interesting things will just look different.

And sometimes it's worth taking on one of your risk categories, right? So in your rulebook, I might say, this is a little bit risky, but if you're compensated for that risk, it's okay to violate this rule in the framework, right? Whereas in rules-based investors, like, look, we're not going to do that because this scores a three on this. I might say it might score a three on this variable. But, hey, look at these three incredible Palantier engineers. That talent scarcity. It is being applied in a novel way where I can understand how this could really transform the upside case.

And when I look at this, it is okay for me to violate a part of my framework. because I'm potentially getting something in return, right? And it shifts the entire debate into what is novel, what is different, what sits sort of outside of our framework, and then it prices it in. And we're in the equity risk-taking business. So we're supposed to take risk. We're supposed to be conservatively courageous. And so how do you do that?

You have a clear understanding of what you look for, and then you challenge it all the time. And when something's different, that doesn't make it bad. necessarily. And some of the most interesting investments are when the model has this been tweaked or looks a little bit different or you might have a philosophy of equal partnership is the best setup. An organization you only want to back equal partnership. What are some incredible investors who run a CEO-led strategy? And if you're rules-based, you might struggle, you might not spend time, but you suddenly spend time as an organization that looks a little bit differently. And you start on asking different questions around, okay, so if this is CEO,

how do they attract and retain the best talent? It feels like, and my framework just tells me where to put the emphasis of my due diligence. But if I answer it, it's okay if something looks totally different. When you look at your portfolio, do you think ahead of time, what percentage of your portfolio you want to be rules-based and which ones do you want, for lack of a better we're breaking those rules? I don't want any rules. I just want a very disciplined approach to what we underwrite. I don't want creativity for creativity's sake. So this is not that riskier things are framework-based and less risky things are rules-based. This is that the entire process for whether it's a plain vanilla strategy or something novel allows for the identification of

things that are different. It forces a clear discussion of them. It creates accountability of when you're taking on something that is different. But you also know, because we're going to get a lot of things wrong. And when you get things wrong, you should not have knee-jerk reactions. You should be able to go back and say, would I make that decision again? And if I said, yes, it was to give an information. I would make that decision again.

Then it was an okay risk to take. I tell my team all the time, we have to write very nice investment committee memos because we think actually being able to articulate so they're all. It's in Word, not in PowerPoint. You have to really express sort of write a good 15, 20 page document

on any of the investments we do. There's sort of a risk section in the back. And I always say, this is your get out of jail free card. If you describe in there the risks that we've identified, that we're willing to take, on and something goes wrong because of that, I'm okay with that because I know we've debated

it. I know we priced it. If something goes wrong and it's not in the risk section, then maybe we made a mistake. In other words, you're not punishing the scientists for setting up the experiment. As long as the experiment is good, you just want to make sure that the experiment is well thought out and then let the results be what they are. Again, nervous was the word experiment because I want a pretty high hit rate, but yeah, that principle is correct. To many people, it might seem, well, why is the University of Pennsylvania? Why don't they just do all the rules-based. You get a look at all the top managers.

But if you look back the last 40, 50 years, some of top-performing funds are in these novel strategies. If you think about the capital markets, it's a competition between supply and demand for specific strategy. If everyone's using the same strategy, the same right to win, the same differentiation, that looks a lot like data. And oftentimes some of those best opportunities are in novel ways.

So novelty, to your point, is not a thing for its own benefits. It's a way to actually differentiate and to generate alpha in asset classes. This goes back to the early part of our conversation. We know the world is always changing. I can't afford to have a static portfolio. So how do I create a process where we occasionally can take on something totally different and new? And there are examples of organizations that have been very, very successful for 30 years,

but they're pretty rare. We should always be re-underwriting our existing portfolio versus a new opportunity set. I think the discipline of having your existing portfolio always go up against new opportunities, really important. Otherwise, what you do is you just wait so something goes wrong in your portfolio, you get rid of it, and then you have an open slot, and you fill it with something new. But in the perfect world, you can front-run that process, and you don't do that loss fund where suddenly the business model was broken,

and the AOM was too big, or the partners weren't quite as focused, or the succession planning never happened, et cetera. And that already got competed away with something new because you've always been open to something new. Reminds me what Mel Williams told me is that when he gets net new capital, everything competes for his, I believe, 11 core managers. And the best thing most of the time is more money into those managers. Once you have alpha, you just pour as much capital as you can.

Obviously, you have to build a portfolio. But alpha is just so scarce. sometimes it's not just looking for something new. That makes sense to me. Both in my venture and buy a portfolio, our top ten relationships speak for the vast majority of our capital and uncalled capital. But they don't start off in a top ten position.

They grew into it because we got more familiar, because successful firms tend to build on that success, and we have quite a lot. It's a Stanley, Drunken Miller, invests and investigate, write a small check, and as you gain more conviction, you... I'm not sure I fully agree with this. Tell me more.

And they're very, we have peers of being very successful in this, but sort of this farm team approach, plan a lot of seeds and then really double down. One, I don't think that makes us a great partner. So just from a, you're an optionality. They're an optionality when really what we should be is their cornerstone and really, I mean, we're really good at supporting young organizations in franchise building, right? I think a lot of investors who are raising fund one totally underestimate how complicated it is to build an investment organization. I always say you run an operating company first and a pool of capital second and hopefully we can be really helpful to you in that operating company building phase and at some point they're really good at and they don't need our support to the same degree. If you have a farm team, it is very hard to build that kind of relationship because you just can't spend that much time and it's, It's like they're always on probation.

So I think, generally speaking, we want to write a high conviction check from day one on. I'm still over-diversify. It is. I'm far away from being over-concentrated, so I can afford to do that. It raises the bar for me on when to pull the trigger. It is, if I had the option to write a whole bunch of little checks and see how it goes, it is very, very hard to maintain the investment discipline all fronts. So I would rather have a high bar make it really difficult to get into my portfolio.

Then things slip in, you have a rising star on your team. You're like, I'm not sure about this, but they're really excited about it. Let's write a small check. There's some really difficult dynamics to contend with when you do. Growing up, I thought managing money meant paying bills and balancing a checkbook. But as you know, that is only a small piece of the financial puzzle. managing your money takes more than just checking your bank account every once in a while, and great financial decisions come from having a complete picture and proactive management

of your income, expenses, and investments. Take control of your finances with Monarch. It brings together all of your accounts, investments, saving goals, and spending into one place, making it much easier to understand where your money is going and whether you're actually on track to achieve your financial goals. What I like most about Monarch is that doesn't just tell me what already happened. It helps me plan ahead. The AI assistant lets me ask questions about my finances in plain English. And the AI weekly recap highlights spending changes or upcoming expenses before they become surprises. It's like having a financial advisor in your pocket.

Write your own money story with Monarch. Use co-invest at Monarch.com to get your first year of Monarch Cor half off at just $50. That's 50% off your first year at Monarch.com with code invest. Growing up, I thought managing money meant paying bills and balancing a checkbook. But as you know, that is only a small piece of the financial puzzle. Managing your money takes more than just checking your bank account every once in a while. and great financial decisions come from having a complete picture and pro to active management of your income expenses and investments.

Take control of your finances with Monarch. It brings together all of your accounts, investments, saving goals, and spending into one place, making it much easier to understand where your money is going and whether you're actually on track to achieve your financial goals. What I like most about Monarch is that doesn't just tell me what already happened. It helps me plan ahead. The AI assistant lets me ask questions about my finances and plain English. And the AI weekly recap highlights spending changes or upcoming expenses.

before they become surprises. It's like having a financial advisor in your pocket. Write your own money story with Monarch. Use co-invest at Monarch.com to get your first year of Monarch Corp, half off at just $50. That's 50% off your first year at Monarch.com with Code Invest.

Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manned staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business,

Square helps you run your business without running yourself into the ground. I was actually thinking about this other day when I stopped by a local cafe here. They use Square and everything just works. Check out as fast, receipts are instant, sometimes I even get loyalty rewards automatically. There's something about businesses that use Square.

They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are. In store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly,

in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built in tools like loyalty and marketing, so your best customers keep coming back. And right now, you can get up to $200 off Square hardware when you sign up at square.com slash go slash how I invest.

That's SQUA.R.com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter to Square. Get started today. This over-diversification, it's a common investment theme. I had former investor from the Cornell Dowman explain it that a lot of investors would actually double diversifying. So they want diversification on the portfolio level, but they also want on the manager level because they're so sensitive towards any one manager not doing well.

Do you think in general, LPs double diversified versus looking at it as a complete portfolio? This is absolutely true. I sit on over 40 L-PACs, and I can't tell you how many times LPs are asked a question of diversification within a one manager's fund. And I'm like, why do you care? I mean, I get that the manager doesn't want to put all their eggs in one basket or too few eggs in their basket. I want conviction. That's all I'm looking for.

And if my manager comes to me and says they want to put 40% of their fund and they have a big GP commitment into one deal, I love it. But even with having sort of that approach to conviction and concentration, when I look across all my relationships and we don't have very many relationships, we're over-diversified. And really you should not look at just your asset class. You should think of diversification. If you do your job really, really well and you have our type of setup, diversification should be just on the endowment level across all asset classes. really hard to do, but that should be sort of the real goal. So I love co-investing not because of we might get a few, pay a little less fees and carry. I like coin investing for a couple of reasons, one of which is I can get really big look through positions into some of the highest conviction

companies of my partners, and I'm okay. We have a couple businesses that are one, two, three percent of our entire endowment. And I can live with most LPs, Colin? I saw a headline UNC endowment was 10% in SpaceX because it had gone up some absurd amount and everybody saw it as a crisis. I thought, what a great investment. Don't spend that money before you've harvested it.

But, I mean, it's a good problem to happen. It's a wonderful, I mean, that's why you're in venture, right? In venture, you can get these outsized returns that can be transformative for a pool of capital like that. So it's a luxury problem. There's some sort of endowment management and portfolio management things you have to work through on interim spaces until you've sort of fully harvested that position. But I mean, good for them to have that problem, right? Concentration versus diversification.

Why concentrated portfolios, on average, outperform overly diversified portfolios? And my understanding of this is the way that I explained on the most simple level is if you're a manager and you're looking at 250 opportunities in a year, you have a top 10 opportunities. set. And within that top 100, you have these top 10 that you really like. And even within that 10, you have the top three that you really like. If I'm forcing you as an LP to invest into 15, your average, you're going to go down to your number 12, 13, 14, 15th position versus if you have a portfolio of 10, you get to pick your top 10. Is that really what it comes down to or is there more to it? You have to believe that you select better in a continuity portfolio. Otherwise, it doesn't change your return to, right? You actually know which part of your portfolio.

If every deal did the same, it doesn't matter if a lot of them or a few of them, right? I agree with you. I think selectivity matters. There's only so many good deals. In certain strategies, there might be only so many good deals, right? Ventures complicated, especially early stage venture, because you do need a certain, you need to be in the right businesses, but it's very hard to tell what the right business is. So you do need enough shots on goal, and so it's a bit of a separate conversation. but in buyouts, I do think concentration forces a lot of discipline around not having the

marginal deal slip in. It means there is no room for the right, sort of the mid-level person who wants to make a career and knows they get promoted based on deployment because it is that the slots are so rare. Now, you do have to ask some other questions sometimes. Some investors become risk-averse, right? They worry too much about the downside of protection. Talk about my lessons learned over the last decade. I mean, that's one, right.

Overweighting downside. You go back to what we talked about, this rules-based. You need every deal not to be bad versus really going for the big deals, for the winning deals. I'm the opposite. But you're saying that's the risk of a manager. If you only give them 10 positions,

they have to justify every 10 position. They can't take any risk of anything. They're worried that a single write-off impacts their portfolio too much. Here again, I think if they focused on making sure there's enough right-tail, you don't need that many deals to, right? if you can get three to five X outcomes in a buyout strategy, if you have only eight deals,

you can actually afford a couple ride off services. But that is the human nature. That's a hard thing to live by. I've had several allocators say today the venture capital ecosystem is more confusing than any time in their 20, 30 year career. Do you find that to be the case? You can't compare it with 10 years ago, let alone 20 years ago. It is scaled so much. It is a totally different ecosystem. The capital inflow has gone through all the way from growth all the way down to seed, right? You can see that in valuations.

The amount of capital has been available on companies being staying private longer, creates a whole different dynamic. We have an early stage bias that hasn't changed for us. You only read about the exciting parts of venture. I think for most investors, be very careful whether you want to include venture in your portfolio. You need to be able to get into the best firms. It is close to impossible to build a high-quality venture portfolio if you don't have accessed.

How do you define the very best firms? Combination of firm brands and individual partner brands. And if you came out with a list, if I asked you to name what are the top 10 venture firms? And I did it. I pick anyone else who's remotely interested in venture. I guarantee we overlap on 80% of it. There's consensus at the top.

I think there's consensus at the top. And it doesn't really matter that we think that. The entrepreneurs think that. And the entrepreneurs are smart. And who's maybe going to help me, but who's going to really help me raise the next random money? Who increases the likelihood that I can raise a series B after my series A?

And I should have to end on my cap table. And then maybe I'll take someone else, someone that I feel resonates with me or understands my industry even better and entrepreneurs have gotten smarter right then not giving 20% to one single firm they sort of but the way you know if someone's a top-dea brand is don't speak to all the entrepreneurs and which entrepreneurs tell you all else equal I will take their money at a discount of valuation because I think that's actually still a creative to me that's the sort of the mathematical test of who are truly the top-tier firm

Professor Ilya Strablov from Stanford actually did a study on this whether there was a brand discount for highly branded firms. And that's what he found is that founders are willing to take a lower valuation from the top funds versus just a regular fund. The other way to look at it is a repeatability of success. And you can actually go back in time. And we did this. You can prove out that brands matter because the persistence. The persistence, except for seed. And seed, you cannot, except for Y Combinator, which has a big structural advantage on the seat space.

Why do you think there's no persistence in the seat space? A couple of reasons. One, it's really easy to raise a seat fund. So this is a lot.