Miles Dieffenbach：深入 Carnegie Mellon 的40亿美元捐赠基金，以及 DPI、TVPI 与非流动性的计算逻辑

My message to all venture capitalists is: now is the time. Please take your companies public. I breathe investing. These business models these GPs are creating are some of the best high-margin businesses ever created. My question to any new allocator or investor is: do you think you're going to have access to top-decile managers? At that point, top decile means you're achieving returns above the PME consistently, but below that, even top quartile, you're not.

Dude, I'm so excited for this. Listen, we've been friends for a while, and I'm so excited that we could also make it happen in person. What no one knows is I dragged you around London for a walk last night and it poured with rain. You were so patient and great. Thank you for joining me, man.

Thank you for having me. It's a pleasure to be here. You've had some incredible guests on the podcast, and I'm honored to be one of them.

You know what, dude? It's amazing, given the fact that I've known you for a while. Then, in the research for this, learning more and more about you, I didn't actually realize this, but at 26, you went through a cancer experience, and you're a cancer survivor now. It's pretty unbearable to think about, given the fact that I'm 29. It's just the most incredible strength. How did having cancer and facing your own mortality change your mindset? I've never asked that question to start a show before.

Well, let's dive into it. We'll dive into the heavy and hot. It's a surreal moment when that happens. I think everyone at that age thinks they're invincible. I did, right? You get that news and you're in a bit of shock, right? It was so abnormal to me when they told me I had lymphoma. I said, “Oh, great. What's lymphoma?” I thought it was like a cold. I didn't even know what it was, and they said, “It's cancer, and it's progressed quite substantially. We need to start a chemo process here within the week.”

Like most people, I sulked for about 12 hours, went home, was mad at the world, and didn't want to speak to anybody. Why me? I woke up the next morning, and one of my college football coaches had a great quote that really stuck with me: “Success in life is 10% what happens to you and 90% how you react to what happens to you.”

I took that running the next day. I said, “I'm going to attack this. I can't change the situation I'm in, but I can change how I react to it moving forward.” I basically said, “Cancer can't kill me if I don't stop moving.” I started a pretty insane regimen of workouts. When I would go in and get my chemo, that was my R&R. That was my recovery period. I'd get out, I'd start that again, and 4 months later, I was cancer-free. I've been so ever since.

Do you remember the moment you were told you were cancer-free?

Yeah, it was crazy because you get a scan right before, and then you go into the office. I waited 2 hours in the office post-scan. Usually it's about 30 minutes, and I'm sitting there thinking, “It's got to be bad news if he's waiting 2 hours.” He came in with his arms wide open and gave me a big hug. It was pretty incredible.

Wow. That must be the most special moment.

Yeah, it's special. Looking back on it, everyone's had adversity. You've had adversity in your life. A lot of people do. Everyone does. No life is perfect, but there's beauty in the struggle, right? That makes you who you are as a person, and it builds you into a stronger person. The trials of life are many, and I wouldn't change anything.

Did it set a benchmark that now makes everything else seem kind of okay?

The perspective you have moving forward after that is one of the great blessings of it, right? Life is an incredible joy and a blessing, right? There aren't many things that can take me down mentally at this point.

How on earth does one go from surviving cancer and beating the odds to the endowment model?

It's a pretty smooth transition for me. Give me credit. I do want to start by laying out the landscape and framework for how CMU operates and is structured today. If you think about a construction that's easy for everyone to understand, what does that portfolio construction look like for CMU today from the top down?

From a top-down perspective, we manage $4 billion on behalf of the university. Starting at the highest level, we think of equity and fixed income as the 2 parts of the endowment. 85% of the endowment is equity, and 15% is fixed income. That is our allocation, and we manage to that on a quarterly basis.

One step below that are the sub-asset classes within it. Our target is for 50% of the portfolio to be in privates. That's a mixture of venture capital, private equity, real estate, natural resources, and private credit. The other 50% is hedge funds and liquids, which are public equities and fixed income.

That's the top-down management of the portfolio. Within that private bucket, we have free rein over the underlying allocations. We call it a best-athlete portfolio. How do we find the best risk-adjusted returns globally across all of those different private asset classes so we can have the best risk-adjusted return for the portfolio?

When you look at it today, how has that makeup changed over time in terms of where the private distributions, or rather, commitments lie?

From a liquidity perspective, we've been fortunate compared to most endowments, where that private equity book has been self-funding for the past 3 years. Our distributions have paid for our capital calls over the past 3 years.

The sub-asset classes within that have had very different performance. Our buyout portfolio, our private equity portfolio, has contributed the most to those distributions. Venture has been the largest detractor, but it's been self-funding, right? Our private equity book, at around that 50% number, has stayed relatively consistent for the past 6 or 7 years.

As venture distributions have slowed down dramatically over the past 3 years, venture has risen as a percentage, but there have been markdowns along the way as well.

When you think about your commitment to venture as a whole, what is the percentage commitment to venture of the endowment?

For us, venture globally is a little less than 25% of the total endowment, so almost half of that private equity book.

How does that compare to others like you?

I'd say we're overweight venture by anywhere from 5 to 10 points versus most other endowments of our size. We're underweight hedge funds and real assets, which would be real estate and natural resources. In privates as a whole, we're right on par with most endowments, plus or minus 5 points.

When you think about all of those different asset classes that you can allocate to, how do you think about opportunity cost? I think you said it before, which is a unit of return per unit of risk.

We take everything through a risk-first lens. When you think about the different private asset classes, you've got real estate, natural resources, private equity, and venture capital, which is a mixture of growth and early stage.

Take real estate, for example. You could have an industrial building with a triple-net lease, with rents being paid by Amazon. Those rents increase 3% a year. It's a very stable asset. There's a replacement cost to that asset. It's not nearly as risky, and so the returns will compensate for that. It is not as risky an asset, right?

With early-stage venture, you could have a $100 million fund investing in 2 or 3 people with an idea. It could be a completely new idea. It could be an idea going against big incumbents. The company isn't going to be profitable when it starts out. It's probably the riskiest asset class you could have, so you need to get compensated for the risk you're taking within that asset class.

Do you think LPs are getting paid for the risk that they are taking investing in venture?

Absolutely not.

Why not?

We take a very hard look at the data that comes out of the asset class. There's really good data from around 1998 to today. You look at the median IRR for the asset class over that time period for mature funds, so we'll look at the 10- and 15-year returns for every one of those vintages, stopping at 2016, as that's going to be the closest to a mature vintage you're going to get.

The median IRR is about 8% net for that asset class, and the top quartile is a bit higher, at 15%. The MOIC is about 2.5x. The big difference is when you look at those performance numbers on a DPI basis. We'll stretch that from 10- to 15-year top-quartile DPI. For 15-year vintage funds from 1998 up until 2015, it's 1.8x for top-quartile DPI.

When we think about those underlying asset classes and our public equity portfolio, we have a public-market equivalent for every private asset class we invest in. For real estate, it could be VNQ, which is Vanguard's REIT index.

For our buyout portfolio, it could be a small- or mid-cap value index. For venture, it's the QQQ, the Nasdaq-100. That's been the best-performing PME globally over the past 25 years.

When we think about it, though, absolutely not. You're not getting paid for the risk that you're taking. And then, a statement that you said to me before, which is, “90% of LPs shouldn't be investing in venture.” Who should, and who shouldn't, then?

That's the million-dollar question. I think you need to have a frank conversation with yourself. Say you're a new endowment or a new family office, and you say, “We want technology exposure.” You've got 2 options: you could do that through the public markets, or you could do that through the private markets.

My question to any new allocator or investor is: do you think you're going to have access to top-decile managers? Because with top decile, you are achieving returns above the PME consistently, but below that—even top quartile—you’re not. That is the question, and I think most people, clearly by the data, especially as a new entrant to a major asset class, don't have that access.

That instantly suggests, though, that you're working on historical, lagging data, which is obviously their prior returns—not a first-time fund or smaller micro-funds that are in their first vintages. And that is where we see a lot of family offices and even smaller endowment funds playing today. How do you think about that, then?

It's a strategy that a lot of people are taking: first-time funds and smaller funds, as the incredible performance of the now multistage venture firms has allowed them to scale, right? As that performance has allowed them to.

We spend time in that space as well. But it is a place that is quite risky: new funds, small funds, and it's a hypercompetitive part of the market. There are thousands and thousands of managers—specific seed funds, angel funds, operators, and so on.

You know what I find funny—sorry, I want this also to be an open and free discussion—but I find it really funny how all LPs love $50 million to $100 million seed funds. When you actually run the math on average seed-round sizes, that's the worst place to be. The average seed round is $4 million to $5 million. To write a check with ownership, you need $3 million to $3.5 million; if you want enough diversification, you need 30, and so you need $3.3 million checks. Well, there's $90 million. You're not going to have that with a $50 million to $100 million fund. It's impossible.

So then you either have subscale ownership or subscale diversification, or you do what everyone does, which is they end up writing tweener checks, like $1.5 million checks. It is fucking hard to get a $1.5 million check in a $3 million to $4 million seed round when the best in the world want it. They'll put $50,000 in, but not $1.5 million.

My response to that would be: consensus seed deals—either a consensus founder or a consensus idea—are extremely hard to plan for, because the multistage firms have all planted a flag at seed and have essentially said, “All these seed funds are our shrapnel. We're going to blow your model up,” right? We have a much cheaper cost of capital than you, and we can deploy $5 million to $10 million checks at seed when the model traditionally was $2 million to $3 million.

But if you're doing nonconsensus founders or nonconsensus ideas, those rounds are usually noncompetitive, and that shows up in price and ownership. I'd say that's the question.

Do you see that in your portfolios? Because I don't actually know what is nonconsensus anymore. The rounds that were in the old days, they're kind of not now. Try to find non-AI deals, but non-AI deals are still priced incredibly richly. Actually, when you push now, it's such a mature asset class. I don't think you have that luxury on price.

I think the true moat of early-stage venture capital is the picking skill. You look at some of the most incredible companies that have ever come out of the venture asset class—Airbnb, Uber, SpaceX, Amazon—all struggled mightily to raise their seed round.

So, to your question, is there so much capital available at seed today that that's never going to be the case moving forward? I hope and pray not, right, as an allocator to the space. I still believe there is a moat around picking. But we'll see.

So unfair of me. Do you think venture is an access game or a picking game? You're in some of the best brand names. Is it access or is it picking?

I think it's both.

You have to weigh it out of 100.

If you are a multistage firm that is deploying large checks at scale, 70% access, 30% picking. If you are a small and nimble early-stage fund that is trying to break the mold, I'd say 70% picking—I'll flip it—30% access.

We mentioned that multistage funds go into seed, and we mentioned the $50 million to $100 million seed firms, which I don't like. What do you like when you see a fund come through the door? Where are you like, “That's straight down the fairway for me”? Size-wise, geography-wise—hit me.

I think for us, the sweet spot is dependent, first, on the GP's skill set and what they've done prior. For us and our commitment size, which at the low end is, call it, $10 million, at the low end we'll do an $80 million fund. At the high end, anywhere from $400 million to $1 billion, in that range, depending on the skill set and the track record of the team.

But it's very much dependent on the people, what they've done, what they've proven, what they want to do with this fund, and the pattern matching and diligence we can do against that.

We spoke before this about the pillars of venture. I'd love it if you could just unpack the pillars of venture and how you think about them, and where you place more and less emphasis.

The 5 would be sourcing, picking, winning, helping, and selling. Selling is going to be the newest of those 5 for the asset class as a muscle as a whole.

Do you think your managers have been good at selling over the past decade?

Some, yes, some, no. Some have been better than others. I think Union Square, broadly—and we're not an investor there; we wish we were—but I think they've perennially been the best at selling. They've got a very strict protocol that they run through from years 8 to 12 on those funds and with those founders to let them know that they are going to be active sellers. Some have been better than others.

Do you think managers should distribute shares or stock? Do you think Sequoia is right that the evergreen fund structure means they are best placed because they have asymmetric information? How do you think about that?

We like managers to distribute cash versus stock. The reason is, if they distribute stock to us, there is sometimes a time lag between when we sell that and when others sell that. There could be a 1% to 2% pricing discrepancy.

Versus them distributing cash on day 1, which is quite easy: they sell that entire book immediately and distribute that to all their LPs equally.

Do you think the last generation did a good enough job selling in the 2021–22 vintage?

Clearly not. I think that's a pretty easy one. The reason it got so crazy was that the public markets were pricing growth assets for an 18-month period at, you know, the median ARR multiple for a software company—it was 20 times. If you were a top-quartile grower, it was 40 times, right?

Everyone looked at their models and thought their company was going to be worth 2 or 3 times what it was in 3 years. You had public-market comps to support your reasoning for holding stock, but that all changed very quickly.

Do you believe managers' books? You know, we all come back with these prices. In terms of the marks on our books, which is where we mark our portfolios, the latest valuations, do you think managers are accurate enough in how they price their books?

Certain ones, yes; certain ones, no.

Who's the best?

Usually the multistage firms—think your perennial firms like Accel or Sequoia. They're taking very aggressive discounts on basically all of their securities. Even if it's a great company that is perhaps achieving an even higher price on the secondary market, they're still going to hold that at a 20% to 30% discount.

But 2021 caused us to create new muscles in regard to underwriting as a group as well. For any re-up or any new manager we diligence, we'll look at the top 10 company NAVs within that general partnership. We'll underwrite those companies ourselves and, on a rough approximation, determine whether these assets are extremely overvalued, undervalued, or fairly valued.

I think my biggest worry is that we've got a generation of marked books where they're like, “It may not be the 5-times fund; it might be the 2.5-times fund.” I'm worried that it's not even going to be that. Do you think there's a realization amongst LPs of, bluntly, the dire nature of some of the books?

Look at the data. I quoted that Cambridge data to you. Top-quartile TVPI is 2.5 times. Top-quartile DPI is 1.8 times.

One thing that really pisses me off, because I do some LP checks when I meet managers, is when they say, “Listen, I don't know if we're going to do an 8-times, but we'll definitely do a 6-times.” And I'm like, “Do you know how hard it is to do that?” Any things that managers say in early meetings with you where you're like, “Oh no, just don't say that”?

I've had a few manager meetings where folks come right out and proactively say how easy what they're doing is, how much great access they have, and how great the performance will be. They say that the market they play is just like shooting fish in a barrel. To me, that's always, all right, we're going to stop this call early. That kind of hubris—this is one of the most competitive asset classes in the world, and we look at everybody's returns, right? We see how hard it is, like you said, to achieve a 6x net fund. So that's definitely a big one.

Starting at the start of the process—I'm jumping around so much, but I love this shit—we said about the 5 pillars. Starting at the start of that process, we've got the access element, or the sourcing element. How many managers do you actually think have proprietary sourcing where you're actually like, “Ah, I see. They see shit that no one else does”?

I think the premier funds on Sand Hill Road and in London, such as yourself.

Well played. Thank you.

I think there is no systematic sourcing strategy. The partners and the brands are so strong, and they're so networked in the S-tier founder community, that they're just going to be a first call for a lot of these firms. I think if you're doing a more esoteric strategy, such as bootstrapped companies in Australia or some of these tertiary markets in Pittsburgh, you can build automated CRM to maybe track some of those companies that are going to be off the radar of your traditional Silicon Valley firm.

But I think for those more traditional firms, the brand and strength of the partners mean that there isn't much systematic sourcing strategy there. The thing, I think, when you are such a tier-one brand name, is that you just become a de facto meeting in the fundraising process. Before I sign the term sheet, I'm going to go to Index, Accel, Sequoia—you name your firm—but you just want to be one of the flagposts.

I'll always remember Pat Grady saying something brilliant to me. He's so humble, which is why I love him so much. He said, “People think we're so successful, Harry. Pretty much every software company that goes public, we've missed. We're not in it, because we do see a lot.” I thought that was, A, incredibly humble, but, B, the flip side is that they see everything at some point in the journey.

100%. Those partnerships have stood the test of time, clearly. When you think about proprietary access, where you actually buy it, who stands out most to you on the sourcing side?

Yeah. Well, I mean, I'd say Ali Partovi.

Yeah, his fund is incredible. Cursor and a few others. It's amazing to see him. I'm so pleased for him. That stands out to me. Any for you?

It's become such a crowded market. There are so many alternatives. You've got South Park Commons, you've got Ali Partovi and their network, you've got YC, you've got Techstars, and you've got 1,000 seed funds. I think outside of maybe a few like Ali—and now I'm willing to be wrong here—but I think there's a lot of luck involved in sourcing.

You're just hustling. You're going out, you're getting emails from friends, you're getting emails from partners, and you're taking as many meetings as you can. You're on a call with a Harry, and he's like, “Wow, Harry is fucking unbelievable. I'm going to dive into this.” It's the magic of venture, right? That's how I think I see most of it.

I agree with you, which is why, in some respects, I do think it is a young person's game. It's about pounding the pavements, being there, and showing up at 7 a.m., and that takes youth in a lot of ways. Picking is the next element. It's really difficult to unpack in a lot of ways. Who do you think is the best picker that you know?

I love the way Mike Maples discusses picking and the way he thinks about companies that are going against the grain of the universe. They're inherently not going to be super attractive or super hot because it is against the grain, and it is dysfunctional against the way our human minds work today.

I'll never forget when I first heard of Uber. I thought it was the stupidest idea I'd ever heard. I was late in college: I'm going to get in some random person's car, and they're going to drive me somewhere. Same with Airbnb: I'm going to go to some random person's house, and I'm just going to sleep in their bedroom. This is the craziest idea ever, right?

Those are the people and investors—Cyan Banister, another one—whose ability to see into the future is something that not a lot of people can do. It's a superpower. How do you unpack whether someone's a good picker? Is it just looking at track record?

I think it's looking at track record, understanding the true thought behind what they were thinking when they made that investment and when they met that founder. Then we speak to founders, and we want to hear their side of the story as well.

What was that pitch like with the broader community? They'll usually tell you, “No one would even pick up the phone for us, right? No one would respond to our emails. Cyan or Harry sat down, and they had a blink in their eye. They saw the idea and believed in us before everyone else did.”

We really want to understand the depth and granularity of those stories.

Do you often get bad references?

Yes.

Do you?

Yes.

Wow.

Yeah. The way we think about referencing, when we do a new fund, we're looking for at least 20 reference calls, right?

20 reference calls.

And we'll take 5 from the GP, which are the worst references we'll get, right?

Yeah. Mars was great. Mars was great.

And by worst, I mean they're going to be patting Harry on the back, right?

He's also the godfather of my children. He's my best friend from school.

So those ones we don't spend too much time on—the golden references or the offshoot references. Thankfully, venture is such a networked community that, when you spend enough time in the asset class, you're able to build those networks pretty quickly. We're proactively trying to get other people's perspectives on other GPs.

About other people's perspectives on other GPs, like venture to venture—does that make sense?

Perspectives on strategy, not so much. We are very much trying to find interpersonal risk and partnership risk. Those are 2 things that we are really digging into. We want to know: are they a good person? Have they created a bad persona amongst other people? Have they wronged others in a malicious way?

Then we want to understand the partnership dynamic, the things that they will never tell us on a phone call. We could ask them bluntly to their face, “Is there any risk in the partnership? Does Harry like Sally? How is the mesh?” They say, “It's incredible. This is the best partnership ever. We love each other. We sit down every day. We've never disagreed on a deal.”

We spend a lot of time trying to understand that partnership risk.

What is the number 1 reason you think partnerships break down?

Incentives. Incentives and who's working the hardest. Those are going to be the 2 every time.

Do you think we have a generation of venture firms where the partnerships are staying together for the kids? I mean, I personally think you've seen partnerships—what's the word I'm looking for? I mean—

The amount of change at partnerships over the past 2 years is the most I've seen in my 8-year history as an LP, easily.

How do you justify that? How do you reason that?

I think there are a lot of reasons. One, folks who had made a lot of money didn't want to deal with the crap that you're dealing with today, right? These 3 years of no liquidity, dealing with broken cap tables, dealing with founder transitions—it's just a lot of hard, gritty work that, if you made a lot of money, why do it?

Two, if you were a newer GP, you were promised a certain amount of compensation for your role, and part of that was variable carried interest. That carry has evaporated as performance has come down, and now you're getting paid 70% less than what you thought you were. So why not start fresh? Why not start with a new book, or why not start my own firm?

Why not start your own firm? We're seeing a lot of spinouts too. Do you love spinouts? I think they're drastically overrated.

Yeah. Historically, we have not done many, if any, spinouts. Call it your tier-one, maybe clean spinouts, right? Kevin Hartz at A* is a new partner of ours. He was at Founders Fund for a few years. He wasn't there that long.

And he was kind of tinkering on the side. We both love Kevin. He wouldn't lie. He was always a founder.

Yeah, exactly. Traditionally, we have not done many spinouts.

When you think about getting a good read on that, time helps. How do you think about your willingness to write checks fast versus the need to build the relationship over time, with the knowledge that they might scale if you wait 3 funds?

It’s a risk we take openly. I’d say half of the new funds that we commit to, we will not invest in right when we meet them. We’ll wait over a 6- to 8-month period and invest in their fund that year, and the other half will take either 1 fund or 2 funds into the future. So, 3 to 6 years, we’ll build that relationship over time.

The way we think about it is, if you’re an early-stage venture fund, it’s going to take at least 15 years for that fund to be wrapped up—probably 18, right?—to be fully done, with all positions liquidated. When we back a new manager, we want to back them for at least 3 funds, so call it 25 years of an illiquid relationship. It’s longer, like twice the length of the average marriage in the US. I don’t know what marriages are like here in Europe, but—

I think we’re less. I think probably less. Yeah.

So, one thing: we’re more proactive than Americans. Congrats.

Yeah.

But yeah, we really need to be sure who we’re partnering with.

You know what’s fascinating about that, given the duration you mentioned, is LP churn. LP churn is freaking real right now. Yeah. Oh my God. How should GPs think about LP churn?

I think, one, it’s good to have a relatively diversified LP base, which protects you from that, right? A mixture—and not everyone can choose their LP base, right? Sometimes it’s, “Take whatever. Money’s green.” But in a best-case scenario, you’ve got a mix of endowments, foundations, family offices, founders, and maybe a couple of GP checks in there from venture funds—a mixture of folks who are aligned to your long-term vision, right?

Inherently, stuff’s going to happen. Folks are going to have a liquidity crunch. A family office—the family’s going to say, “Fuck venture. We don’t want to play in this asset class anymore.” You’re going to have some things come up. I think being open to that and trying to still be as good of a partner as you can is pretty important.

How much is the right amount in terms of concentration from your biggest investor?

I think anything more than 30%.

30%. Wow.

Yeah.

I’ll never forget Micky Malka. I think he was telling me 10%.

Yeah. Yeah. I mean, best-case scenario, you don’t have anyone with more than 10%. But if you’re raising a $50 million fund or a $100 million fund and you can secure a $10 million, $20 million, or $30 million check and they’re long-term aligned, I think that still makes sense. But best-case scenario, yeah.

Yeah, I was lucky; we did 10% on the back of Mickey. He’s a fantastic advisor. Okay, so I totally get that. We have the 10% there. In terms of stability, I was always taught that endowment funds are like the blue chip for stability. Is there a rubric? How do you think about advising managers on stability amongst different asset classes of LPs?

Yeah, I think you’re right. Historically, endowments have been quite long-term oriented. The endowment model in the US today has headwinds, right? In particular, certain endowments where they’re going to start getting taxed in the 8% range. It’s 5 endowments. That’s a headwind to their model, in a sense. It’s not as bad as the 20% that it was going to look like a month ago.

Would you expect them to cut positions, downsize?

It’s all going to depend on what they do with their draw, right? So, what does that mean?

An endowment is mandated every year: 5% of the endowment goes to campus to support scholarships, professors, salaries, and buildings.

That can range anywhere from, call it, 4% to 6%. But most endowments have stayed right at that 5% number forever. If it turns out we’re going to start getting taxed 8%, we could lower our draw down to 4.5% versus 5%.

The real risk you run as an endowment is eating into the purchasing power of the endowment, right? The way an endowment works, you’ve got a 5% draw every year, and then inflation—let’s call it 3% for higher education here in the US. So, just to maintain the corpus, the purchasing power of that endowment, you need an 8% return, right?

Most endowments are targeting an 8% to 10% return over the long term—10 or 15 years. When you start getting closer to that number, you run into some real risks. It’ll depend on what they do with their draw. If they don’t reduce the draw, I think venture broadly will be okay. It’ll still be the idiosyncratic headwinds of there being no capital coming back from venture, right? That’s the headwind to the asset class for LPs re-upping today.

What do you advise managers in terms of closes? First closes, many closes, one close?

I think GPs should be spending the least amount of time fundraising as possible. That’s not your job, and you make your money investing. But some people are not as fortunate to do the one-and-done closes, right? I think it’s very much dependent on your situation.

Best-case scenario, you have a very crisp timeline. You know, “We’re going to do our first close here,” lining up your LPs, being sure they’re committed to that process, and doing work on the subdocs and the legal work prior to that is really important. Just set clear timelines.

Do you mind if a manager ever sells part of the management company?

Yes, absolutely. It is a massive red flag for us, and I would say most institutional LPs.

I’m not going to speak for everybody, but—

No, it is. It’s just one of those things where I see so many first-time GPs bullied into it by one large investor, often a family office, and then really regret it over time. It’s the one thing where I’m like, “No, no, no. Never.”

The magic of a partnership is the carried interest, and you are now giving that carried interest away to a silent partner who is not going to be, like we said, grinding and taking 100 calls a week and working 9-9-6 like you. How do you feel when you deliver incredible returns and a silent partner is getting a decent chunk of that carried interest? That’s the problem.

How do you think about the rise of multistage platforms? You mentioned the 8% to 10% that these endowment funds—the endowment model—relies on to keep that corpus the same. Everyone says, “Well, it’s going to be fine because, basically, yes, they will have worse returns being multistage funds—8% to 12%, say—but the LPs they have are different now, and that’s good enough for them.” How do you think about that?

It worries us. The funds are extremely large today, and I think it’s hard to assume the same returns you had from 2010 to, call it, 2017. I think Masa and SoftBank—I would put the flag in the ground at Vision Fund 1—were when all the other venture firms saw the opportunity to just absolutely scale their capital base.

I think it’s wrong to assume the returns you had from those years, when almost all venture funds were basically raising a $400 million Series A fund. All the premier funds maybe had a $400 million growth fund attached to it, but the fund size had stayed basically the same for a decade. So, it worries us tremendously.

Do you think they will post as good returns, then?

No. I’ll walk you through a very simple math that other LPs can put in their back pocket for how we underwrite these big funds today.

This is a live manager. I won’t share their name, but this is a manager we underwrote a year ago. We’ll look at their fundraise. This manager was targeting a $7 billion fundraise.

What we do is calculate a dollar-weighted entry ownership across their different funds. This manager had a $1 billion early-stage fund, a $2 billion to $3 billion growth fund, and the rest was an opportunity fund. As an LP, most LPs have to invest pro rata across those funds—equally as a percentage of the fund across those vehicles. Inherently, your smallest check is going to be to that early-stage fund, and your largest checks are going to be to the growth and opportunity funds.

What we do is look at the early-stage fund. This fund had 15% entry ownership. The growth fund had about 6% to 7%, and the opportunity fund had about 2.5% to 3% ownership. We dollar-weight that across the funds, and then we look at our check: What is the average entry ownership our check is getting within those funds?

This fund was about 5% across those vehicles, dollar-weighted. The very simple math there is $7 billion divided by 5%, which is $140 billion, right? That is the enterprise value. That is the market cap of the companies—the size of those companies—they are deploying that fund into.

For us, when we do a venture fund, our target is a 4x. That’s our goal. If we want a 4x net, these funds charge 2.5% and 30% at the early stage, and growth funds charge 2% and 20%. You’re going to need at least a 6x gross to get a 4x net on that fund.

So, $140 billion times 6 is close to $800 billion of market cap needed to return a 4x net for those multistage funds.

Now, for reference, 2021 was the best exit year of all time. There was $850 billion-ish of market cap exit value that year. You need an entire year of IPOs and M&A just for this one manager. Clearly, it’s going to be broken off across numerous years, but that’s a staggering number.

My counter to you there would be that you’re assessing performance today on the current outcome size, not projecting forward to what it could be in 10 years’ time. In other words, now we have—you’ll correct me—9, 10, 11 $1 trillion companies. We didn’t have any 10 years ago. The outcome sizes are so much bigger than they’ve ever been. If we project forward a decade, there’s a very real chance that Microsoft is worth $10 trillion and that we have, I don’t know, $50 trillion companies. If that’s the case, we could see that play out.

It could. We acknowledge that we could be wrong, and SpaceX, OpenAI, and Anthropic could go public at trillion-dollar valuations. What we look at—and, as I said, this is backward-looking data—but we’ll give you a few data points. There have been 11 $50 billion IPOs ever, venture-backed: 11.

The 2 largest venture-backed IPOs ever were Facebook in 2012 and Alibaba in 2014. So we’ve gone a decade, including one of the greatest venture bubbles of all time in 2021, and we still haven’t had a bigger exit than we were getting in 2012 and 2014. My guess is that a $100 billion IPO over the next 10 years is still going to be a generational outcome.

The question I throw back is: do you think there are going to be 10 or 20 $100 billion-plus IPOs?

I do not think so. You look at the trillion-dollar companies. I think there will be 10 or 20—way more, actually—$100 billion-plus outcomes, because what I’m finding so worrying right now is that, bluntly, there are so many exciting companies that I would love to be a part of, whether it’s your Anthropics, your OpenAIs, or your SpaceXs. I just can’t get access to them, given the extension of the private markets. These are all companies that would be in the $100 billion IPO price range.

Stripe, SpaceX, and OpenAI are all $100 billion companies today, for sure.

But where does the rubber meet the road there? At some point, the liquidity has to be passed to someone who goes, “Fuck, I need it.”

Yeah. Even still, I think 2021 is a good learning opportunity. Most, if not all—except maybe Palantir and a few others—of these very large 2021 IPOs are still down significantly from that price today. These were the greatest venture assets of that vintage. To say that it’s a guarantee that OpenAI is going to be worth $1 trillion in 5 years, there is a lot of risk involved in that.

What we posit back to our team is: what is the margin of safety? The great investors Warren Buffett and Benjamin Graham coined these terms. What is the margin of safety we want when investing in a fund, in terms of what we have to believe in to achieve our desired return?

I would rather not have to believe in $800 billion of market cap IPOs and M&A transactions to get a 4x net, versus other funds where maybe we have to believe in—maybe it’s a $1 billion fund, but the entry ownership is 10%, and we have to believe in $10 billion, $20 billion, or $30 billion. Anything above that is where you get the real alpha. It’s hard for us to imagine these very large multi-stage funds having that kind of alpha.

Who is the single best performer to you at scale?

Index. I think they have to be. The performance they’ve put up in the last 12 months is unbelievable. In a market that is as bad as you hear in the news and from all the folks on the podcast, the performance that they’ve delivered and are delivering into the future is unbelievable.

They’re the largest shareholder in Figma, the largest shareholder in Dream Games, the largest shareholder in Wiz, and the second-largest shareholder in Scale AI and Revolut. It’s unbelievable.

I give Index all the credit in the world for not scaling. They even reduced their latest fund size after the 2021 era. They could raise as much capital as they want to, and they don’t. They are the most performance-driven culture that we see, so I give them a ton of respect for that.

Danny has been unbelievably good to me since I was very young, 18 or 19 years old, which I think is testament to him helping the next generation amazingly.

It’s annoying, though, isn’t it? It’s like the perfect kid at school who’s also really nice. My question to you on the back of that is: do you think they’re in for a hard time? I’m not singling them out, but the funds that are in that $1 billion-to-$2 billion range, where they’re sizable but they’re not that sizable.

When you’re GC, Lightspeed, or SoftBank, your cost of capital is such that, to throw out a $10 million check, it’s like, “Thanks for the coffee.” When you’re in the Index range, you’re not one or the other; you’re in the middle ground. How do you assess and think about that?

I absolutely think they will continue to survive and thrive at that range. You have enough capital to write big checks, so you can participate in abnormally large seed, Series A, and Series B rounds. It’s a limited enough amount that you can still drive extreme power-law outcomes within the fund.

I think the performance-driven culture and what that brand stands for—being the backer of some of the most generational companies of all time—are powerful. You had Vlad on the show recently. You should ask him why he went back to Index for his new math company. He could have gone to a cheaper source of capital and got—

Mickey told him to fuck off. You probably could have gone to a cheaper source of capital and raised from Masa at SoftBank or General Catalyst, or you name it.

Just to be clear, you don’t actually inherently believe in that fund-size range. You just think Index is so good that they’d make anything work.

And what do you mean?

You don’t love the $1 billion-to-$2 billion fund sizes. You just think Index is so good that they’d make anything work.

Most people—most funds—can’t raise $1 billion or $2 billion. Most are inherently going to be at the lower end, and the ones that can raise that much have had good enough performance. Most of them scale.

Have they? Most of the big funds have not had great performance.

I think so. We’ve looked at all of their returns. These people deserve to raise larger funds. They’ve produced really strong performance.

So when do you say, “Enough’s enough. I’m out. It’s too big. It’s not my game”?

First, we lean on the math. Even if you do own 10% of a generational $20 billion outcome—which is still going to be generational; Figma is a generational company, and we’ll see where it prices, call it $20 billion to $25 billion—if you’re General Catalyst and their last fund raised $7 billion, say you own 10% of Figma, which is a generational company, that’s $2 billion. They’re going to take 20% of that. You’ve returned what, 0.2x? 2x? You need 15 Figmas. It’s mind-boggling to me.

My favorite also was Wiz, which was obviously a $30 billion, $31 billion outcome—the GDP of the country.

And it returned a third of Insight’s fund, and you’re like, “I’d be really pissed if I was the guy that led Wiz.” I’m like, “Oh, thanks for the third.”

I’m sure he’s happy enough that he still did it.

Listen, I’m sure he is, but I’m just like, ah.

So you go back to core math.

We go up to core math, and really what we try to understand—and this is more qualitative—is that at some point, the alignment breaks, in our opinion, between the GP and the LP.

Let me put this clearly: I don’t ever blame a GP for raising bigger funds. I love incredible business models. I study, I live, I eat, and I breathe investing. These business models these GPs are creating are some of the best high-margin businesses ever created.

You think of a firm that has raised $7 billion in this fund. They raised $5 billion in the prior fund and $3 billion before that—$15 billion of capital. They’re charging full fees on all that, right? They’re making, call it, $300 million a year in fees—

For often 5 or 6 partners, where 80% of that fee stream goes.

Yeah. We really try to understand: has the magic bond been broken between GPs and LPs? That leads us to think the fee structures need to change to accommodate for that.

Why do you think the fee structures need to change? When you’re investing at that size and scale—when you’re a fund that big—you are inherently setting up for $100 million checks into very well-established, well-run, well-oiled companies.

You’re essentially acting as a long-only public-equity investor. You’re not actively managing the company. They’ve got their own HR team; they’re doing all their own hiring. They’ve got a 20-person product team and a 10-person BD team. This is a well-oiled machine. These are what public companies would have been 10 years ago.

So you’re charging 2 and 20 on basically passive investing. You’re not actively managing most of those positions for most of the time.

And so I don't think that early-stage managers are actively managing, and I don't think they should be. I work with many, and when they actively manage, they do not make the right decisions. They push managers to do things they shouldn't do. They push them to go enterprise before they should, push them to do more products, push them to scale faster and take on more cash because they want markups. I think you want passive.

Yeah. But you still need the fees for that in a $400 million fund, right? You need a team to go out and meet all of these people. You need an office to bring these people in.

With a $400 million fund, you're not becoming a billionaire off of that, right? Sadly. If you had $15 billion in AUM—which, God bless, I hope you do someday—you're going to become a billionaire off that fund, off those funds, right? And that's the difference: you need that capital as a true early-stage venture capital firm. They're utilizing it.

So I get you totally, but fundamentally, leverage is everything, and these firms can raise the money without changing the fees, so they just go, “Dude, thanks for the advice, fuck you.”

Yes, yes, yes, absolutely.

So we're never going to get this fee structure changed?

Yes.

Yeah.

Yes.

That's nuts.

Yeah. It's remarkable, right?

But you suck it up and pay.

But this is Renaissance Technologies, right? The best hedge fund of all time. They were so good that at one point, I think they were charging something like 60% or 70% carry and 2% management fees. They kept increasing carry and increasing management fees to incentivize their LPs to get out of the fund because they wanted all the capital for themselves. The performance was so good that folks would pay them whatever they wanted to be in that fund.

What's hard for us to understand today is, I share the performance data with you. You don't look at that data on a $7 billion fund and think, “God, we will pay whatever we need to get into those funds.”

And so what our hope is—and the hedge fund industry went through this cycle after the global financial crisis—there were thousands upon thousands of hedge funds, they were all charging 2 and 20, and performance was incredible for a very long period of time. AUM increased, competition increased, and returns came down. The global financial crisis happened, and you had a complete bottoming out of the hedge fund industry, which obviously gave rise to these incredible multistrategy hedge funds. But fee structures changed dramatically from 2005 to 2007, then from 2010 to 2013.

What will fee structures be in venture in 10 years' time?

I mean, if you're raising that early-stage fund, the core $500 million Series A fund, charge us 2.5 and 20. If you're good enough, 2.5 and 30—we're okay with that, right? But those growth funds that are really for scaled businesses, that are mature assets, should be charging long-only public equity fees, which are 1 and 10. And if you really love your LPs, it would be 0 and 10, or budget-based—based on the team—but 10% carry, I mean, that's the number for a passive long investor.

Going back to the size—and we scale out of you, so to speak, when you're too large—is there ever a case for LPs where it's like, “You know what? Fuck it. You've made us so much money. Even though we may not believe in the fund, we're in for loyalty”?

Certain LPs, yes. Us, no. I mean, we are an extremely performance-driven culture.

But if a fund does you a 6 or 7x net, which is amazing, and then they raise a big-ass fund—which most would do—do you ever think, “We've got to come back; you showed a 6 or 7x net for us”?

It depends. It depends on how different that fund is and how different the strategy is, right? It very much is dependent on the situation.

I have a lot of LPs where they're like, “I want to be in X brand name,” and I'm like, “That's not the best risk-adjusted return as an opportunity cost to your cash. I think you should be in one of these 3 names.” And they go, “No, no, no, you don't get it. I don't care about the performance. I just want to be in Andreessen, Sequoia, Index.” How do you respond to the brand-driven nature of LP allocations?

I get why. I think it goes back to an incentive problem in the LP industry. For me personally, I could be your janitor here at the 20VC offices, and I'm going to be the best janitor you've ever had. These are going to be the cleanest floors you've ever had. This is going to be the cleanest table you've ever had. If my name's going to be on it and I'm going to be a part of it, I am going to put in 150%.

Maybe there are certain people that are incentivized to park capital in brand names that won't get them fired, right? No one gets fired buying IBM, right? That's the classic quote.

And so, frankly, for you, is it easier for you at CMU to get a check done into X brand name versus saying, “Hey, I love Cyan. I'm going to go out on a limb and get Long Journey in”?

We have an investment committee that we go to for approval. That's our governance committee, and we write a detailed memo for any re-up or any new name in the portfolio, and we've got to present our merits and concerns.

But we've educated our governance, which is such an important part of any LP that's wanting to get into venture: having the proper governance set up to allow you to take these very long-term bets. We educate them on the math and the risk-adjusted return of the funds and the fee structures. So they're very understanding of our strategy and how we think about the world.

Do LPs not realize that some managers are doing $30, $40, $50 million a year in fees at the large multistage, and LPs hate it?

I think certain LPs choose to just not even think about it, frankly. And so certain LPs, such as ourselves—like I said, I don't blame you for raising $10 billion. I will give you—

But you're not going to write me $1 billion.

No, dude. Come on. Come on.

No.

I'll never blame you for doing that, and I'll never blame a GP. I'll never bash a GP, saying, “Oh, how dare you?” Right? It's the market. You've obviously done something well enough that's allowing you to raise that capital. It's our choice to determine: is that the right place, risk-adjusted, for our capital?

I think not enough people see this as a game of levers. And what I mean by a game of levers is, you can have a smaller fund but deploy it more quickly and actually play that lever game into a massive fee game in the AUM game. How do you think about temporal diversification? We saw a real shift from 3-year deployment to 2-year deployment. How do you think about that?

I think it's very important. I think it all stems from what did that GP tell you they were going to do? If they told us, “Hey, this is a 2-year investment cycle; we're investing it in 2 years,” and they come back to us 2 years later, we're okay with that. We underwrote that, right?

But if this is a 3- to 4-year investment period, and you told us it was going to take 3 to 4 years, and you come back in 2 years, then we'll have some questions for you, and we'll want to work with you to understand why. What's the reason? Because time diversification is quite important in venture. Extremely important.

I think it is. What happens if they're slower? Is that bad?

No, I don't think so. I think, frankly, because a lot of people say, “Play the game on the field.”

Play the game on the field. Right.

I think certain folks would have today bear-hugged their GPs for not playing the game on the field in 2021, right? We're not investors, but Mark Suster—I give him all the credit in the world. He's been in the game for a long time and, upfront, he saw 2021 as an insane period, and he strip-sold the majority of his portfolios and his funds for a very good price, DPI in the pocket. All of his LPs are bear-hugging him for that brutal market.

Is it a brutal market?

Yes. I mean, look at the data, both at European venture fundraising and US fundraising. We'll see what Q3 and Q4 look like, but in the US this is going to be the lowest year since 2017. In Europe, the same goes back a bit further, maybe to 2016. But it all goes back to liquidity.

What's the takeaway from that? Is that the lack of liquidity? Is that the concentration of capital to a few names who've scaled and just eaten up more of those dollar allocations? What is the conclusion from that?

I think there's a lot of different reasons. I think the main reason is liquidity, right? From 2002 to 2004, you had more dollars raised in the public markets from IPOs than you did from 2022 to 2024, and with an asset class 10 times the size.

And just for reference, the dot-com bubble took 13 years from the peak of the dot-com bubble to get back to par on your public equity position in the QQQs or the Nasdaq. That was a real downturn. It makes 2021 look like pennies, obviously, and you had more IPOs in the 3 years following that, right?

Something clearly is broken in the industry, given how bad the liquidity was over the past 3 years.

I think what really frustrated LPs is that you watch the public markets continue to perform, especially as technology factor exposure has done tremendously. I am not a believer that the IPO markets are ever closed. It is purely a function of price, right?

That is the problem. Folks paid significantly too high prices during the peak, and growth has slowed down. There is not much of a market for a $100 million ARR SaaS company growing 15% with break-even free cash flow when you can buy Microsoft growing its topline at 14%, growing earnings at 17%, with real GAAP profits, buying back 1% of the company every year, and with the strongest competitive moat in the world. People get frustrated when it is, “No one’s going to give me 8 times ARR or 10 times ARR for this business.” Look at the alternatives of what investors could invest in with a similar factor to your company.

I think PE is not coming to save us like everyone thinks it will. I think people also always have lower expectations of what it takes to buy good companies. Like you said, you need to be a 20% grower and profitable, and there are so many companies where they are bluntly at 10% and not profitable. That is a tough spot to be in.

Yeah. We look at the data, right?

How close do you get to the underlying portfolio companies?

Very close. We ask for trending revenue, trending gross profit, and trending free cash flow for the top 10 NAVs of every fund we underwrite.

Wow. Does every LP do that? No?

No, definitely not.

So when you look at that, do you think you are able to predictably tell good managers in real time?

Yes, because they have great assets.

Even though you have ones like Circle, where for years it is maybe like, okay, and then it turns into an absolute freaking monster?

There is always going to be an extreme-distribution, right-tail outcome in these funds that is going to be impossible for us to underwrite, right? That is the beauty of venture capital. We acknowledge that we are not going to know exactly what our valuation of the company is going to look like 3, 5 years down the road, but we just want to know whether these are good, fundamental businesses that are growing in value and give us conviction that these are going to be real, durable businesses one day.

How did you analyze Yale and Harvard selling their venture portfolios?

I think there are a lot of factors that go into it, one being the headwinds we talked about to the endowment model. You look at Harvard selling $1 billion; it is a $50 billion endowment. $1 billion is not some monumental thing for them. That is probably just a refresh of the portfolio.

But I think there are real lessons learned. There was an article out today about Yale and CalPERS. CalPERS was the buyer of a piece of Yale’s portfolio. I was on the phone with our CIO this morning. Just take a step back: we had a venture capital fund that we committed to in 2012. This fund was in its tail life and was 13 years old.

We had not looked at this fund in 3 or 4 years. There was 1 asset left in the fund; it was basically fully realized. We have a great analytics team and an analytics system that tracks our underlying portfolio companies, but the companies have to be over $1 million in NAV for us to have them in our system. This company was not even showing up—Circle, the company we are talking about—in our system because it was below $1 million.

Fast-forward, and the manager was holding it at a 30% discount, plus or minus, to the last round valuation. I was reading the S-1 one morning because my son woke me up, and I was up, so I was reading it for fun. I was looking through the cap table, and I saw our GP on there. I thought, “Oh my gosh.”

I started looking through the quarterly reports. They were holding it at a 30% discount, plus or minus, to the last priced-round valuation, which I think was around $5 billion, so call it a $3.5 billion-ish valuation. You look at Circle, and it is a $50 billion company today. This is a 13-year fund that is essentially going to do an extra 3 turns on the fund in its 13th year. Unbelievable.

The article with Yale and CalPERS was about CalPERS buying a very large piece of their portfolio, part of which was General Catalyst, and Circle was the largest position in that fund. Essentially, in a 2-month time frame, I think the article said they bought $500 million, and you had a $100 million write-up from Circle alone.

That is the risk of selling secondaries as a long-term venture investor: you are going to have these crazy right-tail outcomes in the fund that could come to fruition in years 8, 9, 10, 11, 12, or 13. Traditionally, even if I said to Chuck, “I am not that smart,” we would have underwritten Circle if we were looking to sell that fund a year and a half ago, and we probably would have sold.

Who would have guessed that Circle was going to trade at 100 times EBITDA in the public markets, and that stablecoins in a year and a half were going to be the hottest sector in crypto? You could not have predicted that. I would imagine Yale probably did the same. They probably underwrote that and thought, “There is probably not a lot of juice left to squeeze here.”

I have friends at Yale who I am crying for, and I have friends at CalPERS who I am crying for with happiness.

I am sure Yale would do well. That is a fantastic team with a great portfolio. But it just goes to show the risk of these fat-tail outcomes in these funds.

Dude, 10% discount, I think, was the reported number. How did you analyze that? Higher than you thought or lower than you thought?

Much higher than I thought.

You thought it was higher—wow.

It is a great deal. That is what I meant. Fantastic. Lower. Yeah, fantastic deal.

Do you think we will see many more of these large institutions doing strip sales as their venture portfolios?

I am not sure. Certain ones with real liquidity needs, I think they will have to, right? That will be a forcing function. But there is not a ton of secondary capital out there that is going to be able to swallow all of that NAV, right? If every billion-dollar endowment comes out and says, “We are selling 10% of our venture book,” the pricing there is a supply-and-demand market. There are only so many buyers.

You said that the liquidity problem has been a driver of the brutality of the fundraising market. With sales from Dream Games, Figma, Revolut secondaries, Circle, CoreWeave, Hinge Health, which IPOed, and Chime, are you just drowning in distributions now?

We are thankful to say that we are now self-funding in our venture book this year, which deserves a round of applause. It is the first time since 2021.

So that is a positive. But on the flip side, there is still a lot of liquidity that has been announced, but it has not happened yet. The Wiz deal is going to be a Q1 2026 event, right? That has to go through FTC approval. Figma has not gone public yet. Dream Games said in the article that they have to get European approval for—

So, yes, 2026 will be a year where that liquidity really hits. What is exciting me—and this is a crazy statement, right? It is not that I agree with the statement, but—

So much? Just me and you?

Yeah, exactly. For the longest period of time, private-market capital was cheaper than public-market capital, which is the most mind-boggling statement as a fundamental investor ever. It is hard to fathom that, right? But that was the case.

That is why the best companies in the world did not go public. You could get a cheaper cost of capital, you did not have to do quarterly earnings calls, and you did not have to go through all the hoops to go public. Why would you go public? We speak to founders, and we understand why they do not want to go public.

But the public markets are now pricing risk very differently than they have over the last 3 years. You look at Circle, Nebius, CoreWeave, Palantir, and Cloudflare. These are all businesses trading at extremely healthy multiples. My message to all venture capitalists is: now is the time. Please take your companies public.

My question to you on the back of that is, Rory O’Driscoll from Scale always laughs at me. He goes, “My favorite thing about Harry,” and then he goes, “Yes, so what about me?” I specialize in that: “So what about me?”

If we have this liquidity dropping in 2026, does that mean that in 2027 you will have a load of LPs flushed with cash coming back to the venture asset class saying, “Let’s fund some more funds”?

I mean, inherently, it will help, clearly, right? Particularly as maybe folks take that—

But is it needle-moving on that, really?

There's been such a dearth of liquidity over the past 3 years that 1 year is not going to solve the industry's problem, right? We're going to need multiple years of really good liquidity to get back to a normal state. There's still a lot of wood to chop here, but it'll help. Undoubtedly. Absolutely.

Do you love thematic funds like every other LP does?

We are agnostic. We do not have a mandate or a rule saying we're only going to do thematic funds or we're only going to do generalist funds. We're a best athlete. When we find really great partners aligned with us for the long term, who we think have an incredible skill set that aligns with what they're trying to do in the fund, whether that's a generalist fund or a sector-focused fund, we'll do it.

We've done 1 new sector-focused fund over the past 3 and a half years. It hasn't been a huge part of our portfolio, but we are absolutely open to it.

What was the best-ever-performing fund you've been a part of?

We had a fund out of China that produced over a 20x net return to LPs.

Wow. I hope you sent them a Christmas card.

We did. Yeah.

How do you think about China?

It's a very high bar for us today and a very hard place to invest. There are a couple of really big headwinds. One is the U.S. executive order mandating that U.S. dollars can't go into artificial intelligence- or semiconductor-related companies or defense companies there, which we completely understand and align with.

The big problem—what's so unique about the China venture capital market that maybe a lot of founders or LPs who haven't spent time there don't know—is that, in China, these GPs raise USD and RMB funds alongside each other, right? These RMB funds are from local governments and municipalities. Most of the time for the past 15 years, since the China venture industry has been around, those funds were pari passu. They mostly invested in the same securities, and that isn't the case today, especially now that U.S. dollars cannot go into these AI companies.

I think the last stat I checked was that 70% of these deals in the U.S. are AI companies. It's everything. That's a big alignment issue, right? What are we getting exposure to in that fund? That's a big worry.

Super interesting. I'm actually more bullish on China than most people give credit for.

We've got incredible partners there that we've had for a long period of time who are extremely hardworking, extremely smart, and have been great partners to us. It's a hard market today. Frankly, a lot of the best Chinese founders have chosen to raise elsewhere, whether in the U.S., Singapore, or London. It's a tough place.

We mentioned the liquidity. The other thing that's also kind of weird and paradoxical to think through is that you mentioned the public-market players just having absolutely ripped. You see Meta throwing out $14.9 billion for Scale. That's 45 to 50 days of free cash flow. It's really not very much for them. Google's buying Windsurf. We all give a [expletive] about it. It's like a coffee. They put $3.5 billion into Ray-Ban at the same time, and no one paid any attention.

My point being, we have these opposing worlds of liquidity starvation or drought, and then the glut of these public-market players who are playing with market caps of $2 trillion. How do you think about that?

I think if Wiz gets approved, every other large Magnificent 7 company is going to see a green light in regard to making big, splashy acquisitions again, which is a good thing. You look at Google, Microsoft, Amazon, and Meta combined. They're doing $600 billion of operating cash flow—just cash coming off the company—every single year. I think they would much rather make very strategic acquisitions than buy back 50 basis points of the company, right?

The big worry that I think those companies see today, from our purview, is that the AI landscape is changing so rapidly that, in the 12-month time period it could take to go through a review and get that acquisition done, that company could be obsolete in 12 months.

Dude, you saw this with Windsurf. Things changed a lot in a couple of months. Lots of great, hot AI companies have been very hot and then not hot. Stability AI and lots of other companies have gone through these waves, and there will be many more.

You look at the Wiz deal: there's a 10% breakup fee there, the largest breakup fee ever for an M&A transaction. Say that someone else wants to do a $30 billion acquisition of Perplexity, and Perplexity says, "Oh, we have to wait 12 months. Our board's going to recommend a 15% breakup fee." Will those big companies risk a $4 billion or $5 billion breakup fee and 12 months, when this company might not be what it was 12 months ago?

I think that's the reason these folks are acting so fast: taking the top talent, licensing the IP, licensing the tech, and getting these people building within our company now, day 1.

Totally agree. I think it's the smartest maneuver around it. But it only works when the people and the tech are the assets, and not the revenue and the customers. In Wiz's case, the revenue and the customers are the asset. Don't get me wrong, the team and the technology are too, but—

It also helps that it's not an AI company.

Sure. But without the revenue and the customers, it's not worth $31 billion. So I completely agree with you there.

I do want to ask: you said to me before that OpenAI could still be a zero. When you think about that, what did you mean by that?

The way we think about it is, we spend a lot of time on unit economics, and from what we see with OpenAI, unit economics are improving rapidly, which is great to see. But still, when you take into account capex, why has OpenAI raised 2 of the largest venture capital rounds ever in a span of 12 months? It's not because they want interest income from the cash on the balance sheet. It's because they're burning $5 billion to $10 billion a year, right?

In my opinion, the music will stop eventually. This would be the ultimate anomaly if a bubble did not pop in AI, right? You look at past historic, incredible technological moments. You think of the railroad, cars, electricity, steamboats, and the internet. Every single one of those had a bubble that popped, and every single one impacted the equity markets at that time.

Inherently, for the long term, it's a good thing, right? It shows that this AI thing is real and people are going to overinvest. I would find it extremely anomalous if there was not a bubble that popped here.

If you believe a bubble will pop eventually, and you do not have control of your own destiny—if you're sitting like OpenAI and your prep stack is, what, $70 billion or $80 billion?—and stuff hits the fan, and no one's willing to write you a $40 billion equity check anymore because the capital markets have completely gotten smoked, what happens?

Do you think there's a chance that happens, though? Honestly, when you look at SpaceX—

SpaceX is self-funding. They don't need cash. That's what I mean. You look at Google and Meta, right? When they went public, Google and Meta had 30% to 40% GAAP operating margins. These were the most profitable companies ever. They had complete control of their own destiny, right? So, whatever happened in the capital markets, it didn't matter. They could not be killed.

SpaceX cannot be killed. Starlink has reached escape velocity. That's a very high-margin product. They do not need cash. They're doing secondary tender offers. OpenAI needs cash. Will OpenAI and Anthropic be independent companies in 5 years' time?

To say, slam dunk, these are going to be trillion-dollar companies 5 years from now—there's a lot that can happen within that 5-year period, right?

We would say there's still a good amount of risk in both of those businesses.

If AI can massively impact global GDP—we've talked about this before—and if it hits 10% GDP productivity growth, then it's about $10.7 trillion of the $17 trillion labor segment. Do you think AI will have that global impact on GDP within the next 10 years, at that scale?

10 years gets closer. I thought you were going to maybe say 3 or 5, which I'd say no. I think these technological transitions historically take a pretty long time to bleed into GDP, create industries, and impact everyday life.

OpenAI is obviously an incredible company, but they burned up all their GPUs in April because people were making emojis. They were making cartoon figures on the app. That's not a GDP-boosting product to me. Clearly, they're making inroads, but all these things take time.

The problem is, time is not your friend. When you look at the hyperscalers, just take them for example. You look at 2024 to 2027 estimates, and it's $1 trillion of capex they're putting into the ground. Then you add on venture and industry investing. Say the run rate is $100 billion here in the U.S., and 80% of that is going into AI companies.

Now, sure, not all of those are going to be capex-intensive. Maybe some of those will be application companies, but that's a lot of money to invest. If this does not come true for 10 years, there will be a lot of pain.

We spoke about Nvidia. This is why I would push back on your thoughts on Nvidia, which you said is too highly priced. If you believe in AI, you buy Nvidia.

I do not think that it's too highly priced for the business today. One of the benefits of our roles is that we're generalists, right? We get to invest across buyout funds, hedge funds, real estate and public equities, and we get to witness some of the best investors in the world.

A man from your hometown, Chris Hohn, is one of the most incredible investors of all time. He thinks a lot about peak earnings and peak multiples, which is a common theme in the public-equity industry. But Nvidia is a cyclical business. At the end of the day, when you look at its historical financials over the past 20 years, essentially every 3 years it has had extreme negative year-over-year revenue growth.

It rebounds, right? But this is a hardware-inventory-cyclical business. So, back to my question: if folks agree that an AI bubble will pop at some point, and the largest buyers of these GPUs are advertising-driven companies—Google, Meta, and Amazon, which now has a very large advertising revenue line—and advertising is also a cyclical business, then you have a global downturn. There is a really plausible scenario that revenue drops 20%. I think that would be conservative—20% to 30%.

Then earnings, right? If they don't react on their opex quickly enough, maybe earnings drop 40%. I looked this morning, and they're trading at about 38 times forward earnings. Maybe it drops to a trough multiple of 24 times, which has been a trough multiple for Nvidia. You just blinked and had a 70% drawdown, right?

To think that that's not a possibility in the future, I wouldn't say that. I'm not going to guarantee you that's going to happen in 1 year, 2 years or 3 years, but I think it's a possibility.

One final thing I want to touch on before we do a quick-fire is founder-friendly. Everyone loves to say how founder-friendly they are and how founder-friendly their GPs are. How do you think about the founder-friendly tag that's in venture today?

My background comes from a sports background, right? I played football growing up and in college, and I was used to hard coaching. You don't love it in the moment. You don't love a coach MFing you, screaming at you and telling you that you're playing terribly and need to do this better and that better, but it's better for you, right? It's coming from a coach who wants the best for you. They don't want you to fail; they're incentivized for you to do the best work possible.

I love getting coached hard. I told our CEO, Chuck Kennedy, when I first joined that he shouldn't have hired me to begin with. In my mind, I had a pretty good thought: there's probably a good chance I don't make it 6 months, but I'm going to try my best. I told Chuck, “I need you to criticize me. I need you to coach me hard.” He looked at me with crazy eyes, like, “I've never heard anyone say this to me in my life.”

But I love hard coaching, and I think no founder is going to be perfect. Founders are going to have weak spots, and if you can have people who are, from a loving perspective, close to the business, who can supplement certain weak spots and bend the trajectory of a company even a bit, why wouldn't you push for that? Those are going to be tough conversations, but tough conversations aren't bad things, right?

I totally agree with you. I think we way overrank founder-friendliness.

Yeah, when we're sourcing and doing reference work, that's not something we try to dig out. We want the most founder-friendly GPs. That's not something we source for.

I'm so glad. Thank God. I'm sure mine would not say I'm the most founder-friendly.

Harry says 996. I'm so tired. I'm so tired. Go to sleep.

Dude, I want to do a quick-fire with you. I say a short statement, and you give me your immediate thoughts. Which venture firm charges 3 and 30 and shouldn't?

Any fund that raises over 4 billion? I think that's a pretty easy answer.

There are firms that do over 4 billion.

No, excuse me—on their growth funds, right? So, the early-stage funds—

But they do 3 and 30 on growth funds.

No, no, but they're charging 2 and 20. I don't think they should charge that. I think a core early-stage fund, if it has produced incredible returns over the past 15 to 20 years, deserves 3 and 30.

What's the biggest lie GPs tell LPs during fundraising?

Oh, that's a great question. I would say, “Miles, this is the perfect fund size for us. We want to be a Union Square. We want to be a Benchmark—300 to 400 million. This is the perfect size. We're never going to raise a bigger fund.” I hear that, I kid you not, at least every other introductory meeting I take with a firm.

And it's 99% [bleep].

But 99.9% [bleep]. Yeah.

What's one red flag in a GP that others keep ignoring?

I would go back to alignment. We talked about LPs looking the other way, but alignment—

GP commitment is one form of alignment. Sorry to interrupt you. How do you guys feel about that?

It's a very important data point for us. The nominal number is not important to us; it's what that number means to that person. That's very important to us, right? Frankly, we have 2 quantitative data points outside of fund size and past returns that are the best forward-looking indicators for future returns of our funds. One of them is GP commitment, so, yeah, it is an important factor for us.

Who is the most underrated emerging manager today?

If I say his name, he'll probably raise a bigger fund, but I'll say I think Kevin Hartz and A* Capital. I think they've done fabulously well as a partnership.

What do you think makes him so good?

Kevin, please, if you're listening to this, do not use this to raise a billion-dollar fund. What's interesting about that team is that you've got Kevin Hartz, a multiple-time founder who took his companies public, has been through a lot and has seen a lot. You've got Gautam, who was COO and CFO of Uber, and you've got Bennett, who did some incredible deals at Coatue.

I think it's a very heavy and powerful team for a right-sized fund. I don't think there are many of those funds around, frankly. Their ability to have really premier access that traditionally a multistage fund is going to have 99% of the time is pretty rare.

When you think about a fund investment decision that was a mistake, what did you not see that you wish you had seen?

I think a key thing we go back to is people and really trying to understand who the people driving the returns at that fund are.

Do you think about your attribution?

We've gotten much more sophisticated on our reference work. We build our own attribution tables, right? That's another huge red flag and lie that we get from firms. It's not an outright lie, but they'll give us attribution, and then you have 1 partner leave, retire or go to another firm, and you're getting this attribution from this new person who clearly, we know, was not the partner on this home-run deal.

We understand why they do it. They have to assign somebody to it, but it can be very misleading to a new LP coming into that fund and saying, “These incredible partners who led these incredible deals are all still here.” Through reference work and longevity, we build our own partner attribution.

Would you rather back a 25-year-old first-time manager or a 55-year-old unicorn founder?

Well, if it's Harry, that makes the decision a little bit tougher. I'd say, in general, we would lean toward someone who has been through multiple cycles and has the scar tissue of that. So, I'd say we'd probably lean toward the 55-year-old, but we're open to everything.

What did you believe about fund investing that you've changed your mind on? For me, in investing, it was people, market and product. I used to weigh them equally, and I've completely changed my mind around that. Markets change, products change, and this is for seed. I massively overindex on people.

Yeah. When I first started, from a first-principles perspective, I was drawn to the data, which we laid out here in the beginning, and you can't overindex on that data too much, similar to what we've talked about. I would go back to the fact that, at the end of the day, this is a people-driven business.

You can do all the data work you want, which is important, clearly, as we've stated, but really lean on the qualitative reference and people work. Speaking to founders is critical. We don't take a lot of founders' time, right? They have a lot of better things to do than speak to measly LPs like us, but really understanding why you chose that partner, why that partner chose you and what that relationship has been like—and understanding that dynamic—is critical for us.

What fund are you not in that you wish you were in?

Union Square.

Easy one. Yeah. What's the wildest GP behavior you've seen in a fundraising process?

Oh, I've got 1 good one and 1 bad one.

Oh, go on.

Okay. What do you want first?

Start with the good.

Okay. The good: Long Journey Ventures, which is an incredible partnership between Lee Jacobs, Zion Banister, and Ariel Zuckerberg. We had a celebratory dinner out in San Francisco. We got towards the end of the dinner, and somehow we started talking about ping-pong.

I'm a pretty good ping-pong player, and I brought up that when I was in college, I won the Pennsylvania State Ping-Pong Championship. Which is true. I did.

Lee immediately was like, “There’s no way you’re a better ping-pong player than me. I am a really good ping-pong player.” So Zion was like, “Well, we need to settle this.” And I’m like, “It’s 9:00 p.m. We had just finished dinner. I don’t know how we do this.”

She was like, “I’ll find a ping-pong bar.” Zion gets on her phone and finds a ping-pong bar. We all go to a ping-pong bar at 9:30 p.m. in San Francisco, and Lee and I played ping-pong for about an hour.

Who won?

I won.

Yeah. And then you wrote the check.

Yeah, exactly. If he beat me, we got a discount on management fees.

If he beat you, check canceled. That is unbelievable. I also love that you Americans are like, “9:00, dinner was finished.” Yeah. So in Europe, that’s when you start drinks. That’s so funny.

The bad one—I mean, this one forever stands out—was that we underwrote a manager in 2023 that was holding OpenAI at $13 billion, which I thought was crazy. You questioned them on it.

Yeah, obviously.

And they came back and said, “We’re going to revise our valuation policy, and we’re going to revise that mark.” That was a crazy one.

Yeah, dude, that is absolutely wild. Listen, I so appreciate having you in the studio. I so appreciate the friendship. This has been so much fun to do, so thank you so much for joining me, man.

Thanks for having me. This has been a blast. We could talk about it all day.