This Week in Startups - E1126: Capital Allocators Host Ted Seides goes deep on endowments, LP turnover, public/private market insights, ESG investing & more

Episode Date: October 20, 2020

Check out Capital Allocators: https://capitalallocatorspodcast.com FOLLOW Ted: https://twitter.com/tseides FOLLOW Jason: https://linktr.ee/calacanis

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Twist listeners get up to 40% off select products with an exclusive Black Friday sneak peek at launch.com slash Dell. While you're there, sign up for a free IT consultation. That's launch.co slash Dell. Hey, everybody, welcome to this weekend startups. One of the questions I get a lot is what podcasts you listen to. And, you know, I have some peculiar ones. I have some ones that you probably listen to already. On the weird side, I listen to Brett Easton Ellis, who is an author who wrote

less than Zero and American Psycho. and he's got an amazing podcast that's on Patreon. It's paid. I listen to Red Scare, which is like part of this dirtbag left, all these crazy lefties. And then on the right, sometimes I'll listen to Ben Shapiro. I like to get the range of ideas that are different than me, still processing on the New York Times, lots of different ones. But then a really interesting thing that's happened in my world is I discovered a podcast that I became obsessed with because, listen, there's only like one group of people, honestly, that I answer to anymore. and I barely answer to them, but I do have to go hat and hand and do a little dance and tap dance.

Like literally, you think I probably don't have to tap dance to anybody. I got the FU money. I don't care what anybody else thinks. There's like one group where I put on a suit and I go on tour and I go to them. And who are those people? LPs, limited partners. I have to, every three or four years when I raise a fund to Angel invest and to do early stage investing, I got to put a suit on.

I got to go to the East Coast. I got to get on that M track, up and down the corridor, go into these rooms with 12 M-D BAs who all went to Ivy League schools and I went to school at night at Fordham. And I literally have to tap dance around the room and tell them what I'm planning to do for the next decade, only to have them say, gosh, I would love to get to know you a little bit more. Maybe we'll do the next fund. It's literally in my life. It's literally in my life.

But part of that is that there is somebody who interviews these people. So I get to at least know what I'm dealing with on the other side of the table when, yes, as crazy as it seems, the greatest angel investor of the last 10 years, except for me, be for Chris Sock. But I have to deal with constantly being, uh, constantly being told no. And Ted,

uh, Cidiz, did I pronounce it correct? Cidis. Cidys. Cidies. I will get it by the end of the pod. Ted Cidies,

uh, runs a podcast called capital allocators. And it's just awesome. It's freaking awesome because you wonder who runs like the Harvard endowment, the Yale Endowment, the Duke Endowment, or who does this derivative trainings? Who are these people in finance? Well, he does what I do with founders

and venture capitalists on this podcast, except he does it with the capital allocators, who give people like Bill Gurley or Chumath or myself money to invest in startups. So welcome to the podcast, Ted Seides. Thanks, Jason. Thanks for having me. Who are you?

And how did you come up with this idea for capital allocators? How did you get to all of this? Give us a background on who you are. Yeah, I mean, look, we can go through the long version or the short version. The short version is I've spent 20 years on that side of the table. So very beginning, first job out of college, I worked for the Yale Endowment for David Swenson for five years, and then went to business school, thought I wanted to do direct investing,

you could say tried and failed or tried for a little bit, and went back to it and ran a hedge fund of funds for 14 years. So, you know, those are my friends and peers, and that's the world I know really well. So that reminds me a little bit of the DNA I have here in doing my podcast, which is those people respect you as a peer. So you're able as a podcaster to get them to talk, correct? Sure, yeah. And to book them as guests, because these don't seem like people who have a lot of upside and coming on a podcast. Like, they seem like they work for these big endowments.

it's a pretty great job. They don't want to lose it. So they are typically podcast and media shy, correct? I think that's right. I mean, you know, the first 50 guests or so, my show has been going about three and a half years. And the first 50 guests, I think something like 48 of them were friends that I asked for a favor. And as people started listening, you'd think that for the most part, these people don't answer to anyone. They don't care.

But it's not the case, right? Almost everybody answers to somebody. else. And so a lot of them do it somewhat as a favor, somewhat because it's become a comfortable platform to tell their story. And if they have an agenda, and they usually don't, but if they have an agenda, it may be just sort of a protection on their career. You know, maybe they get a little bit more exposure. More likely they do it because they want to help make their process more efficient. So if someone describes what they're looking for and like Jason, I'm sorry, like they're never going to invest in angel round seed venture.

And you hear it, you won't bother them. So I think that's a small part of it to just try to tell their story once and let more people hear it. See, I think that's interesting. And it's like Bob Dylan says, you've got to serve somebody. You can be an ambassador to England or France, but you're going to serve somebody at some point. So a capital allocator explain what that job is. in the world. And do you have any, I was thinking about this today when I was in the shower. I was like,

where did this concept of capital allocators even originate from? We know about carry and that when, you know, ships used to go to the, uh, what was then called the Orient, uh, or to India to get spice or whatever, somebody would say, hey, listen, if you get the package back here, I'll give you 20% of whatever makes it back to shore, you get carry. You get a portion of what comes back. And that aligned interest. So we know that piece. Where did the concept of a capital allocate or even come from? I think it's relatively new. If I go back, I started my career in 1992.

And just to give you a perspective at the time, there were no more than a half a dozen of these offices in the country. And I think I was the only junior analysts looking at funds in the entire country. Like Yale used to hire one undergrad a year. And so Harvard had an office, but they were mostly direct investing. And Stanford had an office, but there were four or five, you know, senior people. There are very, very few of them. The reason I think it's come to pass has kind of goes hand in hand with the notion of modern

portfolio theory in that if you have a large pool of capital and you're trying to preserve and grow it for a long period of time and their spending needs along the way, people have adopted the notion that you want to be diversified. And so the question is if you are four or five people, you know, maybe it was 10 or 12 back then and a little more today, but you're four or five people sitting in New Haven, Connecticut, and you want to diversify around the world. You have two options, right? One is you could say, okay, let's go figure out how to compete with Jason and all the other seed states of entry capitalists and we'll compete with Sequoia. And then let's go to Asia and what we'll pick Chinese

stocks. And, oh, by the way, we probably want to be in large cap and small cap stocks in the U.S. and equity and credit. Oh, we need expertise in the bond markets. At some point in time, your head starts spinning and say, well, we can do one or two things. We can either try to compete with an increasingly specialized world, or we can just go try to identify them. Let's develop our skill set to try to identify the best and partner with them. And so that became a model that went hand in hand with this kind of strategy and really got popularized when David Swenson wrote his kind of seminal book

called Pioneering Portfolio Management in 2000. And then you started to see proliferation of more of these offices and more LPs and these strategies. And so the clear path to becoming a capital allocator at one of these endowments was to have been an alumni of that place for some reason. Is that correct? I mean, I suppose, right? One of the things that's interesting about my show is when I interview a bunch of these CIOs, there is no clear path. Because the fact is the industry didn't exist 20 years ago. So how could you have been trained in it?

Yes, that makes total sense. It's like asking for somebody to be like an AR developer. It's like, or, you know, an AI develop. Well, AI's been existed for an 30 years, but yes, people were like, I need a iPhone app developer with five years experience. When the app store had just came out, people would put up. Exactly. And it's for that kind of doesn't make any sense. Yeah.

So when we get back from this quick break, what I want to understand is what did you learn at Yale? Because that seems to be the nexus of excellence and process. and let's just say a person I know who's very close to me might have almost gone through the microscope of Yale but they said are you sure you want to do this because it's going to be arduous and painful and I actually said let's wait till the next fund or that person I know so let's wait to the next fund and then go through this what somebody referred to me as like

the ultimate invasive exam from Yale when we get back with TED CDs from capital allocators. Look, 2020 has proven to be the year of many things, but if you order a startup, this could also be the year you switch to better payroll. Gusto wasn't just

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Ted Seidies is here from capital allocators. I'm getting through my dyslexia. figuring out how to pronounce really easy names. So you worked for David Swenson, who is a legend in, I think, specifically running an endowment, but is it correct that his speciality was venture specifically and being able to master getting into all these venture funds? No. I mean, that was just one piece of it. It's certainly something that's because of the success of venture capital that's driven a lot of the returns.

David David's a fascinating guy. I mean, he is well-known and world-renowned for all of the right reasons. He's innovative. He really thinks from first principles. And then I had the benefit, as did many of my colleagues at the time, of learning from a guy who's just a gifted teacher as well. So there's really two pieces of that. One is the whole framework that he thinks about investing. And the second is which you were talking about, which is the proctology exam that comes at the end of that. that framework is something that is broadly applicable across all of investing and many people just don't do it. And I would describe it as a following.

You start with having a set of beliefs. What do you believe about the world? How does the world work? And for him, it's based on academic research. And then you actually implement on those beliefs and stay disciplined to them. So that can apply anywhere. Now, for him managing an endowment, which has effectively a perpetual time horizon, he was very equity oriented. He believed in diversification.

And then he had a whole bunch of things that he believed about the types of investment management firms he wanted to partner with. And he's very disciplined, and so he didn't veer from it. He's also just a uniquely brilliant guy. So he could sit down with you and not ask you about your return. stream and, you know, what deal worked, but he could really understand and see through what you were doing to the underlying assets and just kind of ask the right questions. And so to be able to sit in that kind of cauldron of learning for five years, which I did. And, you know, a lot of my old colleagues now are managing other endowments, foundations, family offices around the

country. It was just an exceptional place. Yeah, that's my understanding is that a lot of his alumni now run the other endowments in the world because they learn something from him in terms of first principle thinking or process, I guess. Like, process is important, isn't it, in capital allocation? Sure. Yeah, I mean, look, he had a huge first mover advantage. I was so early on that I didn't even think that there was a path to do what all these people have done.

So most of the people who are these protegees of his that are CIOs followed me in my tenure there, not all, but many of them. Yeah, that process is. starts with, you know, what I described. And then in the implementation of it, the asset class and sort of asset allocation component of it is now sort of well understood. I always said that people misinterpreted what David wrote as an homage to private markets and hedge funds. He believed that you wanted to be invested in equities and diversified. And the problem was if you start with owning U.S. stocks and U.S. bonds and you want to diversify and have more of an

equity orientation, anything else you own is going to be less liquid. Right. Because this is the most liquid assets in the world. Sure. And is being illiquid, a feature or a bug in the mind of a David Swenson in the mind of these capital allocators from the big, you know, tens of billions or multiple billions of assets? Yeah. I don't know if it's that simple. I mean, it is, is a feature in the sense that if you accept illiquidity and you can find ways to get paid for that, that's a good thing to do when you have extremely long duration capital behind you. It's a bug in the sense that, you know, ideally you'd like to have liquidity if you could or at least have liquidity that's matching the underlying assets.

And sometimes that isn't always the case. And how has that game of, you know, from when you joined it and when you were at Yale's endowment. And now we're, I guess we're here 20 years later, or so, 25 years later. How has that changed other than these endowments have become ginormous? I mean, they are really spectacular in the footprint compared to where they were. And so I'm curious how that job and how that has changed in addition to why do they need to be so large, you know, and why are they not going down in size? It's some weird thing to me.

And you see this when Harvard took some PPP money or whatever the stimulus money was. And people were like, why is this Harvard taking stimulus money? This is abhorrent. So talk about the size of them and then how they've changed. Yeah. Well, let's start with how they've changed. Really part of the reason, probably a big part of the reason why I started the podcast was I was curious to answer that exact question.

Because we didn't talk about that. I went from Yale to business school and then spent 14 years. just focus in the hedge phone world. And so when I took a step back and said, you know, that was the first thing I wanted to know, what has changed? In some sense, not that much should change because, again, we're talking about what happens over 10 or 20 years on pools of capital that should be around for many hundreds of years. So from the structural perspective, there are subtle changes in asset allocation, asset prices move.

As you mentioned, there's just a ton more capital, not just the size of the endowments, But in the last 20 years, you have all these sovereign wealth funds that, you know, are new. All the Australian super funds are brand new in the last 20 years. And the Australian super funds are based upon their retirement because they basically said, hey, we're going to take all of our retirement accounts. And that became a national thing. So these things became very big. Correct.

In other words, very fast. You're forced to put money into your retirement in Australia. That's like the big difference, almost like Obamacare here, where you're forced to have. your health care. Yeah. In Australia, you're forced to actually put money into your retirement account, and then they manage it for you. So all of a sudden, that's explosive.

Then Norway found a lot of oil. Saudi Arabia realized, and all the countries, Qatar, is it Qatar or Qatar? I hear people. Yeah, I'm not sure. Yeah. Qatar, the UAE, all of these places have just ginormous, you know, sovereign wealth funds that they have to figure out how to put it to work because they don't, they They see the writing on the wall when it comes to oil, yeah.

That's right. I mean, it's everything, right? Japan's had their GPIF, their government pension fund, which is a trillion and a half dollars, which is fine. It's been around for a long time. But it used to be something like 95% Japanese bonds. And so when they shift 10 or 20% into global equities, it has a meaningful, a meaningful dent in the world. So what we're seeing is these large pools of capital are emerging because the world's getting

bigger. There's more people. People are living longer. so retirement is an issue, so money's being pushed out there. Natural resources are changing. So you have this confluence of events. The people with the largest amount of natural resources which have a value need to diversify. The population grows and ages, therefore massive pools of retirement capital emerged.

And then for some reason, I guess the Harvards and the Yales, et cetera, their alumni are so successful, perhaps because of some of those other. trends that they then donate money back. And this, we have this flywheel here going that you've been investigating on capital allocators your podcast. Yeah, that's exactly right. That's exactly right. So let me touch on the second question, which is, you know, something that I think I and most people over the last quarter century didn't think was a serious question.

And it probably is becoming one now. The way that an endowment works is a little bit different from how most people think. So, you know, we think of it from the outside as Yale has $30 billion and they can just spend it. But if you look at where the money came from, and as you mentioned, actually, most of it's come from donations and returns of the investments on those donations. And most of those donations have been given with a specific purpose. So it looks more like a mutual fund with lots of different shareholders, many of whom have already told you where you can spend the money. So as a starting point, it's not the case. There's just this big pile of money they can go. spend. That said, there is a bunch of discretionary money, and it's grown and grown and grown.

Any of these organizations, like any business, they grow over time. And when I worked at Yale, the endowment went from $2.5 to $6 billion. So it was a while ago, but it wasn't that long ago. Today, Yale spends north of a billion dollars a year from the endowment. Wow. So literally when you started the throw-off. Yeah, so the throw-off is about half of what, or a third of 40% of the total endowment size is the throw-off today. Yes. Right. And so if they were spending a billion dollars in 1992, the endowment would have lasted two and a half years. Yeah. So that gives you the sense that, and by the way, they're spending a billion. If you want to go from spending a billion to spending a half billion, you're cutting half your budget. It's not easy to do. We learned that

in 2008. It's not easy to do. So The dollars are big. The institutions have grown. They've become stronger. It's another game of haves and have not. That said, you have this unique period of time now with the pandemic. All right. So let's answer that when we get back.

It's how the pandemic is impacting all of this. And then I want to know how these capital allocators are compensated because if they were running hedge funds, they're compensated massively. And it's the same skill set. So why would somebody go working a down in and then how did they get compensated when there's some professor or the headmaster of the school or whoever's running whatever, the Harvard Business School is going to get paid a lot less than the person running the endowment. How does all that work when we get back on this weekend startups?

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Watch episode 1087. He was a great guest. Okay, let's get back to this amazing episode. Welcome back to this weekend, startups, really excited to have Ted Seydies here. He is, I guess, a reformed capital alligator who, now it's a podcaster. But its podcast is great. It's called Capital Allocators. And you're writing a book now, too, about, gosh, you've done over 300 episodes. Podcasting is amazing for learning, isn't it? It's great.

Yeah. Yeah. Yeah. Yeah, I'm writing a book. It's, we went back and forth for a while on the title. It won't be out until next year. The title ready for this is going to be called Capital Allocators. Very nicely done.

Very nicely done. So you workshoped that. Took a little time. Took some wordsmithing. There's a subtitle that clarifies it a little bit. But yeah, yeah, it was a big endeavor. I just love podcasts because it's such a great excuse to just sit down with somebody for an hour and chew the fat and just, you know, try to work through things that you've been thinking

about in your brain. And that's where I find the best podcast come from. So when I mentioned at the top of the show, you know, Preet Bihar or Sam Harris or, you know, Brady Sinellis or yourself, like you all just trying to figure and understand the world better. And it's so much better than journalism today, which journalists are so ill-informed, you know, I was a journalist. Like, you're trying to understand like 5% or 10% of what's going on in the world when you're a journalist. and it's really hard to do because you're not the subject, but you were the subject. You were the person people called for a quote.

And it's really amazing to see podcasting works best. It's like when an expert, you know, does like this random act of journalism of interviewing. Yeah. No, it's been, it's been really fun. And if anything, like, I feel like I'm just scratching the surface of the conversations because they're only an hour long. and, you know, you'd like to record and keep going and going. And sometimes the conversations you have afterwards or the next week or end up being the meteor stuff.

It is definitely people leave stuff in the dugout to have that same experience. And then do you have the experience where it's going really well? But you're like, oh, God, I've already taken 90 minutes of this person's time, 60 minutes this first time. I've got to get off the call. But you want to go that extra half hour, right? Well, the truth is when I, it's only when I cross into your world. So, I mean, that certainly happened when I was interviewing Joe Lonsdale.

He's just a busy, busy guy, fascinating guy, but I felt like I was on his clock. But no, for the most part, at this point in time, particularly the CIOs, if I don't know them already, they know the show. They're really excited and they're comfortable. And they take the time to do it. So that part of it's been great. Another big secret, I think, is you're not in, and not making this a session to beat up on journalists, but a lot of times journalists, if it bleeds, it leads, they're, they're

basically looking for somebody who tripped and they're like, oh, this person's returns, we're off this year. Let's make that the cover story. You're not doing that. You're just saying, hey, let's talk about your process and what you're thinking about and let's tell your story. So you have a better chance of getting somebody to talk and open up than somebody who's actually coming at them, you know, with a knife. Yeah, I could care less about what's happening right now. And, you know, one of the nice things, which I'm sure you've experienced, when you do these podcasts, it's never really about you. And after my first couple episodes, I wasn't working at the time. I'd left my old partnership and I just didn't think I had anything to say. So I figured out,

I might as well just let them talk. I mean, I'm a middle child. I like talking. Yeah, me too, middle child. So, you know, it didn't initially come naturally, but it was, it was great. And people love telling their story. And as long as you know or have a sense of what the right questions are to ask next. It's really, really fun. And I say it's quite similar to the role I sat in with one huge difference that goes right to what you said, Jason, which is that it's not evaluative. Like, I don't have to leave the meeting and decide if I'm going to say yes or no. I can be positive and supportive of everybody and just let them tell the story they want to, they want to tell. Yeah. It's so, it's such a nice, you're weekly or so. Yeah. And,

I mean, it's such a nice cadence, too. I'm now two times a week, sometimes three. And I find if I don't do the podcast for a week when I'm on vacation, I get antsy. I'm like, I need to talk to somebody. And it's really saved me during the pandemic because, you know, as somebody who's a high extrovert, which I get the sense you are too, you like to talk to people and engage. It really is a nice way to just sort of keep contact with interesting people. It's always a great excuse.

How do these people get paid? And why do they pick running an endowment versus running a hedge fund, which is, essentially the same skill. Are they just want to do something and they're lazy or they want to do something? They've already made their money. They want a cush job. They want the, is it more notary? Is it more, what's the word? Are people who run these big endowments more famous than the hedge fund people? I don't get the sense they are. No, I mean, what's the thing there? Let me start with my experience because it's exactly the opposite of what you think. I graduated college in 1992 coming out of a recession. Same. There weren't that many. There weren't that many jobs. No, it sucked.

And that was the job I got, right? I didn't. And one of the contentions I had with David Swenson when I decided to go to business school, he thought business school was worthless. And he is someone who deeply believes admission. It's never been about money. And he, you know, back then he wasn't even making a million bucks a year working at Yale. He had left a big Wall Street job.

So there are some people, you know, it's some weird word, Ely Musonary or, you know, some nonprofit that just deeply have that sense in them. and this is an intellectually fascinating way to go about doing it. That said, Andy Golden, who manages a Princeton Endowment and worked with me at Yale, he was five years out of business school working at Yale, got hired by Duke, and two years later was running Princeton's endowment. And in each step of those two, they tripled what he was making. So these people get paid low millions of dollars a year, something like that, two, three, four

million bucks a year. Yeah, the bigger ones. Yeah, the bigger ones. Yeah. And that's all public knowledge. because they have to put it. Very public. So they can make $2, $3, $4 million.

But they would be making $20, $30, $40 million if they were on Wall Street or in a hedge fund. If they were succeeding. So the skill set is different. It is different. Okay. Explain to me what's the difference between being at a hedge fund or at an endowment. Yeah. So the vast majority, there's a lot of overlap, but the vast majority of the CIOs who are picking managers,

they're not in the markets every day. and so the level of stress that you might have, the ability to just truly think and act long-term and not have to do things on any moment are, it's just much more prevalent in that seat. Hedge funds a total is just the opposite end of the spectrum, right? You're beholden to your returns all the time. Yeah, hourly, daily. I mean, it never ends. You couldn't.

And even though you hear about. like endowment returns every year because the Wall Street Journal will pick it up and report on it. When you talk to any of those people, they could care less about their one-year return or three-year return. It's a much longer duration game. So that's one part of it. You know, I think that in the early years, again, nobody really knew where these people came from. And now it's a very intellectually fascinating job, right? you can have conversations with Bill Gurley, you can have conversations with Henry Kravis,

you could have conversations with, I was going to say Warren Buffett, but he's not managing money publicly. But you name your favorite money manager in the world doing anything, and you can become a partner with them. And so the diversity of what you're exposed to, your ability to kind of stay in touch with what's going on in the world, it's just really an amazing, amazing job. and people thank you for it all the time. So, you know, you're managing money for...

There's a reward to it that is immeasurable in that you're getting kids scholarships. Yeah. Yeah, there's a huge psychic reward. Or if you're the Ford Foundation or Memorial Sloan Kettering, you're literally solving for poverty, some global disease, pandemic, whatever, or cancer, right? Like, it's pretty great to go to work every day. Yeah. You're trying to build the endowment to cure cancer.

It's pretty, that's pretty claus. Exactly. It's just a different. What is their, how are they judged by their, they have investment committees from what I understand that are basically a subset of the boards of these institutions, correct? Yeah. So how are they judged? Are they judged every 10 years, five years?

It seems like it's got to be a long horizon. Yeah. So the compensation structure and the governance are two of the most screwed up things about this whole universe, because as you are a CIA, of an endowment or a foundation or a pension fund or whatever it is, and you go out and interview a venture capitalist, you are all over them for their alignment of interest, for how they're compensated, what their other activities are. And if you turn that, you turn that around the other way, what you'd find is that there

are some compensation schemes that are tied to, you know, longer term three year, five-year returns. They tend to be discretionary. If you're at a public pension fund, you're paid like a government employee. Yeah. There's no incentive at all. It's just, it's terrible structure. If you're managing a family office, you're beholden to a family, and we all know what families are like. Yeah, they're just fighting over like whatever asset is there.

There's some screwed up kid who's blowing their money and asking for more. They want to do a movie. Yeah. Some nonsense. Some of the practices are fine, right? There's salary bonus. Sometimes there's incentive comp that's tied to long-term performance. Some are horrible.

So one of the common ones that I think is the most pernicious is you'll have peer comparisons. So you'll have someone who's the head of an endowment or a foundation, and part of their compensation is tied to eight, the performance of eight, you know, comparable sized endowments or foundations. Wow. And, you know, that could make sense. Well, it can be pernicious. I'll give you my favorite example, which I wrote about a little bit in the book. I was looking at a, I had an investment in an Asian distressed debt manager. This goes back 10 plus years.

And they had just, they had just gotten their first endowment as a client. And so I was asking them about side letters and, you know, what special deal did they ask for? And one of the things they asked for was that they would commit their money on the condition that that fund never take money from these other seven institutions. Wow. Wow. sharp elbowed. Wow. So they're like, I need to have this. I need to block other people from having this. And that's just lame. Yeah. Well, it's entire, I mean, you could make a convoluted case that over the long term, they're competing for professors and whatnot. But at the end of the day, it was because

that CIO is trying to, you know, thought they had something special and wanted to juice their own personal compensation. So that doesn't happen that often, but it's not a great. Every institution's a little bit different. You know, the amount they're funding out of the endowment as a percentage of the budget is different. And it's not the right way to create compensation schemes. All right. When we get back, I want to do some lightning rounds here. I want to know what the pandemic is doing to all this, what you think of SPACs. And then I want your counsel on how I should manage my relationships with these people. And I'll give you my problems and my personal experience making these visits to very various mecas with leaving the names out when we get back on this week in startups.

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startups. Okay. Let's get back to this week in startups. Ted Seides is here. He runs an amazing podcast called Capital Alacators in a book coming out in a year that I'd like you to stop right now. Is it on Amazon yet? Can they pre-order? Soon. Not yet. Soon. All right. Whatever. In a month or two, just do a search on Amazon. It's very very important that you pre-order the book and you send one as a gift to a friend, or maybe you order two to give one to a friend, because we all know for book authors, they store up all those pre-orders and they pop off the first week. So if you get five, 10,000 of them. It's great. And since you have the podcast, as an author, they now pick books based on podcast audience.

I don't know if you knew that. I did not know that. Follow account on Twitter. Yeah. Follow account on Twitter, number of emails on your email list, and then podcast. If you have those things, you can easily get a book deal. You just have to learn how to write and have something to say. So what is the story with the pandemic in relation to capital allocation? Because one thing I've been trying to figure out, you know, we were talking earlier about real estate and it's just so hard to figure out real estate because you have this like layer of like, well, I have to live somewhere. And there's a commute involved typically. So real estate is just very hard. to understand. But in the pandemic, I was just talking to my friends today. Los Angeles real estate's going up. High-end real estate's going up.

It's a pandemic. And the stock market's going up. So are we in like some micro-inflationary situation? Or is it just chaos out there? What are capital allocators doing in the year of the pandemic? Yeah. Well, there was a whole question of sort of how do you respond in a period of a crisis? And I did like almost like a mini-series within my show.

of just reaching out to guests who had been on the show and saying, hey, what are you doing? And a lot of it was what you'd expect at the beginning, kind of just trying to orient with where people are working from and how they're communicating and what's happened in the portfolio, right? Because March was pretty nasty until everything bounced back. And the big question they have now is a lot less about, well, what's happening in the economy because it's just these pools of capital are not set up to pivot that quickly on big questions like that. The big question is, this role, these CIOs are really in a people evaluation seat. And so at what point in time can they decide that they can go ahead and evolve their portfolios with people they haven't met face-to-face? And it's, you know, at first, there's none. you hear a lot of, well, we re-uped with the last fund.

So you're definitely right now in the situation where the people who've already had the capital will continue to get it. But it's harder if you're going out and raising something new. You have situations where you have called them star launches, where someone was a big name at another fund. And the CIO may be interested in that anyway, but also may want to show their committee, hey, we're still doing stuff. So what a great way to do it than something that feels safe and maybe somebody they met once. What you haven't seen yet is a real shift into these people saying, this is the new normal. And going forward, we are going to need to meet people for the first time, do all of our work and evaluate them without having met them.

At the very, very beginning of that and people still hoping that that won't be the ultimate fate. Yeah, that is something you have to adjust to. And we, when I saw it coming, you know, when the pandemic hit, I immediately thought, you know what, I'm now 49 years old. And I've been through how many of these bubbles bursting. This is the time, because I have a chip stack, that I am going to do it right. So I just moved massively into equities as the market crashed and that paid off. And that was on a personal basis. I just did. I just dialed it all up to equities. And so that worked out very well. But in my fund, I was like, everybody's scared? I'm going to invest more. And so I just said,

our accelerator is now 100% virtual. Do twice as many. Let's increase our activity now. Because half the VCs I met with, an early stage were like, I'm taking the rest of the year off. I'm just going to work on my portfolio company. I'm saving my draft potter.

So what I did was I went all out to get more LPs. I met with more LPs on Zoom. and we're closing LPs and investments over Zoom in 30 minutes, 45 minutes. People like it better. That's great. Now, are those, do those tend to be like high net worth individuals? High net worth individuals are more interested. So we have a syndicate called The Syndicate.

We were the first syndicate on Angelist. So now we can pivot into the real reason for this podcast, which is for me to get pre-consulting from you on how I should run my business. But we were the first syndicate on Angelist. The first deal we ever did was Calm.com. We put $370,000 in that when it was a $5 million company. That's like a $60, $70 million position right now for us. It's one of our biggest positions after Uber and Robin Hood.

It's actually bigger than Robin Hood. And then we left because we didn't want to share carry with them. We want to control our destiny. So now we have The Syndicate.com with 5500 angel investors, high net worth individuals. And so they are also LPing our funds. So we've done basically three funds, 10, 10, and 40. and when I went out to do the $20 million fund, launch fund three,

we had so many people say no from the big endowments because we're too small. They want to write a $50 million check. But then all the people in our syndicate were like, I'd love to write a $50,000 to $250,000 check. And I've never actually done a venture fund. How does that work? And boom, we just doubled our target immediately.

So it's been pretty great. So I guess the question I have, though, is with these funds, you mentioned, before that they were sticking with the relationships they have. This is the thing I hear over and over again from these endowments who have been, you know, I get incoming from them. They ping me. And they come out to see,

the pre-pend pandemic, they would come out and see me and have lunch and spend three hours and want to meet the companies and want to see our returns. I mean, I've been relationships with them for two years now, three years in some cases where I've met with them four or five times. They've never become an LP. So what is the story with how they evaluate venture funds,

and let's face it, I'm a new manager, I've been doing it for 10 years. The first five were like part-time and then last five full-time. How do they evaluate new managers? And you mentioned this relationship. And then conversely, how do they kick managers out? Because that seems like a very delicate thing as well. Yeah. Well, in the first part, you're doing it.

You are in the process. I know you feel like this thing's gone on way too long for rationality, particularly in a world where you're, you know, pumping out so many different deals every year. But this is what they do. They're not in a rush. They have a full portfolio. And they want to pay attention and get to know you and see what you're doing. Because if they do decide to invest, they're not intending to invest for Fund 3.

They're intending to invest for Fund 3, 4, 5, 6, and 7. Got it. So they're going to take their time. And that's, you know, the fact that they're still willing to come talk to you means that, hey, they're interested in continuing to have a dialogue. The frustrating part of that from your perspective probably shouldn't be that. It's that the duration of the tenure of the people in those particular seats isn't necessarily, you know, 10, 20 years long. Right. So they'll spend those couple of years.

Yeah, I mean, it changes, right? There's been a lot of CIA turnover in the last couple of years. I have had that where people were at one endowment and then they ping me and they're in another one. Like, oh, by the way, I know they're longer here, but I'm here. So, hey, I wanted to just touch base with you. And I'm just like, wow, this is a really slow process. but I guess the idea is if you're, because I've got like a 15 endowment list of like the top ones.

I've met with all of the multiple times now. But I guess if one or two of those do pop off, they're going to stick with me for funds four, five, six, and seven like you're saying. How does a fund get kicked out of an endowment? Does that ever happen? Because, you know, when I went on the road, a lot of the discussion and when I met with folks and I did it for the last two funds, they'd be like, oh, you know, I know you know Bill Gurley.

Oh, I know you know, Chimoth. Oh, I know you're, you know, I was the first Sequoia scout as well. Oh, well, I know you know Sequoia. And they're like, yeah, we don't have an allocation in those. And we don't have an allocation of Founders Fund or Sequoia. I was like, oh, well, I'm an LP in those funds. And I'm surprised with the people over there. So no conflict, no interest.

It was almost like they were asking me to get to Bill Gurley's fund. And it was like, what is this about? But how do they, does that happen often that a fund manager that they've committed to for four funds gets kicked out, and then how does that work? Yeah. So it's different in the private markets and the public markets. But in the private markets, it can. And, you know, the question is why.

And usually you could think about it like any other investment where there's some thesis going in, usually explicit, right? There's people with all that time, they do a lot of work. They write a memo, a big extensive memo that will go to that investment committee to get approved. So they've thought carefully about why they're investing in something. And usually it's change, right? So, for example, partners split. You can track at some point in time, you can track which deals went to which partners.

It's not that hard when you're an LP. Growth can be a big one. So, you know, you're all excited. You get this $40 million fund. You want these guys. Well, you know, part of the reason benchmark has been. benchmark is they've just never grown past $500 million funds. I think that's the right number.

And you look at a Sequoia or an Andreessen and they've continued to do well, but they're huge, or, you know, $10 billion organizations. So, you know, Sequoia's had somewhat of a magic pixie dust over all these people and you don't see almost anybody leaving Sequoia. But you do see... If you're leaving Sequoia, it's because you were not invited to come back. Right. I mean, the GPs there, the partners, but you're talking about the LPs.

The LPs never leave. Because the fear for them is if they leave, there was famously one person who left a benchmark fund. And actually, I think Yal got into it with Sequoia at some point famously because they didn't want to do Swenson didn't want to do China. Do you remember that story? I wasn't there then, but yeah, I remember hearing about it. Yeah.

And so that was, that's a cause of friction is that the number of funds. Andresen's doing, and that's basically a new firm. They've only been around for 12 years. And they've been an underperforming fund according to some of the leaked documents. So you've got someone like Andreessen Horowitz who's got famous founders, high profile, not great returns, but they keep adding funds. Like they've done, I don't know, it's 15 funds or something in 10 years. It's bonkers. So how do LPs look at them? Do they look at them and go, oh, if I don't do this indreason fund, then Mark and Ben are going to take it? a person, they're not going to invite me to the next one. So they're almost kind of like

gun to the head. Don't lose your spot. You have to do this next fund? Probably not with Andreessen. I think it's case by case. You sort of hit on all the key criteria, right? Ultimately, it's about performance. And if someone, if one of these firms has gone out and you could look at a gray lock or a Sutter Hill, you know, certain venture firms that have done exactly what they said they were going to do, grown with discipline for a long, long time, you never see those LPs turnover. You know, where you see the LPs turnover are when there's growth beyond what the LP perceives as the sweet spot for that strategy.

So, you know, like Jason, okay, you're doing this really early stage spreading on a lot of different deals. Can you do that with a billion dollar fund? I don't know. No. Right? So if all of a sudden you had a loyal group of LPs when you were doing it and let's say you grew it to a $200 million fund and it was still working.

And the demand was there because you had a couple home runs in that fund and you wanted to raise $800 million. Well, other people might step up and do that. But the ones who were there early in our discipline wouldn't. What's the percentage venture should be in these endowments? What did they think? Because when I visited them pre-Ur Uber going public like two years ago or maybe 18 months ago, when I visited all these endowments for the last time, they were like, we are so, they had like two things that were very, I asked them like, how's your business going?

Like, how do you? And, you know, sort of some of the questions I'm asking you. So I did a little interview with them. And they were all like, we have 25% venture exposure now. Because some of these things like Airbnb and Uber, they had gotten so big that they just had an over allocation. They really, I said, well, what do you want to be at? And they were like, well, traditionally it's five to 10% venture. And now we're 25% venture. I was like, well, why don't you just, since you can, Since you're liquid on those investments as a secondary market, why don't you put yourselves, why don't you put that into your public market since they're liquid and they're kind of like big private, but they're liquid private?

You can sell your shares to Machia Isha, Or whatever. I'm like, I've never thought of that. But what's the proper percentage in their minds today? Yeah. Well, there's a pretty wide range. Just to give you a sense, I think the less sophisticated, so let's call less sophisticated an office that's really only been around, you know, 10 years, maybe a pension fund that has a governance board that aren't filled with investment people. You see zero to five. In most of the

endowment world, you see 10 to 20. But let me give you one example that's at the other end of the extreme, at the other extreme, there's a foundation in Pittsburgh that has something like 90% of their capital and private markets, 30% is in China. And they're probably 40 or 50% in venture because they've figured out that they don't have the liquidity needs of these other institutions. It was set up in such a way that they pass on the capital to other institutions that have smooth spending rules. And they're just there to grow the base and get higher returns. So a lot of it has to start with what is that pool of capital serving and what is the duration of that pool of capital and the liquidity needs

and then you work backwards from there. We've seen SPACs, my bestie, Chimoth, one of my good friends, pre us both being investors. We both worked, he worked at AOL. I'd sold a company at AOL, so we met each other in the revolving door on the way in and out of AOL.

He's doing these SPACs. He brought SPACs. And now everybody's doing a SPAC. I heard SoftBank's going to do a SPAC. So it's kind of a two-part question. What's the impact of people going public earlier after we just had Masayoshi son taking people public privately with his fund

two really weird events that nobody anticipated. I'm curious what you think of each. Yeah. Well, you've had, let's just start with the fact that you've had this massive shift from public markets to private markets, just number of companies, mostly small companies. That probably follows the ultimate,

like these endowners of capital being interested in the private markets, so private equity funds can raise more money. So you have that situation and the question is where does it go from here? Spacks are fascinating, you know, a fascinating trajectory where they were so bastardized, I'd call it five, ten years ago because it was just a bunch of crappy companies with chop shop investment banks, you know, taking them out, with structures that were pretty usurious for the sellers to now a lot more mainstream and probably will serve an important role in a lot of these later stage, particularly technology venture back companies going public. There's also an interesting dynamic that has to do with interest rates because if you're a hedge

fund, for example, and you can borrow extremely cheaply, why not fund a SPAC where worst case scenario, you're probably getting your cash back? And best case scenario, the sponsor goes and buys a good company and you have this great upside. So it's a pretty asymmetric risk reward if you have capital that you can leverage against. And so there's really a huge demand to invest in these vehicles, which is great. I actually disagreed to go on the board of my first SPAC. So even someone like me who's on the outside of this stuff, got a call about that. And I said, you know, I can't imagine a project that is more asymmetric than being on the board of a SPAC.

It's terrific. Yeah. There's literally, oh, you have to, there's no downside. No. And if you find something, I mean, the only downside is time. Yeah, but not on the board. I'm not on the board. It's not like it's a ton of time.

You're not like operating a company. I know how to say yes. And yeah. So, you know, there's fascinating. It's set up, you know, the question I've always had about SPACs, which I don't fully understand because I haven't gone through one. This is part of the reason why I'm doing this is that there's dilution. There has to be dilution, right? Because the sponsor of the SPAC is taking some percentage of the ongoing company.

Whether it's 20 or it gets negotiated down, 10 or 15, it's fine. This, in theory, is, you know, Wall Street takes 6% until you're avoiding Wall Street. Well, maybe, but it's a fascinating. The risk rewards across the board are really interesting. And it's the hardest one for me to see is sort of how does the seller sell the business when they're giving away, you know, you're paying it. There's a purchase price, but then there's this chunk of the business that's going into the sponsor's pocket in warrants and direct equity.

Yeah, and it doesn't feel too onerous because if it's a $400 million spack going into a $4 billion company or a $2 billion company, like it's all going to work out in the end. Yeah, that's right. They're not getting 20% of the entire company. They're getting 20% of the money they put in. So they're getting 20% of $400 million, it's $80 million. And if the company was sort of $44 billion, in that case, they're getting... It's 5%. It's actually not inconsequential.

It's not inconsequential. It's, you know, I guess it avoids, I guess, a 6%. underwriting fee. But the question is, if you're an investment bank and you're going to get crushed by these, why do you keep charging 6%? Why don't you charge 4? Yeah. It's definitely going to have a rippling effect through the industry. The thing that I think is particularly interesting about it is we've had this really horrible advice out here, stay private longer. And in fact, my top investment to date was Uber. And it was the poster child for staying private too long until Airbnb decided,

hold my beer. We'll stay private for another two years or something at risk at all when the pandemic hits. What are the, how do these capital allocators who own large swats of like an Airbnb? How do they deal with this staying private so long and not being up to cash in their chips?

Are they selling on the secondary market? Or I heard that some of them in Uber might have been like collaring their stock and just like giving the upside, you know, to, you know, some bank or something. How do they deal with it? It's not the first time it happened, right? So when I was leaving, I left Yale to go to business school in 1997 and, you know,

the SNAP will buyout had just hit Netscape, it just gone public. So I can circle back to Mark Andreessen. And Yale had a venture portfolio through, you know, those couple of years heading into 2000, where the publicly listed shares were larger than the largest positions of the largest stocks held by the public stock managers that Yale had hired. Wow. So, you know, that time around, Yale hedged it. And they hedged it too early.

And I think at one point in time, it was a billion dollar short portfolio back when the endowment was, you know, $5 billion or $6 billion. So they left a billion on the table. They look like idiots until. Until it all fell over. And they, I don't remember the exact numbers, but something like over four or five years of running this short book that had grown to, you know, really, significant size, Yale made something like $100,000. But it smoothed out the returns, right? So if you

looked at kind of Yale's performance in that one particular year, which for them, it's a fiscal year, is probably that July 2000 to June 2001, they were up 10% when everybody else was flat. And the year before, they were up 40 and that looked good, but they probably would have been up 50. So it was a hedging mechanism and it also allowed them to reduce that exposure. I don't know exactly what people are doing today. I think it's a lot harder when the companies are still in private hands. Yeah. And the question is, you know, do you want to hedge with a comparable basket or do just

want to let it ride and understand that, you know, sometimes the venture firms don't mark them up all that much. And so, you know, there's potential upside. There's some downside. Think about Tesla. I mean, people sold when it went public and it was $14 a share. It went up to $30 or $40 and they sold. And then it's gone on the tariff.

of all tears. I mean, they went from a $20 billion company to, yeah, whatever it is now. I mean, you have a lot of those dynamics across markets when ownership changes hands, right? So if you own that Tesla stock in the public markets, but your investment was to make the money as a venture capitalist in the private markets, well, you've got your public stock managers then could look at Tesla. And, you know, maybe you were lucky and you had Kathy Wood or Ron Barron and they wrote it all the way up. But a lot of them said, you know, okay, that's not, you know, now you're in a larger universe of potential opportunities. Yeah, that's one of the things I've been looking at is, as an early stage investor, when do we trim our positions? And the closest I can come to is, you know, when you're investing at a $5 million average entry price for the valuation of the company, maybe when it hits $250 and a billion, it's good time to just cash out 10%, let's say. and then maybe when it hits

five or ten billion, it's time to, you know, something about cashing out 20% or something. But, you know, it's very weird because the SPAC thing has happened.

Now, there's a half dozen portfolio companies we have, whether it's Com, wealth front, Robin Hood, data stacks, thumbtack,

all, and desktop metal previously, which then got spacked or is in the process of spacking. This is going to shorten the return window for me

from, you know, 10, 11 years, back down to six or seven, which could be dramatic for our industry. Yeah. I mean, it could be a great thing, right? The question is at what price, but, you know, we'll see. I mean, I do think that the public markets, generally speaking, not in all sector,

certainly not true in biotech, but the public markets generally speaking are not that receptive to cash flow and negative businesses. No, yeah, they spanked Uber until. Uber was like, you know what? We'll give you what you want. We'll lay people off. You guys want to see us hit profitability. Fine.

F it, we'll do it. I mean, and it was just like, wow, that's what got us here is not what's going to get us there kind of situation. Like what got us to being Uber was being bold and audacious and just break even or lose money. Just let's get as many credit cards and as many people addicted to the service as possible. Can we get 100 million people to use? use this, can be a 200 million, 300 million?

Just basically what Bezos did at Amazon. And now the, I don't understand the public markets why they don't understand this playbook very well. I mean, it's such an obvious playbook, but I guess they've been burned before or something. Yeah, I mean, well, the question is to what end, right? The playbook has worked from nothing to something substantive. Yeah. And the question is, like, what are the unit economics?

Does it work? And if it doesn't work, the public markets don't want to fund it at infinitum. So it's not that surprising. Back in the days when I worked at Yale, you just didn't see this kind of thing. Venture capital would fund the business until it was its own self-sustaining business. And the last round of capital to get there was in the public markets. And that was it. So it's a little bit of a different, you're right.

I mean, it's a different world, the power of what's happened in all of technology and the ability to grow quickly and scale is kind of unprecedented. And, yeah, it's possible the public markets just don't quite embrace that yet. In the Uber one, I was just like, hey, guys, just take the losses and divide it by the number of rides and you'll see it's like 50 cents being lost on every ride. Do you think if you've raised the price of every ride on average 50 cents that it would change user behavior in any meaningful way? It's like, no, it's not going to change it.

But I guess people don't buy it. And I think that's the big lesson for, I think that's, this is what I've been telling people the new playbook is. In the private markets, VCs just want to see top line growth and understand that there is some sort of plan that, you know, we could eventually boil the frog, raise the prices, and people are not going to go away. In the same way, Netflix, you know, got up to whatever, $12 or $13, a subscriber from, you know, $8,9 a subscriber. Eventually, you can add that, or I don't know if you know about Amazon Prime, but you've been on Prime for over a decade, I assume? A long time, yeah. Do you know what you first paid for it? Do you remember? No idea.

It's 50 bucks. It was like $40, $60. $60. Do you know what you're paying now? No. It's like $150, $200. I was going to say, $99.

You're proving my point. But you're the perfect example. You don't even know what you're paying. That's right. You boil the frog real easy if the product is good. Yeah. If the product's good. No, that's right.

Now the question is, like, you can go into it with Uber, which is if Uber tries to extract that 50 cents, what does Lyft do? Yeah. Well, you know, that was the game of chicken that we all saw. And you don't want to speak about Charabelle. elbows if there was, the word on the street was you invest in Lyft, you'll never own a share of Uber. Like, not even in secondary. You're going to get blocked.

Like, you're, you're, you, you, you, you, you, you, you, you, you, you're, you, you, you pick the wrong family to be part of. This family's got bigger guns, you know. And so, lift just has no, doesn't have the war chest of cash. So, they're going to, you know, and they didn't have the redundant business to, to weather this storm, right? So I think they're going to get a big takeout candidate. What's your take on the public markets? It's very hard for me to understand what's going on. I was on CMBC the other day and say they were like, give us your best top five buys. I was like, my top five buys are so overpriced right now. I wouldn't buy them. But I will tell you, you know, Peloton, Tesla, you know, and Slack to me look like the future. These will be big and Zoom. These look like companies that will be here in 10 years with better products and they're very sticky. And once you're on Peloton, once you're on Slack, once you own a Tesla and you're just, you're not giving that experience up.

or Zoom. Like there's a very small chance that some products would have come and displace those in my mind, but they seem super overvalued. So why is the market so overvalued right now?

And then what happens from here with all this money being printed? I know I'm asking you to answer the hardest question in the world right now, but you must be thinking about this. And what are your guests say? And what are they think?

Because you talk to the smartest capital allocators. Yeah, look, most of them don't pay much attention to it. The overheated market. Yeah. I mean, I think they only try to be sensitive to it at the extremes. And the question is, are we at an extreme? And we might be.

It feels pretty extreme to me. And then the question is, what do you do about it? What do you do? So you've seen from that community more and more investment in private markets. And if you looked back five or ten years to where we are today, it's night and day. And, you know, but venture is one thing. You look at the private equity, the leverage buyout markets, and multiples that people are paying for these deals are up 10, 11, 12 times EBTA. It's a totally different game.

Now, if you go back to first principles and your every business at the end of the day is worth a discounted value of cash flows and your interest rates are zero, well, you know, the businesses are worth a lot more. So the question is what happens when rates go up or if rates go up? and what does that do to the discounting mechanism? So, you know, I don't have the answers. I think that what the markets are clear, and COVID has just accelerated this, what the markets are clearly telling you is that the kinds of businesses you're talking about the technology growth oriented business that have a clear runway, everybody recognizes that. So sometimes what makes for a great business doesn't make for a great investment because of the price.

Yeah, that's what I've been trying to, I teach, of course, angel. university where I've been teaching angel investors every month, 300 people, 400 people come every month, the credit investors. And I'm like, entry price matters. And I tell them, like, listen, here's a matrix of traction of the company and the market cap, essentially, the valuation. And you want to see as much traction as possible and the lowest possible market cap because that's your entry price. And they're like, well, why not pay three times as much? And I'm like, And they're like, it doesn't matter if it's a unicorn, you still get a great return. I'm like, yeah, but you need to have, you can get three shots on goal.

If you can find three comparable companies at a lower price, you get three shots on goal. And really hitting a unicorn is about shots on goal. Can you get to 25 or 30? I hit one unicorn every 30 investments or so to date that most people are not going to have access to the deal flow that will cause that or this time period. But, man, you need to get to more shots on goal rather than. Yeah, paying these crazy high prices. Yeah. Yeah, I mean, like public markets, you're not really trying to get the types of returns, right?

It's not as, it's not as buying. It's not, it's more of a batting average game than a slugging percentage game. Yeah. Yeah. And then the business, I'm in a slugging percentage. For sure. What do you think of the anti-capitalism, uh, pro-socialist, you know, kind of leaning towards Bernie Sanders, maybe it's actually communism, kind of ban the billionaires' sentiment

we see in, you know, what is a small group of people, but a growing group of people in America and the impact that has on the world and returns in the future. Yeah, I mean, the places where it's most pronounced and is having a dialogue are in the kind of the whole sustainability ESG world. Yes. And then somewhat, you know, increasing. in kind of to call it diversity and inclusion. I've seen that trend

changed dramatically in the last two years in the sense that for most of the CIOs, they view their remit as having the widest breadth of potential opportunities and anything that narrows the investable opportunity set is going to be bad for returns, including investing in oil. That's clearly shifted, right?

In the last... That has shifted. Yes, it has. probably accelerated by Greta Thunberg starting last year. You saw it in Davos. You go into COVID. And so that is at the forefront of people's minds. And it's really the E, the G part of governance that's like always been part.

People think of proper governance. So going into COVID, it was really this question of what's going to happen relative to the environment. And then depending on what happens in the presidential election of the U.S., that'll clearly accelerate if you have a left-leaning. government president. The social part that accelerated during COVID with Black Lives Matter is trickier. And in both of these, I've done like a little mini series within the podcast.

Just as you said, just try to learn what this is all about and how people are participating in it. The diversity question in asset management, I have my own views on it now. And again, this is really focused on asset management more of the economy. It's a little bit of a step down in terms of the pyramid and the ecosystem. It's a real problem and it's a problem from, I would say, unintended biases. Not so much. There's always the George Floyd's of the world, but you don't see it that much in asset management. It's more, there have been just a long history of self-interest, driving, you know, sales.

So we need a salesman. Well, you know, tribal affinity. We want the person to selling them to look, sound and have the same. background is the person buying. So, you know, if those people are white, then these people are white. And if those people are men, then these people are men. So those are the kinds of unintended biases. And people are very focused on it right now. But most of asset management, and we've even talked about this in the venture space, is increasingly concentrated in the hands of the winners. So it really doesn't matter if you say, okay, we're going to go invest in a bunch of new minority-owned hedge

funds because no one in the allocator community really cares about the next hedge fund. They already have their hedge fund investments. Right. Back to what we were talking about earlier, which is they're looking to do a five fund. I mean, my arc is, you know, whatever, three years of primary investing per fund. Their arc is, oh, let's find our next manager for the next five funds, three years of, you know, we're talking about a 10, 20 year outlook they're taking. They take a 20 year outlook.

They do. So the question is, if you want more diversity in the venture capital space, how are you going to get it? Well, you might need those people to be trained at Sequoia first, because those are the ones that the allocator community is going to embrace when they're ready to go off on their own. So it's really Sequoia who needs to have a diversity program. Not so much. The CIO said, okay, we're going to go invest. You're seeing both of it. You're seeing this kind of emerging manager allocation.

but it's and that that dynamic takes a decade or two to play out if in fact people agree that it's a problem. So right now people are very focused on it. That focus and interest is going to have to sustain itself for a long time to make any real progress. Yeah, and it's interesting that historically back colleges have had limited access as LP's and venture capital is one story I read. So that's something that needs to change as well.

But we've started to see, yeah, and so it looks like Sequoia and Greylock and other folks are definitely starting to work with the HBCUs of the world. But there is this problem of, yeah, new fund managers. It's pretty crazy. I'm seeing so many new fund managers and it really is diverse. But there's this microfunds which fly under the radar. are. They are done by high net worth individuals. So the thing that gives me a lot of hope is I'm seeing, you know, I got into the game pretty early as an angel investor, you know, my late 30s, but I'm seeing 29-year-old start venture funds on the regular out here. And now they're $4 million

dollars funds or $5 million funds. These are micro funds, but, you know, all you need to do is hit one head and all of a sudden you're taken seriously. So I think it's going to change radically, radically. But the environmental stuff, is that, are you cynical? Do you think it's a, are you, are you think it's window dressing or whatever they call that green astroturfing in terms of the green washing, yeah. Greenwashing astro turfing, whatever? You know, is that what's happening here or is it actually you have people who are at

these funds who are gen Xers or younger who are like, you know what? This actually matters and we need to get out of oil and we need to get into. solar and wind and sustainability. So I address that in two ways. One is, I do think it's real or more real this time. It's what Josh Wolfentlux calls a directional arrow of progress. This is sort of, it almost doesn't matter what you or I think about the environment or whether it's real or not or, you know, Trump says it's not. And it doesn't matter.

The people, this next generation cares. So it will happen. which is great. I mean, that's something to be super positive about. Boomers, you know, they might say they care, but their actions are not of people who care. That's right. And then Gen Xers, it feels like we care a lot. But it's not necessarily the top of our priority list.

Returns would be, we would look at it equal, I think. Yeah. But this next generation millennials, they would put the environment and social justice and diversity and inclusion above returns. Correct. And then the question is, so that's the one side. is from a business perspective, this will definitely accelerate. The question is, the latter, which is, what does it do to returns and what's priced in? So you can look, the easiest way to look is in the public markets, and you can say every

ESG fund with a track record looks good because oil is underperformed. Well, has oil underperformed because of the movement in ESG, or is the movement of ESG accelerating because oil is underperformed? and so now the funds, you know, people like having the mission, but they also say we don't have sacrifice anything. So, like anything else. Yeah, because it also is consumers are embracing this in a way that people did not anticipate. If you look at impossible foods and the mock meat stuff, I passed on all those investments because I looked at it. I was like, when is this going to be cheaper than meat?

And they're like, that's not the point, J. Cal. Like, people will pay a premium. I was like, bullshit. People are going to pay a premium for a hamburger that doesn't taste. as good as a hamburger. Like, that makes no logical sense. Yet here we are. People will pay $15 for an impossible burger when they could get a shake shack for $8 that's

infinitely better tasting. Yeah. You can buy two shake shacks for that price of an impossible burger. And, but here we are. And then you look at, like, Tesla, like, people will spend $100,000 on a Model X or, you know, 60,000 on a Model 3 slash Y. And they could easily get a Prius for 30 or something. but they still want 100% electric.

They're actually voting massively with their dollars. Yeah, yeah. So we'll say, I think that's a big part of the leading of it is that consumers are actually embracing this in a way that is, yeah, shocking to me. Yeah, and we'll just have to see how it plays out. But I think that that's right. And that will continue, certainly in that area and that the whole ESG area. What will get funky, by the way, is when capital rushes into this is the definitions of ESG. What does that mean?

Are you saying if people make too much money in this, then it's going to hurt the cause? It's almost like if this becomes profitable. I'll give you an example. So I've gotten a great window on this from a terrific macro strategist guy named James Aitken, who advises some of the biggest pools of capital in the world. And he said the government is trying to work cybersecurity and national defense into the definition of ESJ. What? that's the military industrial complex, just trying to tailgate.

Yeah, that's not cool. Well, the point is if an index gets created and it includes certain companies and not others, and this is a, you know, it's ETFs and everything else, where is the capital going to go? Yeah. And so the definition of what those indexes are matters. Right. If you put security into the national security into that makes no sense. Like we're talking about the planet here that we're not people.

Maybe that's good national governance. I don't know. That's what they're going to. That's what they're going to. argue, right? It's so funny, before we got on this podcast, I was literally tweeting, like, Apple just spent like five minutes in their iPhone 12 presentation. I kid you not, talking about the virtues. They had a woman standing on the top of the mothership building, surrounded in, you know, evergreens and trees in California, Northern California, you know, vistas, and solar

paddles. And she's like, and the box of the iPhone is half the size. And it doesn't include wasteful charger and a wasteful pair of headphones. Because there are already 2 billion of those in the world. So we don't need to create more of those. And I was like, I think you just told us that it's $1,200 and you don't get headphones. Is that what you just said? Sounds that way. And then you have to go buy a charger for $40 separately.

Like literally. Did they change the plug this time too? No. They're keeping the lightning plug just so that you can buy USBCs for your tax. your iPad pro and your laptop, your Microsoft, you know, your MacBook has to use a USBC, and you still have to carry lightning with you. But it was really,

I thought that was like a special moment for them to get an extra $100 or $50 in margin per phone while passing it off as you really are going to enjoy this. And Apple's going to be carbon neutral, like across everything by 2030. If you look at the environment, the government is trailing technology. people hate tech companies now because they're so big, but the truth is tech companies are opting in and leading the way here. Without any, they're not being forced to do it. They're just taking upon themselves as like marketing or they actually care.

Yeah. Either way, it's a good thing. You think things should get, I'll wrap with this. You think the is you take either one of these. And this doesn't have to do with capital allocation, sorry, but it does have to do with the future. Our relationship with, with China and then breaking up big tech. Any thoughts on either of those? Those are two things I've been struggling with and doing themes on my podcast around. Yeah. How do you think about both those? I don't have any real insight, but I'm happy to express an opinion. Yeah, yeah, opinions that are strongly felt and, yeah, without much depth of,

no, I'll just throw it out there. That's what I'm looking for. You know, look, China, tell me what's going to happen in the Alaska. election and that'll let you know what's going to happen with China. I mean, we are inextricably linked to each other. And so. Which is a good thing? Yeah, look.

Hard to go to war with somebody who your entire economy is based on in both cases. I'm not a particular, I'm not very political person, but I'm not a particular fan of Trump's style. As terrible. Many aren't. I mean, it's going to, basically, going to be the reason he loses is probably going to be style. Well, if he does lose, that'll certainly have a hand.

There's no doubt about that. It feels like even his own, the people who are his own supporters, women and folks who voted from, they're just like, I can't take this craziness anymore. I think that's, you have to tell me why, because I don't follow it well enough, but why the Republicans didn't run a serious candidate against him in the primary is a whole other question. I guess you don't do that to an incumbent, but. You don't do to an incumbent, and I think they thought he was going to slide in again because the economy was so good in the pandemic.

Yeah, that's right. So I got nothing for you, really. on China. I don't know enough to know what the tech breakup means. I do know enough to know that across industries, technology just being the most pronounced, we've had this, you know, 30 or 40 year increasing concentration and decreasing competition. That's, you know, pretty problematic. I had Jonathan Tepper on my show who wrote the book, The Myth of Capitalism, and went through all the research. And it's not just tech. So I do think there's going to be some change, whether that means breakup or just to slow down in the ability to acquire, you know,

tangential businesses and maybe that forces these companies to just pay big dividends because they throw off so much cash. That I have no idea. But I do think it's a problem. And, you know, what do you see that problem as? You think it's impacting competition? Yeah. Yeah, that is the problem.

I mean, you already mentioned it once, right? you can't really have situations where you say, okay, we're not going to, nobody can touch Uber's. If you touch Uber's competitor, you can't participate in Uber. So take that to Amazon any of these businesses. And you could, you know, my favorite new book is Morgan Housel's new book, The Psychology of Money. And he talks one of it, he talks about greed and he talks about both Bernie Madoff and Raj Gupta, who was the head of McKinsey who went down an insider trading. He was using expert networks, right?

No, he was just direct into the Goldman Boardroom. That's a separate. I mean, it's so weird that Raj case is like, if you're printing money, why cheat on the incremental dollars? I feel like capitalism. I always tell this to young founders. Like, capitalism is already rigged in favor of like people who have a bias towards action. You don't need to cheat on the margins. It hasn't served any purpose.

So now let's get back to tech. Yeah. The question is, is Amazon doing that when they start promoting their own stuff and Google their own searches? And there are certain things. The platform is big enough and powerful enough that they shouldn't have to do that. Right. But they overreach. That's the thing.

It's that incremental 5%. That little bit of greed is so the problem. I think you've nailed it, which is they have, they're digging their own graves by just taking a little bit too much. If they had been generous to Yelp and let Yelp have the top listings instead of putting in their own stuff or if they just gave a little chip to journalism, to publication, for licensing their content. There's so many little things

that a Google or an Amazon could do to just keep it. The other thing that's interesting, though, is how does Slack, Peloton, and Tesla, and, you know, Zoom, how do they win in those markets if these incumbents are so powerful

because Microsoft has thrown everything at Slack and Zoom and Google and Cisco and Microsoft is throwing everything at Zoom, can't beat them. Peloton should have been an Apple product or a company. Maybe it still will.

That would be a no-brainer of purchase. If Apple actually had Hootspa and we just buy companies, they should have bought Tesla at $70 billion. And they should buy Peloton now. But they're so not creative with their money. You know, Amazon, you're going to circle all the way back to podcasts now. So Amazon's, I'm sorry, Apple is an interesting story in that you know this from the podcast world. Since it all evolved out of the Apple ecosystem, the company won't sell data.

so we don't know who's listening. Yes, which I consider, like, in some ways a feature in addition to a bug. Because I'm also like, I just don't want my listeners. What happens when you can get that data is eventually people resell it. That's where, like, I think the privacy laws, GDPR and CCCC, something P here in California, like these laws are super important because these companies, CCPA, these companies will not pump the brakes on collecting data. And then they eventually wind up.

selling it. One way or the other, they sell it. And when I was running Engadgett, and before I sold it to AOL and all those things, the ad networks would tag our users. Then they would go to Samsung, who we had as a primary advertiser, and they'd say, would you want to buy Gizmodo, TechRadar, slash. End in Gadget, and they say, how do you do that? Well, we've tagged all the users, so we'll get them when they're on Drudge Report or New York Post. We can tell you the same uses for $5. Offsite. And I was like, oh, then we kicked them all off. All right, listen, I took you for over an hour. 80 minutes, wow. Ted, it's just great to have met you.

And I think we should do this like every year or two. This is my other tip for you with your podcast. When you have a great guest, book them again for 12 or 18 months. I started doing this. So I got Keith Rabe or Chris Saka or Chimov or anybody who kind of crushes it. I'm like, Andy Ratcliffe is another one. I'm just like book Andy. I just said book Andy Rackcliffe every year, the founder of, I don't know if you had him on the pod.

I'm well front now. Yeah, we've talked about it. You got to get Andy Rackcliffe on. You've had Bill Gurley on or no? Yeah, I haven't had Bill on. No. Do you dip down into the VC space that often? Yeah, sometimes.

I've got, I had a whole bunch lined up that I was going to do right before COVID hit. And I don't know the people, so I'd rather do it face to face. I've just kind of waited and, you know, we'll see. You know what? At this point, I think everybody's got a good Zoom set up now. And so I've gone 100% remote and I have this like million-dollar studio in the city. And I don't use it anymore, so I'm thinking of deprecating it and just staying home. All right, listen, stay safe.

Everybody go listen to Capital Allocators and it's Capital Allocators podcast. Or you can just search for Capital Allocators. And when the book comes out, please buy it. Ted, Cydies, great guest, great job. You can follow them on the Twitter, T-S-E-I-D-E-S. And maybe at some point, yeah, when I go out next time, I'm going to need your help because the other thing that they ding me for is I'm outspoken and that's a little problematic for them. So I literally had a meeting get canceled because one of them saw me on CNBC and I said the president is a moron for saying that Apple, I'm sorry, I said the president is a moron for saying that Amazon doesn't collect sales tax.

They're only five states where they don't collect sales tax, and those are the ones that don't have sales tax. The other ones they've been collecting sales tax forever. This is like, he's like four years. This is moronic. This is when he was first in. And literally the endowment canceled the meeting because somebody on the investment board saw that they were meeting with me and said, fuck that guy.

No way we're backing his fund after he was anti-Trump. All right, Jason, let me leave you with this one little tip. Okay. No matter how big you get in this business, yeah. You're not going to have every LP. in your fund. So just find the ones

that find that outspoken nature endearing. See, I think that's good. See, that's probably the best wisdom because that's the same wisdom I give to, you know, up-and-coming angel investors and people who are new fund manager. I'm like, you only need one win.

That's it. You are defined by your winners in terms of, you know, your returns. And then your reputation is defined by the people you pass on investing in. Which is like, when you think about it, like the reputation

of one of these endowments who says no to me, like their reputation of all the, they say no to 99 out of 100 funds or 299 out of 300. So your reputation quickly becomes what are the people who you said no to think about you. Yeah. In addition to what the people you said yes to. All right, listen, Ted, you're a great guest. Great podcast.

I really do. Podcasts or your podcaster. I really enjoy your podcast and your style and the guests. I really appreciate you having it in the world because it provides value. Thanks, Jason. And it's been great to get to know you. Hopefully we'll meet at some point in the real world. the pandemic ends.

Look forward to it. We'll see you all next time on the swing service. Bye-bye.