Investing Billions - E1: Chris Douvos | Venture compared to other asset classes, the Solo GP phenomenon, and Chris's investing thesis

Starting point is 00:00:00 I've had maybe one good idea in my career, and it was that the venture world is bigger than any one entity can understand, right? We have this confidence, and that's maybe euphemistic, that a Lone Ranger on the Wild Western Plains can go and kind of corral up the baddie. But really, I think it takes a posse. Welcome to the Limited Partner Podcast, where we talk about venture capital through the lens of limited partners. I'm your host, David Weisbert, co-founder and head of venture capital at 10x Capital, one of the most active venture capital firms in the world. The world of LPs is notoriously secret and private, but on this show, influential limited partners investors speak candidly to me

Starting point is 00:00:49 about venture capital in 2023 and how LPs are navigating the asset class today. On today's episode, I'm joined by my good friend, Eric Tornberg, co-founder of Village Global, a VC firm with a portfolio that includes Applied Intuition, Multiverse, and Pave. Alongside founding Village Global, Eric is also the co-founder of OnDeck, an accelerator with hundreds of companies now worth over $9 billion. Joining us on our debut episode is super LP Chris Duvos. Chris is the founder of Ahoy Capital and the hashtag OpenLP initiative. Chris is a pioneer in the venture LP space and is an outspoken advocate for transparency in the venture capital GP and LP ecosystem. In today's podcast, we discuss why Chris is still bullish on VC, which VCs have placed the best bets in AI, and whether a risk premium still exists in venture capital.

Starting point is 00:01:38 Chris has been on a few podcasts, but this interview surfaces a lot of information Chris has never shared before, so it's a must listen. Without further ado, here's Chris Duvos. So Chris, you've been in the fund manager game for a long time. You've had different vantage points. You were at Princeton, you were at TIFF, you started at Hoy Capital. What has struck you about the VC asset class that has grabbed your attention and warranted you spending so much time on it? Oh my gosh. I love venture because it's the idea of the new, the child of the real and the ideal, as Walt Whitman would say. There's so much of a relationship, I think, between the kind of progress of humanity and the development of these new enterprises that as soon as I started working on venture, like

Starting point is 00:02:22 the first time I came to California back in 2001, when I was working for Princeton and started meeting with these companies, I'm like, wow, it feels like we're living a few years in the future. There's this great line, I always come back to Walt Whitman. I see in California, the genius of the modern,

Starting point is 00:02:36 the child of the real and the ideal, populous cities and the latest inventions, right? And he was talking about that in 1850. And I often kind of refer to California, but what I love about venture is it's really kind of infected the world. And what started, you know, 50 years ago in Silicon Valley is now taking root around the country and around the world. And through these new enterprises and initiatives, not only are we creating a lot of wealth, but we're making service delivery more efficient. Maybe I'm a techno utopian, but I

Starting point is 00:03:04 believe that that the world is getting to be a better and better place because of the kind of stuff that we get to do on a daily basis. Yeah. I think that's an amazing description. It's inspiring one. How about from a pure numbers sense, when you're talking to financially motivated LPs, how should they look at this asset class relative to other asset classes? How should they make sense of it? From a financial perspective, look, now I go I go back to first principles. What I love is behind me on my wall here for whenever I do Zooms, I've got my CFA charter. And that's like a subtle flex because all these venture world people run around and they're investing on vibes. But I'm like,

Starting point is 00:03:39 at the end of the day, there are numbers that underpin this stuff. And you need to understand that, wow, when things like the discount rate go up or the risk-free rate goes up and all your values and the terminal value, the value of your enterprise shrinks and people kind of scratch their head and say, why are the public markets so bad to us? And it's because at the end of the day, there are a bunch of people who look at numbers and try to think about things like risk premia and sustainable growth rates and things like that. So to answer your question directly, when I talk to LPs, I basically tell them, look, in venture capital, you can collect two really rare risk premia because you're buying the longest dated furthest out of the money

Starting point is 00:04:18 option. So one risk premia you're collecting is you're just able to take a longer term bet than the next guy, but in terms of horizon and the other is liquidity, right? Like your money is locked up. And I always say the average venture fund lasts twice as long as the average American marriage. So you've got this really onerous lockup that deters a lot of people and thus should create risk premia for those who come in. What does that mean? I don't know.

Starting point is 00:04:43 There are a lot of people who say S&P 500 plus X number of basis points, whatever, 500 basis points, 750 basis points, 1,000 basis points. I don't know what that number is, but it should be something significant in terms of compensation for the time and risk that you take. So piggybacking on that, on the risk premium, as more investors go into endowment style model, what do you see happening to risk premium? Do you see that contracting and could it go to zero or 50 basis points or 100 basis points? That's a really important question because the marginal dollar sets the price. And what we saw in the last decade or really since 2016 is there were a lot of marginal dollars that were

Starting point is 00:05:25 attracted to venture. And as a result, kind of prices skyrocketed and that sucks away the risk premium. In fact, there's, you know, one of my favorite equations is kind of Buffett's equilibrium, which is opportunity equals value with a capital V minus perception, right? So in the public markets, it says value grows kind of linearly, but perception fluctuates a lot. And as perceptions get big, the opportunity shrinks. And this is the kind of classic value investors equation. Now what's crazy is in venture, you sometimes get this like recursion between value and perception. And because things are perceived to be hot, they become hot and they actually get some value as a result. But over the long time, there's this kind of mean reversion back to intrinsic value. Anyhow, where I was going with all that is,

Starting point is 00:06:14 so there's a lot of dollars that came into the space. A lot of people were seeking endowment style returns. The problem is that people need to invest in a way that's authentic to their values and their constraints. And what I mean by that is one of the things that's amazing and having lived in an endowment initially in my LP career and then in endowment entities thereafter, you have to understand that investing is about optimizing discomfort. And some people have a wider envelope of comfort than you do. And if you're an endowment, you have a multi-generational horizon, right? Like your whole, one of your kind of, one of the tenets of Dave Swenson's philosophy was that we

Starting point is 00:06:56 have to provide intergenerational equity, right? Tomorrow's students have to be as well off as today's students. And so as a result, you have to think long-term, you have to act long-term. Meanwhile, there was a lot of hot money that came into the asset class looking for quick returns based on recent past performance, but didn't have that multi-generational kind of mindset, didn't understand that they were signing up for funds that could last a decade and a half, two decades. And that kind of mismatch creates a lot of tension. It's creating a lot of discomfort today as the tide recedes. You mentioned David Swenson. I know you have a connection with him through your undergrad as well as in Princeton

Starting point is 00:07:35 Endowment. Some would argue, many would argue that what made Swenson profitable and made him a successful investor is that he was right in a non-consensus way. Why is venture capital still a good asset class today now that everybody believes it to be a good asset class? It's interesting because a lot of people have come into venture believing that they could just invest in whatever and get rich. It's almost like they believe that having... There's two challenges. One is they believe that indexing venture by being over-diversified, in my perspective, they could achieve outstanding results.

Starting point is 00:08:17 And again, that was based on recent past performance. And I think that'll reverse itself. And the other is that I think people come in and think that they can pick the best companies, the best funds, whatever kind of step of the capital continuum they're on. And they think of themselves as being better than average, last few years, a lot of mistakes get papered over. But now as the tide kind of recedes, we're going to see, as Warren Buffett would say, who is actually swimming naked. You said a dirty word in venture, indexing, which is a euphemism for spray and pray. Let me give you another dirty word, fund of funds. You run a fund of funds business. You were at Princeton.

Starting point is 00:09:04 You've been on all sides of kind of the capital stack. Fund of funds, as everybody knows, everybody knows is dying. Why is it not dying? And why does it make sense in venture? You know, investing, if you boil it down, really is an information business. And I don't mean information in the SEC kind of material non-public way. It's about understanding spaces and having differential insights and having an opinion about things. And I think a lot of people who are poo-pooing fund to funds think they understand

Starting point is 00:09:39 the market better than those fund to funds might, which I think in some cases may be true. We live in a large world and people are focused on different things, and there's always a trend to disintermediate. But I think for investors who have the humility to understand that they don't understand a particular space, as well as people who live in that space, fund-to-funds can still be an attractive vector for their capital. There are people who play the fund-to-funds can still be an attractive vector for their capital. There are people who play the fund-to-funds game for quote-unquote great access. And I think one of the things that happened over the last half decade or decade was there seemed to be less of a premium on access. So for those whose hypothesis was like, well, access fund-to-funds and get into these great

Starting point is 00:10:21 funds that we couldn't get into otherwise, that did seem a lot less relevant. But ultimately, there are a lot of fund to funds out there who are doing a great job developing differential insights, finding new and exciting managers, being a step ahead of the market. And ultimately, I think that's what you're paying for, as you would with any other intermediary. And you have to provide value as an intermediary. And I think that's what we try to do. That's what I think there are a bunch of good practitioners out there who do. Yeah. Over the past 15 years, you've backed some iconic managers. You discovered and were

Starting point is 00:10:57 early backers of First Round and Josh Koppelman. And then more recently, our friends at House Fund and XYZ. When you look back at the arc of the managers that you've backed, what is the thread that ties them together, that ties your kind of manager thesis together? I felt momentarily nostalgic because you just transported me back to 2004. Because I've know, I've had maybe one good idea in my career. And it was that the venture world is bigger than any one entity can understand, right? We have this confidence, and that's maybe euphemistic, that a lone ranger on the wild western plains can go and, you know, kind of corral up the baddie. But really, I think it takes a posse. And I had this, you can tell from my

Starting point is 00:11:51 metaphor that I had this revelation while I was watching a Western with my son, who was really into Westerns at that moment in his life. And I was like, hey, you know what, like, how can we figure out people who are leveraging ecosystems rather than staking out on your own and trying to find great companies? How can you punch above your weight? And that's really the thread that when I think about sitting there with Josh Koppelman in kind of 2004, 2005, in the West Conchahok and Marriott, right outside of Philly, Josh was talking about turning venture on its head. And I said, yeah, what you're really talking about is portfolio as community. How can you create a platform that engages your portfolio to create a community? That's the kind of stuff we were

Starting point is 00:12:29 talking about in those days. And watching First Round build their platform and having that flourish and become a real resource and First Round becoming a real service provider to its entrepreneurs has been one of the things that I've really enjoyed watching over the last almost 20 years. And then fast forwarding, you mentioned it will fast forward through like data collective and then to XYZ and to house fund is people who are like leveraging in the case of data collective. They had built this incredibly rich and robust network that was engaged in what they were doing in the data space and doing AI stuff before it was cool.

Starting point is 00:13:03 So like that Ross over at XYZ and the way he was really leveraging, he was really plugged into the Palantir ecosystems and a couple of other ecosystems to the point where I asked somebody who worked at Palantir, once I said, hey, you ever bump into Ross? And he goes, oh yeah, Ross is one of the founders. I'm like, no, he's not. He goes, well, I see him here all the time.

Starting point is 00:13:20 He walks around like, I'm like, wow, that's actually rich and robust. And then on the house fund and E14 at MIT and Rapsi, some recent stuff where people are really leveraging these robust research ecosystems and plugging themselves into new ideas and companies that could have nice moat around them. If they can get the technology right, the markets are there for the taking. But boy, these people have a front row seat at some pretty rich innovation factories. Totally. And that's a great description. And when you look at managers, you're looking to back in the future in 2023, 2024 and beyond.

Starting point is 00:13:54 Which ecosystems do you think are most, or even like types of ecosystems? Is it university focused? Is it company focused like Palantir? Is it sector focused? Is it people who are trying to productize venture in a different way, maybe using data or other things? What do you think is ripe? There's so much that's exciting and interesting out there. Venture tends to move in waves, right? I used to call this Doerr's law. I found out it's called Amara's law after a professor at Stanford in the 60s. Every important technology is overhyped in the short term and underhyped in the long term. And I could give you a bunch of answers and things I'm thinking about and universities and everything has pros and cons. What I'm actually really thinking about, this is really four of mine.

Starting point is 00:14:41 A good friend of mine is named Peter Stein. He was with me at Princeton's endowment. He ran our hedge funds in public markets. And then he was chief investment officer at University of Chicago for a while. And Stein said, look, investing is about two tensions, right? That are kind of interact with each other. One is, he said, it's really important to invest in empty rooms. On the other hand, he said, the market, you know, the Keynes' famous line, the market can stay irrational longer than you can stay liquid, right?

Starting point is 00:15:09 And so how do you balance that tension? And he was, you know, coming from a public markets perspective where it's a little bit more acute. He used to say there's a fine line between being right and being early. Now we get paid to be early, right? And so this is less of an acute tension, but I think about this all the time. How do we invest in empty rooms? How do we invest in places that aren't saturated? And so I actually think that, you know, for me right now to answer the question most directly, because I don't want

Starting point is 00:15:35 to cop out. One of the things I'm thinking a lot about is human computer interaction, right? Like, and I think of people who've been doing that for a long time, like Manu Kumar over at K9. We invested in his first, in his second fund. And that's been a lot of fun. People today like Sunil Nagaraj over at Ubiquity who are thinking about how, and I, I overstate it. Like for people in the business, like this is definitely like, they call me a clown for using this word. But for people outside, I think it's a helpful, helpful word. It's like moving towards a singularity, right? And AI is a

Starting point is 00:16:11 part of that. And hardware is a part of that. And sensors are a part of that. And if you think about like really the Tim Berners-Lee Web3, not this like BS branding that Web3 is just crypto. No, Web3 is about the data layer, the computing layer, and the interaction layer. A lot of our investments are in that interaction layer. But as crypto grows and flourishes at the data layer, and we see AI in the compute layer, boy, I think we're ahead for a 20-year... I just got goose pimples thinking about it. We've got a 20-year period of really interesting experimentation ahead. And some really important world-changing companies are going to come out of that. Hey, we'll continue our interview in a moment after a word from our sponsors. The Limited Partner Podcast is proudly sponsored by AngelList. If you're a founder or

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Starting point is 00:17:29 management platform that offers equity issuance, employee stock management, 409A valuations, and more. I've been a happy investor in AngelList for many years, and I'm so excited to have them as a presenting sponsor. So if you're ready to level up your startup or fund with AngelList, visit www.angelist.com slash TLP. That's AngelList slash TLP to get started. Back to the show. One bearish, so I totally understand the bull case. One bear case for the development of those technologies is, is it possible that AI makes it so much easier to start companies in cost-effective ways or crypto allows for different capital pools that maybe venture isn't as needed in this new world? We were worried about that with ICOs and SAFs and all that stuff. And I think that that's a real concern. I do. But if you think about it,

Starting point is 00:18:25 and we talked a little bit earlier about intermediaries, right? Like a VC is an intermediary, maybe from some perspectives, an imperfect one, but no intermediary is perfect. And I think that there's a real value to having knowledgeable folks as stewards of capital. And that may take on different forms over time. Do we see investing DAOs? I don't know. There are many, many different ways. In the same way that Silicon Valley used to be the only game in town, but is now maybe first among a bunch of potential equals or first among strivers, I feel the I kind of feel the same about venture capital, right? And, you know, there are many, many different ways to, you know, invest in and fund companies, but yet Wall Street remains, you know, remains an important money center.

Starting point is 00:19:15 Yeah. How have you viewed the studio model or the incubator model? And how do you view it going forward? Yeah, you know, I'm very ambivalent, but not in the negative way, in the like etymological way where it means strong on both sides. I have very, very strong and contradictory viewpoints. I do think studios can be really interesting.

Starting point is 00:19:47 You know, as an investor, I like people who can get in early and have big, chunky ownership because I think ultimately one of the failure modes or the mediocrity modes of venture is not owning enough of your winners. I think that happens a lot. I think people are de-worsified, not diversified in a lot of cases. And so I think studios actually can have really meaningful early ownership and have a really nice position on the cap table. I think some add real value and I think that that's important. And I love that catalytic ownership and that's really important. But I also think that every vice is virtually taken to the extreme, right? And you see in some cases they own too much and they can disincentivize management, right? Like there's a dark side, you know, to every upside potentially.

Starting point is 00:20:30 So at the end of the day, it comes down to execution. So I'd say broadly positive, but kind of keeping an eye out. You mentioned AI. I get asked once a week who the top peer play managers are. Feel free to talk your own book or call out GPs you'd like to get into. Who are the best AI, AI VCs, whatever that means to you in the market today? And there's a bunch of folks and they're really good folks. And I could spend the next 15 minutes naming people,

Starting point is 00:20:59 but I'm going to do two completely contradictory things. One, I'll talk about one of my favorites is Matt Ako over at Data Collective. And what I love about Matt is the first time I met Matt, or the first time I heard of Matt, I was at a data scientist's meetup in San Francisco in 2010 or early 2011. And I asked this guy, I walk up to this guy who looks like a Hagrid from Harry Potter. And he's wearing like a leatherrid from Harry Potter. He's wearing a leather duster jacket and an Iron Maiden t-shirt. And he had a PhD from CMU and a PhD from Stanford and was chief data scientist somewhere.

Starting point is 00:21:35 And I said, hey, who's doing good investing in this space? And he said, yeah, there's a guy, but he's not for you. I said, who is it? He goes, Matt Ocko, but he's part of our tribe, not yours. I'm like, what do you mean our tribe? He's like, well, you're a money guy, right? You're a money guy. We're like data scientists. So he's like part of the data scientist tribe. He speaks our language, but you people, people like you won't understand them. And I was like, talk about a, you had me at hello moment. So I have to throw out Akko for old time's sake. And I think Matt's still doing some outstanding investing. The rest of the team at Data Collective, they built a great team.

Starting point is 00:22:10 The fund's gotten a little bit larger, but a great team. And then one actually on the complete other end of the spectrum for me that I've had like two conversations with, but I love the idea of what they're doing. And going back to what I said about leveraging ecosystems is the guys up at the Allen Institute, the AI squared guys. And they've got real academics view of AI, which I think put some people off, but they've also done some really interesting commercial stuff. They've got a ton of funding. And I wouldn't be surprised if some really interesting companies come out of there. That's my wacky thought of the day. I haven't invested in those guys. Like I said, I've had two conversations with them, but they're definitely, I've definitely got an eye out for them. And there's a bunch of other

Starting point is 00:22:50 people I feel bad. I feel like, you know, this is an Oscar speech and I'm forgetting the producer of the movie, but, but I, you know, there's just so many good people. I don't want to play favorites. And is it, is it your assertion that data scientists are going to lead the pack in terms of the best investors in this next generation? Well, look, I think there's a very interesting study done in the late 90s by Bill Davidow for Davidow Ventures. So this is now ancient history, but I still kind of cling to this a little bit. And he looked at a bunch of the big waves of venture, you know, kind of throughout the 80s into the early 90s. And what he found was that the specialists, the specialists had a bunch of

Starting point is 00:23:31 the early wins, but in the fullness of time, 80% of the wins went to generalist funds. And I thought about that a lot. And how does that apply today? How does it not apply? And I do think that everything is becoming more specialized, right? And every field of endeavor is becoming more esoteric and more challenging for generalists. But what I do think is that what's interesting about the last 10 years of venture, at least, is that we are applying technology to real world problems, right? It's no longer this kind of closed loop of innovation where we're creating infrastructure, we're actually creating things that are free in the wild relatively quickly. And so what that says to me is I think that we'll see a ton of innovation and applications. And that's where maybe the long beards of different specialties

Starting point is 00:24:24 maybe have the first step, but in the fullness of time, it's the people kind of from industry who are bringing, you know, kind of an idea of how to use AI for a particular solution. They start to start to kind of come to the fore, which is also why I think going forward, as much as I love the Bay Area, I think I really do believe that they're in cluster theory and that there'll be very important kind of superstar regions that each have very different areas of expertise and are leveraging technologies to boost their industries. And I'm thinking of finance and media in New York. I'm thinking about crypto in Miami and wherever.

Starting point is 00:25:03 I'm thinking about things like healthcare in the I-65 corridor. You know, there's just so much exciting stuff going on out there. In terms of AI in the short term, do you see it more as a revenue generator or a cost cutter? You know, I started my career out of college as a management consultant. So I feel like every new technology starts its life as a cost cutter. It's like, that's my like reflexive answer. How do you squeeze costs out before going for growth down the road? So I do think in the short term, AI is going to shrink industries in, and that's actually like people are asking me, you know, if there's a recession, what does that mean for venture? I think it's actually bullish for venture, broadly speaking, and also for AI because the promise of venture and of AI

Starting point is 00:25:49 is to do things better, faster, cheaper, and that's fundamentally deflationary. Great. Let's pivot a little bit to something that you're famous for, micro VCs, solo GPs. Apparently, solo GPs are now out of favor. How do you look at solo GPs over the next few years? So you say solo GPs are out of favor. And I think that as with everything else in venture, you've got to break the market down into its different pieces. And I know I'm not criticizing the question because I think it's the right one, but it's like my stats professor in college said, you always got to watch out for averages because on average, every human has one breast and one testicle. And so one thing that I worried about from 2016 forward was the dilettantification of venture capital. There

Starting point is 00:26:41 were a lot of people who were kind of coming in and call them tourists, call them whatever you want. And it was really easy to come in and basically monetize your deal flow because there's so much of it and there's so many dollars looking to come in. It was the perfect time to basically run a two-sided market. And I think as the tide goes out, there's less money available. Deal flow has really slowed down. Even though company formation is still at a pretty hefty pace, it's not at the kind of crazy pace. And I think a lot of people are finding that it's not as much fun to do this as it was when the graph was up and to the right. And so I've heard several stories now of people who were kind of hanging up the spikes and moving

Starting point is 00:27:20 on. For me, though, it's always been about understanding somebody's psychographics. And you really needed to understand them as a person, not as a vehicle for the deal flow that you wanted access to. And so that kind of behavioral footprint first investing is what I hope kept us out of trouble. And so far, my managers seem to be kind of committed and leaning into the opportunity rather than leaning out like we see so many doing right now. Talk a little bit. You've seen vintages mature, evolve, and sometimes break up over time and franchises. Talk to me about the life cycle of a venture fund. What are the predictable pain points that people go to?

Starting point is 00:28:02 And what are some ways to avoid those predictable pain points for franchises? You know, so I have spent a decent amount of time in my life investing in fund ones and, or fund twos, whatever, like, you know, early on. And it was born out of this hypothesis that I formed that fund three was like the optimal fund because it's where your growing experience intersected with your declining hunger. And I was actually talking to Charles Hudson the other day and he said something, I think of him as a really hungry guy and a really smart guy. And he was mentioning that he was raising Fund 5 or had raised Fund 5. And I said, you know, it feels to me like Fund 5 is the new Fund 3, right? Because the cadence has gotten so much faster and, but also liquidity times have stretched out.

Starting point is 00:28:54 So, you know, the big thing for me has always been the moment at which people get their first big carry check, right? That tends to, if there were any tensions beforehand in partnerships or even in people's, you know, in SoloGP's own kind of motivations, that's where they tend to crack. And, you know, one of the things that we really try to lean in on is understanding people who are, you know, kind of true believers. Like I think of people like Josh Koppelman, like Josh could have retired, you know, five times already, but Josh is a fund entrepreneur, right? Like his vision for first round of the team that he's built outstanding, you know, senior people, Bill and, and Todd Jackson, Mecca, and, you know, all those guys, Kaylee, they're all like awesome, successful people who are like leaning into the journey and excitement of entrepreneurship rather than here to make a quick buck. And so that's a big kind of area fracture. And then the next thing is like the

Starting point is 00:29:50 generational transition. That's something that has been rarely handled well. In fact, I heard a story once. I don't know if I've ever told this story, but I heard a story once that when they were building the offices that A16Z are now in on Sand Hill Road, the developer, John Arriaga, invited Sequoia. He called up Don Valentine and said, hey, would you guys like this office? And he says, oh yeah, let me check it out. I'll have some people go over. And this is like 2008, 2009, right? So Mike Moritz and Doug Leone go over there, right? Two guys who have made more money for people than almost anybody on the planet. And they go over there and they're looking at the plans with Arriaga and they're like, maybe we can move this around. And Arriaga was very fixated on the design apparently.

Starting point is 00:30:41 And they're like, maybe we put a weight room here. And he was like, no, get out. And he apparently called up Don Valentine and says, the next time I call you with an opportunity, don't send a couple of associates over here to mess with my design. And so Sequoia is a firm that's handled generational transition exceedingly well. But one of my managers once said to me, he goes, look, you're investing in us and you're investing in us as investors and anything else you get is frosting. And I'm just like, that's really interesting. And that was a fund that had a botched transition. And then I look at first round and I look at Josh, who's an organization builder and how he's done such a great job of handing the baton. And as people have transitioned out, they've kind of

Starting point is 00:31:25 reached different points in their lives. And watching First Round run more like a business than a partnership, if that makes sense, that's been really instructive to me. One quick comment on that is one thing that's fascinating, because it's one thing if you're Andreessen or you're Thrive, and you're in Fund 3, but you see this Fund 8 vision, and it's to get significant scale and go much bigger. That's one thing. It's another thing if you've already crushed it and you're not scaling, you're USV, you're first round, but you're just going to continue to be excellent. It's another thing to have that motivation to do the same thing you've been doing, but continue to just crush. That is really admirable.

Starting point is 00:32:01 And look, the OG in that is benchmark, right? And the question is, there is this law of financial levitation, but that kind of runs up often against the hard reality of arithmetic for the LPs. But then there's a lot, like 15 years ago, I wrote this blog post called LPs and their SUVs. The whole idea of it was for a long, long time, like think back to the late 90s, the number one repeat buy rate car was a Chevy Suburban. Like it wasn't Hondas. It wasn't Toyotas. It was like 95% of Chevy Suburban buyers, their next car is a Chevy Suburban.

Starting point is 00:32:39 And why is that? It's because they had eight. If you have eight kids and four kayaks and, you know, all this stuff, that's the only car for you. Right. And so if you're, you know, I kind of poo-poo like the big funds because I think their arithmetic is impossible to generate the kinds of returns that I want, but there are a lot of people out there for whom those kinds of returns work. Right. If you're, and these are all good investors, like Washington State Investment, we're like, great. You're putting out $100 trillion a

Starting point is 00:33:10 year or whatever you're putting out and you want kind of exposure. That's what you got to do. And not to kind of poo-poo that, but so I understand the law of financial levitation and there's something to it there. But man, the guys who, and guys gender neutral, who stay in like a spot because your fund size is your strategy. The old Mike Maples line, your fund size is your strategy. Man, if you just want to pursue that strategy and crush it, and you don't need to have a trillion, the trillion dollar fund for whatever reason, people have trillion dollar funds. Like man, that's the kind of person I want to back forever. So what happens to these large funds? If you had a crystal ball, or if you probabilistically look at it, what are the odds that these large funds return LP capital?

Starting point is 00:33:56 I used to be a real cynic about a lot of things, and maybe I've mellowed with age. I was around for the 01 bust, and I was like, oh my God, these funds are never going to return money. And every quarter, like top-notch funds, funds that people like fall all over themselves to get into, we get their quarterly statements at Princeton. They were down like 10%, 8% the next quarter, 15%. And it was like asymptoting to like 0.2X. And I'm like, these guys are never going to return money. But you look at the actual, I just was looking at the benchmarks for that era of funds. And actually the median return ended up being around a 1x, like the median fund returned capital. And I'm like, wow, you know what? People hustled, right? And made it work. And by the way, if you look at like your opportunity

Starting point is 00:34:42 cost of that capital, putting it in the public markets, maybe you actually even turned out ahead. So, you know, seven years ago, if you had asked me that question, I'm like, Oh my God, all these guys are going to lose their shirts. But you know what? There are a lot of smart, smart people running these funds. And there's a lot of really great entrepreneurs in these portfolio companies. And yeah, they won't, you know, who knows my crystals balls in shop. But if, if the environment continues to be tough, you know,

Starting point is 00:35:04 maybe they won't drop, you know drop a 6X fund on our heads. But you know what? They'll probably do okay. Yeah. As someone who thinks a lot about intrinsic value, I'm curious how you reflect on crypto over the past few years, right? Talk about momentum creating its own momentum. And talk about the idea of if someone is so focused on intrinsic value, my instinct is they're probably skeptical or they've been skeptical of crypto, yet some firms

Starting point is 00:35:29 like Paradigm and others have returned a billion plus dollars, seemingly speculating mostly on Bitcoin. And so I'm curious how you've approached it and how you think about it going forward? I think it's crazy that my son, who's going to college, owned crypto before I did, personally. It was actually off-putting to me to watch him go on Reddit and then go trade crypto. And I'm like, this is insane. But to your point, there was a lot of speculation and a lot of crap. But I also think, again, going back to the Tim Berners-Lee kind of view of the future of the web, that have been pursued over the last few years that have created some intrinsic value. There's also been some speculation where people made some money. And you know what? I'd rather be lucky than good, I guess. So kudos to all those guys. And some of these guys are both lucky and good. So who am I to begrudge it? But I think in the main, there are a lot of people who got snookered into it, chasing momentum. But that's why some of the people you mentioned, kind of seasoned players,

Starting point is 00:36:49 thoughtful, they have an informational advantage. And look, the innovators are followed by the imitators who are followed by the idiots, as Buffett says. And if the innovators are making money on the backs of the idiots, then that's financial Darwinism. So partially what you're talking about is asymmetry of certain bets. And I made a big mistake. I did not invest in Bitcoin. A very smart friend told me about it. I didn't understand it. And I decided and I ventured not to do that again.

Starting point is 00:37:15 And I invested some money in Ethereum. Of course, I should have invested more. What are some asymmetric kind of – what are some hacks in the matrix of venture capital that don't seem like they should make sense, not intuitive, but that in retrospect, you've kind of learned these ways of making money as a venture capitalist and of course, as an investor in venture capital ecosystem? Yeah. So I'll talk about two things. One that I've executed, one that I wish I had executed better and I'm trying to execute better on. So the first one that I've executed, one that I wish I had executed better and I'm trying to execute better on. So the first one that I really tried to focus on throughout my career is a lot of people come at venture chasing performance or using performance as a leading indicator.

Starting point is 00:37:59 But it's really a lagging indicator, right? And this has always been tricky for me as I look at funds, because I think, wow, you know, everybody is looking at, you know, outstanding performance of XYZ fund, but the people who, you know, who made those investments are at different points in their careers and lives, and maybe even cycling out of those firms. And the firm is five times as big as it was when those bets were made. And so turning the evaluation pyramid on its head, and instead of starting with performance, starting with the people and understanding to whom you're entrusting your money. Because at my level, and we do some direct investing, but mostly we do fund investing and understanding the people who are going to deploy the blind pool and their psychographics and what kinds of risks they're

Starting point is 00:38:52 willing to take and what their differential insight is and understanding their sustainable competitive advantage and the repeatability of their actions and their ability to learn and integrate feedback. That's something that's been really important to me historically that I think is maybe a little bit off market. I think we spend too much time chasing performance and chasing momentum. The one that I'm trying to execute better on, and this goes back to my Peter Stein from Princeton thing, is this question of investing in empty rooms.

Starting point is 00:39:25 And I think today we're spending a lot of time talking about equity and inclusion and diversity. And there's so much data and the data is increasing and it's both hard data, but also anecdotal that there's a lot of opportunity in things that don't look like ventures looked like in the past. And it's also, you know, just the economic theory of it is like when a space is underfunded, the prices are more attractive. And in a go-go market, that can get lost because the rising tide is lifting all boats. But I think looking ahead, maybe finding people who are underrepresented minorities or women. There's really exciting opportunities in the types of businesses that people who – I've got four strikes against me. I'm stale, male, pale, and Yale.

Starting point is 00:40:20 I don't really understand the world. 50-year-old white dude, come on, man, who's been around forever. There's a lot that's going on in the world today that's a lot more interesting than my, you know, tainted eye can see. So I think that's something that we're looking into increasingly. I've done a little bit, but there's a lot of opportunity there. Totally. You get involved early in these funds and the first fund and the second fund, and you ask a manager, hey, what do you want fund five to look like? What are good answers to that question or answers that you're looking for? And what are non-obvious bad answers or answers for you personally you're not looking for? So there are many different answers that are good answers. I used to think that there was a single formula for success, but having done this for a long time, I realized that there are many, many different ways for people to flourish. And when I ask people what Fund 5 looks like, what I'm really looking for is an answer that's authentic to who they are and how they're thinking about the organization.

Starting point is 00:41:32 I think about, you know, when I was a strategy consultant, our kind of guru at the firm was a guy named Michael Porter, who was a strategy guru at Harvard Business School. And Porter has this definition of strategy. Strategy is an integrated set of choices that inform timely action. And so when I look at how people articulate a fund five, I want to make sure that there is an might not, you know, or quintuple the fund size, whatever the number is, that might not make as much sense as them thinking about, okay, in fund three, we add, you know, a younger person and train them up over the course of fund three, and then make them a principal in fund four, and, you know, founder in fund five, you know, that's the thinking about that, thinking about your fund as a thriving entity rather than, you know, kind of a stale partnership is a big one for me. And that's more important than the destination. Another thing is a lot of people think the answer is, oh, stay small.

Starting point is 00:42:36 And for me, I have a strong bias for that. The benchmark OG slash, you know, kind of first round slash USV. While that means the arithmetic will be in your favor, there are actually some interesting ways to deploy capital at larger scale in very profitable ways that you can do authentically. You just need to build the organization of the infrastructure to do that in a thoughtful and intentional way. Yeah. Speaking of that, models at scale, look at something like Y Combinator, and it feels like it broke all the rules, right? It's a high volume model. It's investing at scale. It's not a ton of diligence. It's super early. It's special economics. It just looks very different you'll back or we'll see another model that takes similar, you know, high volume scale, special economics that, you know, can be close to as accessible? So there's a lot to love about Y Combinator and they were in the right place at the right time. And, you know, you could say that they grew up with this moment in venture

Starting point is 00:43:49 capital and they were in the right place at the right time. You could say they fed it. It's impossible to think of venture really in the last 15 years without thinking of Y Combinator. But they also were responsible for a lot of things that I think quite frankly were unhealthy for the ecosystem. It just weren't obvious because the arrow was kind of up and to the right. I have behind closed doors people, there are people that I think very highly of as investors who think that safes are the worst thing that's ever happened to venture capital. And then obviously all the demo day BS, basically what Y Combinator did was taught startups

Starting point is 00:44:30 how to maximize, not optimize valuation. And that works in an ultra power law era of cheap capital, but does it work over a more normal economic cycle? And there are definitely questions like that you can ask. At the same time, Y Combinator has done a stunning amount for the idea of entrepreneurship, right? So kudos to them. So love them or hate them, there's something. The thing I'd say, and I also say like, man, Y Combinator is a great business for Y Combinator. But I think if I've seen, I think if you actually look at,

Starting point is 00:45:06 especially in more recent years as the cohorts have gotten really big, there's a lot of, a lot of companies that are really like mediocre in there. And as the tide goes out, maybe we'll see how many of those, you know, kind of succeed or not. And I do suspect that, you know, there, there's some, there's some, you know, there are going to be some great companies and they might even be like disproportionately good, but man, you know, I'd love to teach a class someday. Why Combinator and its discontents? One unintentional consequence I saw of the safes and the converts are that now that valuations have gone lower, people are getting into lower entry prices than they would have at the time. You know, it's interesting. One entrepreneur complained to me that they didn't actually even understand because they had all these safes layered in with different caps and different discounts.

Starting point is 00:45:50 They didn't even really understand their cap table. And when everything converted, they actually ended up owning a lot less of the company than they thought they would. And I think that's a risk. You know, I'm a big proponent of price rounds. I think we all need to have the courage to price. And entrepreneurs have to have that humility. And speaking of courage, you mentioned direct investing, one of the most difficult things to do as a family office or institutional investor. What are some advice that you have for family offices or institutions starting to do direct investing alongside funds? You know, what I'd say is it's really important to trust your partners and trust them implicitly.

Starting point is 00:46:35 And I have seen a lot of direct investors try to get cute with their direct investing and pick and choose. And there is a lot of selection bias and you got to make sure that, you know, somebody once said to me, finding LPs to do my deals is like, you know, it's like walking my dogs. I take my, you know, my B companies out. And so, so if you, you know, but that again, comes back to trust. If you believe that you're with a trusted partner is going to show you a company's, I think history would teach that if you pick and choose, there's a good chance that you might miss the one breakout. And this is such a breakouts business. Warren Buffett always says there's no called strikes in investing, but man, that is far from the truth in venture. Because if you

Starting point is 00:47:23 miss the one great deal in a year or in a portfolio, your results go from being outstanding to being mediocre. Closing question here. You've been a proponent of the OpenLP movement, you and your friend Beezer, our friend, trying to bring more transparency to the LP ecosystem. Let's talk about that in closing. Where do you think that the ecosystem will be more transparent? And where do you think it will, you know, not be as transparent as say venture has been over the past, you know, couple decades? Like one thing I've been curious about is why aren't venture firm returns public? You know, there's, it would surprise a lot of people perhaps on both areas. So where do you think

Starting point is 00:48:03 we'll have more transparency? And where do you expect it to be similarly opaque? Yeah, so, and Beezer has been absolutely the best. She's really spearheaded the OpenLP movement and really, I used to do a lot of blogging, but blogging was very static. And Beezer really picked up the torch and brought OpenLP into social media and has been just such a star, I think, in the business. And so she's the best and kudos to her.

Starting point is 00:48:36 You know, look, I think, and I'm maybe going to sound a cynical note here. I think that as hard as we try, it's going to remain really hard to bring transparency to venture because the people who want transparency from the GP side haven't earned it, and the people who've earned it don't have an interest in it. I think also part of that is there's a lot of delayed gratification adventure. And I look at some of my funds and it's amazing how the value moves in quantums. And depending on what time you take your snapshot, it can really affect people's perception of you. And so, so I kind of, you know, I'm talking out of both sides of my mouth in a sense, but I think that there needs

Starting point is 00:49:32 to be new metrics. And what I am very optimistic about is we're seeing kind of a parallel development in, you know, kind of secondary markets. We're seeing, you know, more real-time marking of companies. GPs are getting more aggressive about marking their companies dynamically. And so as we see venture price more dynamically and be less a victim of sale prices, maybe we do see some of that. But at the very least, I want to see open, authentic dialogues between LPs and GPs and what works and how we can each help each other to support entrepreneurship. That's a great place to note. I feel like we've done a little bit on that podcast. Thanks to you,

Starting point is 00:50:11 Chris. Thanks so much for coming on and sharing your wisdom with us. Thanks. You guys are the best. This is super fun.

Investing Billions - E1: Chris Douvos | Venture compared to other asset classes, the Solo GP phenomenon, and Chris's investing thesis

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