← How I Invest with David Weisburd
How I Invest with David Weisburd
E215: The Pursuit Uncorrelated Returns in Venture Capital w/Dan Kimerling
01:01:54
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- [00:00]
A
It really helps that our first two portfolios are both in the top 5% of their respective vintages on a TVPI basis. So we now have some evidence that the approach is theoretical approach, but is actually a practical approach to. Right. We don't want to be for the sake of excellence. We started with a bit of a thought experiment which is what would be in this type of greatest seed investment you could have ever made. On the top of that list would have to be if you were a seed investor in Renaissance Technology.
- [00:34]
B
So you're the founder and managing partner at Deciens Capital, which is one of the most interesting first principle fund out there and just backed by sovereign wealth funds, endowments. So tell me a little bit about what Deciens Capital, the type of portfolio companies that you're investing to and give me some examples of some previous investments.
- [00:52]
A
Of course, David so Desiens invests in early stage companies in the financial services ecosystem. So that could be fintechs. And we have a long legacy of investing in B2B and B2C fintechs, including Chipper Cash and Treasury Prime. We also invest in financial services companies, so these look more like what we want to be the next generation of stock exchanges, asset managers, insurance companies, banks, like true financial institutions. And those could include names like Tint Insurance, Sidecar, Simply Wise, Generous Energy and so on and so forth.
- [01:53]
B
And when we last chatted, you mentioned that Deciens was not correlated to other venture funds. What did you mean by that?
- [02:03]
A
How a lot of LPs think about the world is they have allocation models that say that they need x percent in equity, y percent in debt, z percent in fix in alternatives, and so on. And so then they come down to well, we want a certain amount of money in venture capital, whatever that percentage may be. And what ends up happening is they add a bunch of managers to their portfolio and those managers, they're or they're largely highly diversified. And so that provides a set of beta that the LP can rest assured on that they will get some level of return. But what we're trying to do is provide an uncorrelated alpha stream within the venture capital asset class for our limited partners. And so what does that mean? We don't want to invest in the same kinds of companies other people invest in. We want to provide very differentiated exposure to our limited partners. So that's what we mean when we say it's uncorrelated and we want to provide it in a way that we think is highly alpha seeking. Like we want One of our LPs says the deciens is to get rich or die trying venture fund. And that's exactly right. We are get rich or die trying. We will have funds that perform excellently or poorly. There will be nothing milquetoast about our performance. And that's what makes us a very attractive firm for a LP that has a mature venture portfolio and is looking for, you know, alpha and not more diversification on top of diversification.
- [04:02]
B
I hear what you're saying there, which is basically venture funds have this beta or this predictable kind of 2-3x returns and then you could put in deciens into your portfolio to get this asymmetric upside. In reality though, a lot of LPs do not want this, you know, highly, I guess, bipolar return where sometimes you're getting 1x, sometimes you're getting 7x. It doesn't necessarily make them look great in front of their investment committee. How do you manage around that, around the realities of your LP investor base?
- [04:41]
A
Well, first you have to just have an unusual level of transparency and alignment with the limited partner. Right. Like David, what I just told you about our portfolio construction and our approach, we don't hide that. We, we, we talk to LPs about it in the first conversation and in every conversation so that we try and maintain that alignment and really about setting reasonable and appropriate and good expectations. You know, I've learned over the years that we are only, I'm only as happy as my least happy limited partner. And what keeps my limited partners happy is that we have done what they expect us to do. And so it's about really the communication and we talk about it in every conversation with limited partners. We talk about it in podcasts or forums like this. We talk about it on our website, in our writing, you know, we've written about what we would call betting on convexity and we have a whole white paper on called betting on convexity.com so David T. Question. It's about the communication and expectations management and then it's also about finding an LP that is at the right time in their life cycle. So maybe they built a mature program and they don't need more of the same, they need something different. So that's one thing. And then your audience is probably familiar with the idea of principal agent conflicts. But just in case they're not, institutions don't allocate to us individuals, humans, real, live, breathing humans ultimately make the decisions on behalf of the institutions that they represent. So it's about finding our counterparties, you know, the people that we sit across the table from that are at the right place in their maturation process within those organizations and within their own career development that can say yes to something like us.
- [07:01]
B
How do you think about portfolio construction?
- [07:05]
A
Well, we think about it in a very non traditional way. How we started was we actually started using with a set of computational simulations. And if you go on our website, we actually share those simulations on our blog. What our simulations showed was that you either want a highly concentrated approach or a highly diversified approach to venture capital. And I think either of those two can work. They provide different things for your limited partners, but you need one or both of them. You need one or the other. And we really believe that a highly concentrated approach is actually the most risk managed approach to venture capital. Because we can be the most active and engaged with our companies when we are not spread thin as peanut butter, you know, and we get very involved with each and every company. My partners or I talk to every company every week and. But the important thing to know, David, is this sounds radical. I know it sounds radical to a lot of venture limited partners, but I actually don't think it's that radical. If you look at the history of investing in equities, what you see is that concentrated portfolios that allow for compounding at high rates of return with a low dilution and tax advantage structures have been the way to create wealth for limited partners for a long time. Newton said that we all stand on the shoulders of giants. Newton was obviously correct in that, but there's not a lot of appreciation for the question of whose shoulders are you standing on. And so the approach I just outlined is actually not at all controversial. If you look at, you know, Munger said it best, I think when he said put all your eggs in one basket and watch that basket like a hawk. That's what we do every day. We have a small basket, we're putting our eggs in it and we're watching it like a hawk. And so I actually think what we do is very conservative, even though it sounds very, very avant garde.
- [09:46]
B
Tell me exactly how you go about constructing your portfolio.
- [09:51]
A
We start with a model and that model says to us how? Right. There are like three variables that we always work with. How much do we own of a company? That what the target percentage ownership at entry and at exit. So that's one variable, the number of companies in each portfolio, that's the second variable. And then the third variable is the reserve ratio. So what percentage of dollars do we put into a company in our first check? And then what do we hold back? So those are the major variables. And within a fixed fund size, you know, our third fund is 93,330,000. So we know exactly how many dollars we have to allocate. And within those three variables, we try and build a theoretical portfolio that gets us to at least 5x net. And so then we work somewhat, we work backwards and an iterative process where like we do our first deal, we look at how that works relative to our model, and then our second deal and our third deal, and we're constantly updating what we're doing against our model in order to drive at least 5x net return to our limited partners. And we do this until we get to, in our typical portfolio, we're trying to do between 10 and 15 investments. And then really where the rubber meets the road is when do you stop? So like in our second fund, we stopped after 11 investments. You know, we target 10 to 15. But when do you stop? Do you stop? The 10th, the 11th, the 12th, and so on. And that's, there's a whole art to that which I'm happy to talk about now or any other time as well.
- [11:53]
B
One thing that's hard to grasp is LPs want to sit down and they typically want a very specific strategy, check size. And one of the things that they harshly judge gps on is, did you do what you said you were going to do in your portfolio construction? Because if you take a step back, what they're trying to do is build a portfolio of portfolios. So the LP is not just investing to your fund. So how do you get around this constraint, especially given that you are raising from endowments, pension funds, sovereign wealth funds. How do you get past their IC with having so much flexibility in your strategy?
- [12:38]
A
It's interesting, David, that you think our strategy is flexible. I use the word focused. I think our strategy is very focused. We want to invest in 10 to 15 next generation financial services companies as the lead investor over like a three to four year period. And we want to start those relationships as early as possible in the company's life cycle. On one hand, that's clearly a very flexible mandate because the world of financial services is quite large and dynamic. Dynamic. And we work very early. And so there's a lot of malleability in what happens, but I think of it less about the malleability and I think about it more about the focus. Right. We want to focus on financial services at the early stage as the lead investor. And that positioning has been very effective. Now it really helps that our first two portfolios are both in the top 5% of their respective vintages on a TVPI basis. So we now have some evidence that the approach is not just a theoretical approach, but is actually a practical approach. We don't want to be different for the sake of difference. We want to be different for the sake of excellence. And we're starting to show that that is in fact the case.
- [14:14]
B
And you believe that financial services companies can return the same or even higher than traditional venture investments? Break down the math for me. And how, how could financial services have kind of these same power law returns?
- [14:33]
A
This, this whole thing actually started with a bit of a thought experiment, which is what would be in this hypothetical, what would be the single greatest seed investment you could have ever made? And clearly on the top of that list would have to be, if you were a seed investor in Renaissance Technologies, a Jim Simons hedge fund, if you would like, in this thought experiment, hypothetical, if you could go back to Stony Brook, Long island, when he was leaving the University and owned 10% of the company that turned out to be Renaissance, that would have been an incredible seed investment because over the forthcoming decades, Renaissance has printed immense wealth for its owners, its clients, and so on. And you, you. And then you start thinking about other things, like if you had helped seed firms like Bridgewater to Sigma Shaw and these, if you had been there when they were starting kkr, tpg, Carlisle, Blackstone, blackrock and so on, and you just start to think about what would be the multiple, what would be the multiples of invested capital you could have achieved if you were Bloomberg lp, another one. Right. Like, it is astounding because these businesses can get very large very quickly. They have very real moats around them. They can print cash in the form of dividends, they can go public, you can sell them or buy them. And so they have many of the best attributes of venture capital, but they're definitely overlooked within the realm of venture investing, which, you know, is like largely a software technology driven kind of business that kind of really comes out of the birth of the modern computing industry.
- [16:54]
B
In venture, you obviously have fintech financial technology companies, companies like Robinhood, Coinbase, Stripe.
- [17:01]
A
And we, we cover those, of course. And, and that's really where I came. You know, I come from that background and that is certainly within our remit as well.
- [17:12]
B
But you're also talking about these financial services companies, are these traditional startups, are these, you know, closely knit companies? And talk to me about this ecosystem of portfolio companies that you go after.
- [17:28]
A
David, I think your audience may not appreciate how large some of These companies are, I was just looking earlier today at the market capitalization of S and P Global. The market capitalization of S and p global is $150 billion. So the scale financial services is 20% of global GDP. It's by some measures the second or third largest industry. And it's been, broadly speaking, the word would be dematerialized. It's been, back in the day there were like people running stock swipes around. Now it's all done electronically. And so the potential for digital innovation in financial services is just immense. Now the kinds of businesses we talk about, the fintech businesses and the finserve businesses, they're definitely, some of them are based in Silicon Valley. Over half of our portfolio is based in San Francisco or the Bay Area. But a lot of them are, are built by entrepreneurs that come out of people adjacent to the financial services industry. As an example, we have in our portfolio a company called Sidecar and Sidecar. The founder of Sidecar, Nick Talraja, he was an investment banker and then he went to law school and was a securities lawyer. And he was doing securities filings for issuers of securities. And he was like, software can own this, it can eat this. And so we, we've ultimately partnered with Sidecar for a number of years now. But what we find are the people that want to build the future of financial services. Some of them have traditional technology backgrounds, but a lot of them have backgrounds more like Nick. They were, they were in the bowels of the system sometimes, you know, turning the crank to get the system moving. And there's just so much opportunity to digitize that entire system that it makes me extremely excited to find the Nicks of the world wherever they may be. In his case, he was actually in Houston. So there are these people all over the world.
- [20:02]
B
One of, I think the concerns that LPs or VCs have about investing these super contrarian or otherwise not venture capital backed companies is that you sort of need the venture capital industrial complex to bring in more capital, to take it to liquidity, to force kind of an IPO and M& A. And I know that's, you're not supposed to say that, but that is kind of the business model and that does lead to this pressure, does lead to these power law outcomes. How are you able to navigate these companies to liquidity given that sometimes you might be, you know, the ones, the only ones investing in them.
- [20:44]
A
David, what you're partly talking about is the. Well, there are a couple of things. First, there is definitely a kind of self referential aspect to the venture capital ecosystem where like a VC needs to raise their next fund so they want to get another VC involved to mark it up. And then the second VC needs to raise their fund so they get the third vc. And we call this the ven. The. We call this the venture hamster wheel. And so there is this kind of self referential dynamic within the venture ecosystem for sure. And I think sometimes this creates like really perverse incentives. So for example, if you could grow a company profitably, even very quickly, if you could grow a company at let's say 3x a year on year profitably, you would. Some venture capitalists would rather grow 5x a year on year unprofitably so that they can go get it marked up so they can like, you know, get the mark to market accounting dynamics in their favor. We ultimately eschew that whole approach because ultimately whenever you're running companies unprofitably, you risk there not being capital for them when you most need it. I would rather, you know, own a company that can like profitably double or triple every year than kind of like play this game of Russian roulette with the livelihood of all these people and the equity and the. All that.
- [22:32]
B
The reason you're able to play it that way is because you align with your both the companies as well as your LPs from the onset. So you're selling a different product to a different market and everybody along the value chain is aligned with that strategy.
- [22:49]
A
Well, I don't think it's a different product in the sense that we have to compete with traditional venture returns. Right? Like if you're an LP and you're picking deficiency versus another fund, we have to be at least as good as the other fund, if not better. What we're talking about is an alternative way to get there. It's not different outcomes. We're not trying to lower the bar. We still want to do at least 5x net funds. What we're just talking about is that it is in some ways to do a 5x net fund where you're highly diversified, own very small percentages of each company and have high mortality rates. What you are assuming is that one or more of your companies can be a mega, mega, mega outcome. The reality is there are not that many ten or a hundred billion dollar outcomes. Your audience may know that the largest venture backed M and a is at 32 billion. There's many venture funds out there that would need multiple wizzes in order to pay out. We call this heroic assumptions if the model requires heroic assumptions in order to hit your return target, you shouldn't allocate to that because heroic assumptions don't happen that often. Alternatively, you know, we would argue that our model and we. If you go on decent.com and you look up this, we wrote an essay called Heroic Assumptions and Heroic Outcomes. We talk about that our model has the same outcomes at far as the same multiples on a net and gross basis for our LPs at far smaller dollars of outcome. And of course I want the wizzes, I want $32 billion M&A, I want 50 $100 billion IPOs, but I don't need them. We can build incredible portfolios, have great returns for our LPs, help our entrepreneurs build game changing companies and we don't need heroic assumptions to have heroic outcomes. David, you were asking another question which I think is also really germane. I think part of the issue in venture capital is that there is a conflation of two concepts. One concept is the concept of liquidity and the other is the concept of exiting. Those are sometimes related, but they're not always related. And I think what we have observed is that we want to be able to invest in some companies that can generate liquidity without exits in the form of dividends or other ways of returning capital to stakeholders. And so I think just in general I would just encourage all market participants to just think about like there's liquidity, there's exits, there are scenarios where there's both and there are scenarios which there are neither. And so I'm just. We always want to be thinking about generating liquidity. Of course it's very important to generate liquidity for our limited partners. But in a world where we can generate liquidity and not sell our position, we've actually had our cake and eat it. You know, we're having our cake and eating it too. As the proverb says.
- [26:29]
B
The counter narrative to this fund size argument, to the small fund size argument, is that if you look at some of the biggest winners, they are from the largest funds. So most recently FIGMA had Index Sequoia Kleiner. Yeah, this is kind of a consistent theme and a lot of the big winners, so they would argue that they're being, they're avoiding adverse selection at the series A, series B that the smaller funds may be going after. There's also an argument that the main reason to do venture is for the asymmetry, meaning that if you just consistently got 3x returns or 2 1/2x returns, you'd rather Just invest into private equity, specifically kind of lower middle market. The main reason to do venture versus lower middle market private equity is, is because once every blue moon, you'll get a 10x15x20x return.
- [27:29]
A
I don't know this for a fact, but you know, urban legend has it that, you know, there's a Chris Saka's lowercase funds or like, you know, 100 bagger funds or whatever they may be. I think there are incredible scaled institutional platforms. Of course, you know, you mentioned some, there are others that are incredible and I'm sure that their LPs are very happy to be in them. David, you said it yourself, there are many ways to make money in venture capital. I think that we, we have an approach that provides that asymmetry because although, you know, basically our approach says that if we have $3 billion of outcomes, we'll return a 5x fund. We're not, we don't want to stop at $3 billion of outcomes. We want to stop at, you know, 300 billion or 3 trillion, whatever it may be. I just think that in a world where there's an alternative world where you're not raising money every 24 months, where you're not getting diluted over and over and over again, where it's actually better for all stakeholders, LPs, GPs, founders. We started this conversation by talking about the spouses of founders and the other stakeholders, employees, their spouses and families. And you don't have to give up upside for that. That's the thing. You don't have to give up upside to have a better alternative approach to venture capital.
- [29:25]
C
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- [30:24]
B
There's this focus on DPI, whether funds like it or not. And you, interesting enough, are actually signing up your LPs for 14 year timelines. How do you get away with having a 14 year timeline in this kind of market?
- [30:42]
A
Well, I mean, we're very transparent about it, so I don't think we're quote unquote getting away with anything. But the thing about it is, you know, one of our big LPs is a pension plan of a large group of public service workers. And if you talk to the CIO of this pension plan, he talks about his obligation to these public service workers and their families being 70 years, 70 year long liabilities. And when you think about big families, charitable organizations, public pensions, sovereigns, they are the kinds of groups that can go long duration. And that's what we really provide, you know, a long duration product. I think of it in kind of the way of we want to actually be co owners of companies along with their management team and have an extremely long duration view of that relationship. And that is like completely opposite to a world in which there are more and more venture capitalists who are operating like traders. You know, they want to get in and they want to get out, get in, get out. And maybe those trading operations can make money. I hope they do well, but it's not what we want. I don't actually think it's what most LPs want. And this I think comes back to maybe like what's been implicit in the conversation all along, but just this idea of compound growth. So David, how you compound money is by having it grow year after year after year, not taking high default risk, not having the chances of it going to zero, be very high. And when you look at the math of that, what you see is that you can generate, you know, I was just looking at this for Nvidia. You just look at how like Nvidia is 32 years old. For 25 or 27 years it was like not the most important company in the world. But if you just compound year after year after year, you can build a $4 trillion company. And when you talk about being able to deliver asymmetric upside, the kind of asymmetric upside that venture capitalists are in the business of, at least notionally in the business of providing, it's because you can find these compounding machines and you can stay with them for the long term. You don't become a forced seller after 6, 8, 10 years. If you sold Nvidia after 6, 8, 10 years you would have been very disappointed. I've been reading Snowball, which is the biography of Warren Buffett. Excellent biography of Warren Buffett. And I'm at the point where Warren offers any of his shareholders $40 a share in 1975 to he in 1975 Warren basically offered any Berkshire Hathaway shareholder $40 a share for that stock. A lot of people took it and are very upset and a lot of people didn't and are very happy. And so I think it just is yet another example of like long term compounding and tax advantage structures with low dilution is the way to get fabulously wealthy in public or private and it is what delivers ultimately venture style upside.
- [34:31]
B
Typically when you have these structural alpha advantages in asset management there's some kind of barrier to entry. There's some kind of unique pool of capital that has to invest through some special structure. There's some counterparty that needs liquidity via secondary. What is it that keeps other funds from investing using this kind of long data strategy of compounding?
- [35:03]
A
Nothing. And in fact we publish our playbooks online. We talk about it freely and openly and I would support anybody who wants to invest in this way. I'm happy to talk to them. It's totally like please and and other.
- [35:23]
B
Venture funds primarily don't do this because they're playing a different game. They're playing the asset management game or why don't others do this?
- [35:41]
A
I. I think there are two reasons. The modern venture capital industry was started by Sequoia Capital don Valentine in 1972 and all venture capitalists are building on Don's legacy for sure and subsequent Mike Moritz and Douglione and now Rasa. But Sequoia built the Coliseum, they created the rules of combat and they picked the gladiators. And what most venture capitalists are trying to do is to try and like be it Sequoia or Benchmark or Union Square Ventures or Andreessen Horowitz or General Catalyst at the game that they are the best in the world at playing what we were like. I have no need to try and out Sequoia Sequoia. In fact I think it's a bit of a fool's errand unless you're one of a small handful of other institutions. But you don't have to beat them at their game in order to do incredible for Your limited partners for entrepreneurs, you can create your own coliseum. That's what really, David, that's what we've done. We've created our own coliseum with our own rules and pick our own gladiators. And in doing so, we've created like an alternative theory of the world which is working. And I would just encourage anybody who wants to be in venture capital to ask themselves, are they playing somebody else's game? Are they playing their own game? So that's one, one answer. But there's a second answer which is within the world of venture capital, there's a kind of like sociological phenomena which is the need for external validation. Right. Like if I'm a venture investor and I invest in your company, David, what I really need is to get some somebody else to mark my position up. That's how I move up within the pecking order of my firm. Right. Whether, David, whether your company succeeds or not, I don't know. But I'll probably be three jobs from now before I know all that matters is can I get into hot deals and can I get those deals marked up? The need for external validation is very real. It's very, very real. And you know, we just eschew all of that. We are, like I said to one of my limited partners just this morning, if we invest in a company and they never raise another dollar of venture capital and are never in the paper, that's a, that's a win for me. If like we just are compound, if we're creating value, compounding at high rates and never get a markup and never get in the paper, but are just creating so much value for our stakeholders, that's a win. And so, you know, again, I think it's about maybe a difference in intrinsic versus extrinsic validation or motivation. But I think that's another reason why very few venture investors are open to these ideas.
- [39:20]
B
Congrats on just closing Fund three. As, as we talked about earlier, you're now three vintages into being a vc. What are some of the mistakes that you made early that you corrected now, you know, closing on Fund three.
- [39:48]
A
The thing I've come to see is that it's more fun to do it with a team and it's more fun to do it with other people who are really aligned on this journey. I don't know if I'd call it a mistake or not, but just building our team, it's a lot more fun to do it with others and to kind of think about this as a bit of a movement making exercise. I'VE come to see that a lot of this is about making enrolling others in a movement for an alternative theory of how to do venture capital, an alternative theory about how to create a lot of value. And as I come to embrace that more, it's become more fun and more lucrative. And we've been able to enroll many different types of individuals and institutions in this movement. And yeah, so, like, mistake. I don't know. But I've definitely. I see that more as like a core part of the Decian's experiment.
- [41:10]
B
So I'm very intrigued. You started to. You look at deciens as a movement, and that's made it more fun. Double click on that. Why has that made it more fun?
- [41:21]
A
I don't think the world needs more venture capitalists. I think the world needs more courageous capitalists, more people who are willing to put. Put their time, money, energy on the line for the things they believe in. And as. As we've kind of like embraced this counter orthodoxy, you know, on our website we have this essay. The. The kind of. The essay that started it all is called Defying Orthodoxy. As we've been more open to defying orthodoxy and enrolling people in this, in the mission of defying orthodoxy, you see how unsatisfying the orthodoxy is to many stakeholders. And you find like, strange and wonderful compatriots in this, in this, in this movement. And that's what has led us to finding incredible entrepreneurs to partner with. It's what has allowed us to partner with incredible organizations and institutions and individuals. It's what has allowed me to recruit a team of people, each and every one of which is much better at what they do than I am at what I do. And so, yeah, it's a lot more fun, right, Being yet another venture capitalist. It's just banal, right? There's so many fucking venture capitalists, and most of them aren't that good. Most of them aren't that differentiated. Most of them are, like, just trying to play the game that Don invented. And we're just trying to, like, really stay focused on what matters. And what matters is partnering with entrepreneurs for the benefit of them, their teams, our limited partners, and the world around us. And as long as we stay focused on doing that and being focused, you know, being obsessively focused on that, we won't confuse the cart for the horse. And that's what I think a lot of ends up happening to lots of VCs is they think that the goal are markups or bigger funds or being on the Midas list. God knows what else.
- [43:54]
B
Said another way you gain joy from being aligned in ecosystem, going towards a very specific model of doing venture versus what some might define. I'm going to give you money, I'm going to keep on marking you up, raise a bunch of capital to make myself rich. Meanwhile, like betting on red over and over with your company and one of my tens will have four reds in a row.
- [44:22]
A
In Silicon Valley there's a kind of pejorative term called a lifestyle business. And I hate that term. I hate, I hate it so much. If you can run a company that doubles every year and doesn't consume cash, and you can do that for 14 years, you're going to have a big fucking company like it just, there's a certain like laws of physics there, laws of mathematics. And the idea that you would want to burn money like drunken sailors and then have to like beg somebody else to keep you in business over and over and over again seems insane. Like on, on its surface it just seems nuts. David. I just think about these companies that have hundreds of employees and that means hundreds of families that depend on them, not to mention the customers or other stakeholders. And the idea that every other year you have to basically beg people for capital to keep going, that's nuts. If any of your listeners are interested in the history of this, I strongly recommend Sebastian Malaby's book, the Power Law. The Power Law kind of goes into the history of all of these dynamics at some exceptional detail. But it made a lot of sense when you could go public early. You raised two or three rounds of capital before you could go public. And each round was like really de risking. So you were actually like taking quantums of risk off the table. But that's not what it is today. Today it's like a way that you like perpetuate this kind of fee gobbling industry in which, like, we're just, you know, like most, a lot of venture funds. You know, there's like a deep dark secret, which is that most venture funds are in the business of just doing well enough to raise the next fund so they can keep the fee gravy train rolling. And there's not a particularly substantive fee gravy train on a $93,330,000 fund. The most overused words in venture capital are alignment and partnership. But we want to actually live those values. We don't want to just use them as kind of a lip service to just the, you know, line our own pockets with our 2 and 20 going.
- [46:59]
B
Back 13 years ago, before you started Deciens what would be one piece of advice you would give that Dan, that would help you either accelerate your vision now or avoid costly mistakes.
- [47:18]
A
Bezos said it best. Actually, I think Bezos was, was quoting E.O. wilson that differentiation is survival. Differentiation is survival. And to not be scared of that, to lean into the differentiation that. You know Wilson, very famous evolutionary biologist, and he talks about this idea that like it is the differentiated organism that survives in competitive ecosystems for resources. And I truly believe that in the world of venture capital you have to be differentiated.
- [48:09]
B
I love the naval quote. The only way to escape competition is through authenticity. So there could only be one Dan Kimmerling. There could only be one David Weisberg. And if you play to your strengths and your combination of strengths, that's really one of the only ways to commoditize, to not come out, become commoditized. That being said, the need to fit in the herd, the social pressure, the evolutionary predisposition towards mimetic behavior, and just copying the same thoughts and principles and narratives is so deeply ingrained into us that it even applies to chimpanzees and bamboos and even our predecessor, not just Homo sapiens. So it is a tall order to do that. The way that I think about it is how do you build structural alpha? The best way is through a combination of structural advantages. What that means is it's one thing to have a different perspective, but if you could now have a different perspective times a different LP base that believes in that perspective, you're starting to compound structural alpha. Now potentially you have a pool of capital that has certain tax structural advantages. We do it now in LP based that benefits from the structural advantages. Then out you benefit from your unique differentiated view in the market. Now you've kind of like to the third power. Now you have compounding. You could stack these competitive advantages not for the purpose of being differentiated, of course, for the purpose, purpose to being different and to have a competitive advantage from others. I think across asset classes, that is probably one of the only ways to have meaningful alpha. The other way is to continue win these probabilistic games. And it's the old adage about the hedge fund. You have a thousand hedge funds in a room. If you flip a coin five times, you'll have kind of, you know, four of those hedge funds that outperform for five straight years, even if it's completely random luck. So you could bet on luck, but the exponential compounding of probabilities for you to continue being lucky is just, it's, it's, it's like basically trying to win the lottery. So I think certainly being differentiated as a financial, as an investment strategy makes a lot of sense. I think it becomes difficult to implement if you don't have these very strong principles, if you don't explicitly state your principles, if you don't surround yourself with people that think differently. I think that's one of the things that you've really compounded that is very different. I think even the fact that you live in New Mexico is itself kind of a guard from this mimetic copying that, that, you know, human beings are subconsciously really, you know, adapted to do.
- [51:11]
A
And this, one of the best things that I've done is I've continued to write and share these ideas publicly on our website and on social media. I think that's been extremely powerful. And so in that regard I, I, I would encourage anybody to do that. But I think, David, what you're talking about is, so I think that within the world of venture capital there are six theoretical sources of alpha. Sourcing, picking, winning, supporting, exiting and portfolio construction. And the question that you're talking about is how do you create durable alpha through some combination of those six buckets? And how do you create a compounding flywheel such that one or more of those self reinforces a different one. And if you can create a self reinforcing system where one or more of those theoretical sources of alpha drives a different one, then you can like actually create real enterprise value because then you've created like a alpha generation system or machine rather than just being lucky. And I, I completely agree. Differentiated LP is one of them, I think differentiated duration is another one. And there's like actual duration versus theoretical duration. And part of that is like getting your LPs to know that you're going to go to the distance and you know, like, and even getting to a place where you can hold even longer. You know, some of these companies, the best companies, the generation defining companies even in their 15th year are just at a fraction of how big they'll eventually be today. That is really consumed by the world of continuity vehicles. And there's this, you know, in the olden days companies would go public early and they would like enjoy the benefits of this compounding in the public markets. I mean the most great example of this would be like Shopify, which went public for like 2 billion and is now well over, well, well over 125. But because in the United States it's impractical for small companies to go, it's not impossible for small companies to go public. But it's just, it's functionally impractical for them to go public. There's like a bunch of interim solutions that like basically create more longevity for this compounding continuity. Vehicles are the flavor of that at the moment, flavor du jour. But eventually there will be a structure that creates a sort of a permanent equity like ability to let these assets compound at very high rates for many years. And you know, Sequoia has done part of this with their restructuring. Your, your, your listeners may be familiar with what they did around what they call the Sequoia Fund and moving to a permanent model, but that will continue for sure.
- [55:12]
B
There's closed end funds that have gone after this kind of co mingling of private assets as well. Although you could, you could also argue that once, once you have solved around these liquidity issues, the returns might start to compress. So there is kind of this benefit to this liquidity. Sometimes this LP alignment is even within the LPs. I had one endowment, that one billion dollar, I had one diamond that went on the podcast and I said that they have, they feel this pressure from their IC to sell rather than going into continuation vehicles. So their default want to re up in the continuation vehicle because the incentives tend to be aligned, the fees tend to be lower, but there's this desire for the gratification of getting the DPI that keeps them from further compounding. So there are even, there's even misalignment within the LP which is kind of interesting.
- [56:08]
A
What you're really talking about is the need for dopamine, like the need to get the markup, the need to get into the paper, the need to sell so that you can crystallize a profit. These are kinds of dopamine hits. I think it's naive to think that people don't need to feel validated. Of course they do. Humans are validation seeking machines. But I think if we can help people see that they can be validated, that they don't need to seek validation from others to get that dopamine hit. That's like where we start to move the ball forward. If we need others to validate our own decisions in order to feel that kind of euphoria, the dopamine hit, then we will always be in this kind of seeking moment where we are seeking others to say that we have done the right thing. If we can believe on the basis of our own thoughts and feelings and actions that we've done the right thing, then we can have the confidence to not need others validation.
- [57:30]
B
One of the most interesting reframes I had Tom Bilyeu who started Impact Theory and he sold his company for a billion dollars. Didn't even raise that much. He's kind of self made guy, blue collar family and then also started a top five media company and podcast company. He's been successful across domains. One of the things that we talked about is ego and he actually says he is an egomaniac. But he doesn't build his ego based on needing to be right. He built his ego based on wanting to be successful which means coming in and listening to other people's opinions. Sometimes he overrides theirs opinion. He has built his identity and his ego around being successful and having his business accomplish the goals versus around the need to be right. So there's also a reframe there around dopamine. What do you get your dopamine from? If you could align in a way that builds communities, that builds the team and you have these other sources of dopamine, you could delay the need or the, I guess the subconscious need to kind of run these dopamine neural pathway loops that lead to these decision making. I, I studied psychology, so I did my master's psychology from Harvard and I was, I had to go back and relearn neurobiology through basically so I had to self teach myself because I realized psychology was just a superficial level. You needed to go deeper. It's kind of like you know, physics and math and all these things. Like if you don't actually understand the underlying aspect of it, you only have a superficial understanding. And the psychology is just an explanation of kind of the dopamine, the serotonin and how the hippocampus campus like deals with a prefrontal cortex and, and we could, we could have a whole other conversation on that. But I, I did, I did come to the same realization that you do have to get to neurobiological level to understand not only other humans behaviors but your own behavior and to be able to influence it at that level.
- [59:35]
A
I, I love that your guest was talking about ego. Of course I'm egoistic and of course like to suggest that I am anything but egoistic would be, you know, of course, right. Like I serve my own firm because I, you know, because of that, you know, and I, I'm now like trying to start a bit of a movement, you know, around all these things. But I think ultimately, you know, it comes back to just, you know, I, every single person at our firm has carry in all of our funds, in all of our funds. We actually had a we, we have an LP that is a charitable organization that provides scholarships to kids with who are the children of vets with ptsd. And if we can help more kids go to college, that's a huge mitzvah. Like in the Jewish faith, there's this idea of Toki olam to leave the world a better place than you found it. And I think a lot about that, like how can Deciens transcend being like just yet another venture capital firm to being a firm that actually like does incredible good through being really good at what we do. And that's like I think much more long term validating than any silly listicle or you know, invite this conference or that holiday party or any of that bullshit.
- [61:19]
B
I think a lot of people approach psychology motivation, how do I influence others? And I think the highest leverage is actually learning how to hack your own motivation and how to maybe you're not as motivated financially so you find a way to align yourself with other employees. Mostly talking about myself and make it so that I have to make a lot of money. I have to make a lot of money because I want them to be successful. That's kind of a hack around that. And you could create kind of these incentive structures. It really starts with understanding, accepting yourself and working within the framework of how your brain functions versus kind of saying I shouldn't be this, I shouldn't be that. But on that note, Dan, this has been a fascinating conversation. I've loved every minute of it. Looking forward to sitting down live, hopefully in New York City, not in New Mexico. But never say never.
- [62:19]
A
Well, our agm. Our AGM is in New York, so we should definitely. I will make a note to make sure that you are invited and we would love to have you.
- [62:30]
B
I would be flattered to be there. And again, congratulations on the latest close and look forward to continuing conversation live.
- [62:38]
A
Thanks David. Cheers.
- [62:40]
C
Thanks for listening to my conversation. If you enjoyed this episode, please share with a friend. This helps us grow. Also provides the very best feedback when.
- [62:47]
B
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- [62:49]
A
Thank you for your support.