E384: CEO of Commonfund on Venture Capital, Power Laws & the Future of IPOs

0:00Mark, you're the CIO of Common Fund, which today has over$40 billion of AUA and AUM. And before that, you were the CIO of the Bass Family Office, one of the best-known family offices where you won Family Office of the Year. That's right. And perhaps most famously, you were the CIO of CalPERS, the largest pool of capital in the United States. So let's start there. Before we started recording, you told me the story of how you got into one of the very top funds in Silicon Valley as CIO of CalPERS. Absolutely. It's a great story. CalPERS is the largest pool of institutional capital in the United States.

0:31Think of it as a sovereign wealth fund. That's effectively what it is. You know, well over$600 billion at this time. Now, what's fascinating about CalPERS is as we were building out our private capital program, it was very difficult for us to get access to the best venture managers in Silicon Valley. And what's surprising about that is when you think about where CalPERS is situated in Sacramento, it's only about 80 or 90 miles away from Sand Hill Road where all the best venture capitalists are. But it was very difficult to access those venture capitalists. First, they're filled up. They already have as many investors as they want.

1:04So they're often unwilling to bring in a new investor. And the problem with the public pension plan is twofold. First, it's public. And venture capital tends to like to operate behind the scenes and maintain a low profile. So that was one issue. The second, of course, is CalPERS can sometimes be political, as most state pension plans are. So for those reasons, the venture capital community were reluctant to accept CalPERS as an investor. But there was one firm that I focused on that I had some good connections with, one of the top five firms on Sand Hill Road in Silicon Valley. And I kept asking them, you know, let us in.

1:39We'll be a good partner. I promise to keep your name out of the press. I promise to keep the politics away from you. And still, we could not access this great venture manager. So one day, on my way to work, I stopped at a donut place, and I bought myself a couple donuts and some donuts for the rest of the staff at CalPERS. And I thought, you know what? I'm going to send a box of donuts to the partner I know at this venture capital firm just to demonstrate what a good partner we are. So I sent a box of Krispy Kreme donuts and they laughed. They said, okay, we understand that you're really willing to go this extra mile to be a good partner.

2:15And that's how we got our first venture investment. It took donuts to do it. What do you think the ROI was on that box of donuts? Oh, it was huge. We were in one of the best vintage years with a great manager. It was a home run for them because we were a good partner, and it was a great home run for CalPERS to get those returns. Jokes aside, what's the lesson there? What did that teach you? The first thing is with regard to venture capital is you have to work with them. You have to be prepared. You have to show up. You have to understand what their business model is, which is the fact that they're going to invest in a number of companies that are going to fail.

2:47That's part of the venture model. It's not so much avoiding the losers, it's investing with the winners. And you have to accept that they're going to have a number of losers in their portfolio until they find those one, two, or three really strong winners that are going to propel those returns. That is the nature of venture capital. There are a lot of failures to go with successes, and that may not be okay with politicians from time to time, but as a long-term investor, you accept that, and that's part of the venture model. And when you can demonstrate you're a good partner and you're willing to accept that is the paradigm that works in the venture industry, then you can get access to those great managers.

3:23Said another way, venture capital, unlike any other S-class in the world, is all driven by these power law outcomes. Oftentimes, it's this once in a generational company. I had the luck, privilege, whatever you call it, to invest into the$4.1 billion valuation for Anthropic. Now it's turned into a tax planning nightmare for me, which is a good problem to have. But if you don't capture one of these breakout companies, if you take it out, the asset class, you could argue you shouldn't even invest into the mean asset class for venture capital. I think the mean is low single digits. The median, though, when you put in these power law outcomes, ends up being one of the best asset classes in the world.

4:03If that's the case, if it's all about getting into those top vintages, where you're really looking from a limited partner, somebody that will back you through the good and bad times, knowing that the way to win this asset class is to keep on deploying and to get these power law outcomes once in a generation. Absolutely the case. There's a lot to unpack there. First, power law. I love this expression, the power law. It's one of those terms that we all throw out, and everyone seems to understand, but it's never very well defined. So let's take a moment to try and define what that means. Basically, the power law says is it's just a handful of concentrated companies that are driving most of the returns to venture capital.

4:40And we see this now with AI. Certainly, the best known AI names out there are the ones that are generating not only the headlines, but also the tremendous wealth growth. So that's one thing. It's just understanding the power law, which is you want to be in with those handful of companies that are really going to drive the returns. And again, that's understanding the nature of the venture model, which is there's going to be a number of losers before you get to those power of law companies. So that's one. I think the other thing you have to understand is the point you just made. The dispersion in venture capital is the greatest of just about any asset class.

5:13In fact, I'm looking at some numbers here that I brought with me. Over the last 10 years, top quartile venture managers earned about 18 percent. compared to, let's say, top quartile public equity managers at 11%. So again, that's a 700 basis point increase over public equity markets selecting the top venture managers. Now, the median venture managers earned about 7.5%. Compare that to the median public equity managers earning about 10%. So if you're with the median venture managers, you're actually earning less than the public markets. and bottom quartile venture managers minus 1%. So that dispersion in the venture industry is great.

5:57The top quartile managers far outperform the public equity markets. Median venture managers underperform the public equity markets. And the bottom quartile venture managers actually are getting negative returns. Now you take this dispersion and you look at the flip side. The flip side to the dispersion is the performance persistence of venture capital is the greatest of any asset class, which means the top performing venture managers tend to perform well again and again and again. Any given manager can have a top quartile manager in any given year. But to do that through market cycles across many years, in fact, across decades, takes talent.

6:41and you see this performance persistence, the greatest in venture capital. So even though on the one hand, you have the greatest dispersion of returns in venture capital, you also have the greatest performance persistence. So what it comes down to is, it's no secret who the best managers are in venture capital. They're pretty well known to everyone. It's getting access to those best managers and keeping that access. That's part of what it means to be a successful investor as a limited partner in venture capital. To go full circle, That's why you as a CIO of the largest pool of capital in the United States, you'd think VCs would be pitching you.

7:15You sent this donuts in a reverse pitch to this top fund. It's exactly the case. When you're working with the best venture managers in the world, you have to come prepared. You have to understand the industry. You have to understand their hit ratio. You have to understand what are the trends. You have to understand what their investment thesis is. So you have to be coming to that table, to that AGM, to that venture manager, understanding the nature of the asset class and that manager's particular expertise within that asset class. And so we work very hard working with our venture managers to demonstrate we are in good deed, good partners.

7:49And that's why at Common Fund, we have a dedicated venture team. That's all they do is venture capital. They're not generalists. They stay on top of the trends. So when they're sitting down with our venture managers, they're on top of the trends, and it's a very informed conversation. You said something extremely important, which is it's more or less obvious which managers you want to get into in venture capital. There's nuances there for sure. But more or less, you know the basket of managers that you want to access. At Common Fund, you have the not-so-easy job of deploying$40 billion and a portion of that goes into venture capital.

8:26How does Common Fund win? First, we share information. One of the great things we have at Common Fund is we have Common Fund Institute, which is where we house a lot of our thought knowledge. Our research papers, all the studies we do on endowments and foundations, all of the research and podcasts that we do, we share that information with the venture managers. Anything that we can bring to the table that is helpful for them, either maintaining better relations with their LP or having some insight into an industry. So we're willing to share our information with them. Again, that's part of being a good partner.

9:00And when we talk about partnership, it's not just economic partnership. It's knowledge sharing. It's being for them, being there with them when they say, gosh, we have a great opportunity for a co-investment and we need an answer in 48 hours. You better be ready to do the analysis and get back to them in 48 hours and not say, oh, gosh, I need another two, three days. You have to be ready to commit that capital when that opportunity arises, and we are ready to do that. That's a critical part of being a good partner with the venture. Again, it's not only a great asset class, but it's partially an access class as well.

9:35And venture capital as an asset class at every layer is becoming this consensus asset class. You mentioned the top funds are known. The top startups are also known, which is why you have this scenario where the top startups are asking you to fund them within 48 hours. It's well known at this point that the top CEOs, the Sam Altman, the Darios will text a group of people and say, we're raising a round, bring us term sheets. And then 72 hours later, they'll have$5,$10,$20 billion. You said something remarkable, which is that you're able to react to co-invest in 48 hours. I've actually never heard that across almost 400 episodes.

10:11How exactly do you go about processing co-invest in 48 hours? So first, our investment committee, our private capital investment committee, which includes venture capital, that meets every week on Monday for three hours. So every week, we're bringing forward all of our investment memos across the private capital industry, part of which is venture capital. But because we're so up to speed, because we do this on a week-by-week basis, when there's a great opportunity right in front of us and there's a short fuse to respond to it, we can mobilize very quickly. One, because we're up to speed, because we're meeting on a weekly basis and going through industry trends, updates, as well as investor memos.

10:48So to respond over a two or three day period is not difficult for us. And again, we recognize that to be a good partner, getting response back. And sometimes the response is no. It's not always yes. Sometimes we say, you know what, we have enough exposure to that area that we're going to take a pass. But to be able to give that response back to our venture managers in such a short period of time helps them manage their capital. There's one other point I wanted to come back to is we know who the great managers are today. The question is who are going to be the great managers tomorrow or five or 10 years from now?

11:20So when we look at our pool of capital that we're allocating to venture capital, we'll reserve 15 to 20 percent of our venture capital with new managers who we think are up and coming. And it's interesting, where we source those new managers is from our existing partners. We ask them, gosh, who's out there who's smart, bright, you keep coming across, who's up and coming? And it just helps to expand our network. Perhaps a dumb question, but everybody has people they like or dislike. What's the process that you go to in order to tell who the next best emerging manager may be? First, it's references.

11:51So again, we'll ask our venture managers, we have most of our capital invested. who's out there that you're working with that is really smart and bright, that has a sense of humility associated with them, but at the same time is willing to take risk. So again, there's a new manager that we just committed to their third fund, but that's a solo venture capitalist. But we found that venture capital, that solo venture capitalist, through talking to our other venture managers. They kept running up against this individual who was committing capital to some of the startups that the other large funds were getting into as well.

12:27And so we began investing with this solo capitalist just as he was passing the hat around. He was coming up with individual deals on a one-off basis. We were contributing capital to that. And then he institutionalized and said, all right, now I want to start a fund. We were an anchor investor in that fund one. Now we're on to fund three with him. Our expectation is he's probably going to be doing this for the next 15, 20, or 30 years. And we'll probably be with him for the next 15, 20, or 30 years. But how do you find these people? Again, it's through the network that you build out. and we're looking for people that have a sense of honesty, integrity, humility, because venture capital is a tough game, but are willing to take the risk.

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15:04So how do you react to deals? You have time set aside every single week to process those deals. You mentioned finding the next great manager. Everybody wants to do that. That's not a differentiated take. What's differentiated is that you structurally do it by asking all of your managers. So you're constantly tracking, you're systematizing that process. We are. Because surprise, surprise, when it comes to emerging managers, there's also consensus. And this is also not sexy. You want to, as a VC, you want to find the diamond in the rough, but everywhere in venture, at least today, 2026, it seems like there's a lot of consensus, even around emerging managers, even paradoxically around fund ones.

15:42How could that be possible? because these top fund ones oftentimes are the top managers from these large top quartile funds. Well, and it gets back to being a good partner with our venture managers, again, because we're not only economic partners, we're knowledge sharers as well. But at the same time, we ask them to share their knowledge with us and try and help us expand our knowledge base, our network, and just better understand the ecosystem that's associated with venture capital. And it's a two-way street to the extent that we get good references from them that help us build out our venture, our portfolio.

16:13It also helps us expand our network, which we can then feed back to our venture managers. And then it becomes a virtuous circle and then just begins to feed off and build on itself. And that flywheel just continues. Our advisor, Britt Harris, who's former CIO of Utimco, also TRS. Yep, no Britt. And he popularized this concept of strategic partnerships, meaning he would take a billion dollars from the endowment, partner with a manager and their best ideas. And he had all these really interesting structures in order to partner with managers. Have you looked at doing the strategy? And if so, how do you structure something like that?

16:50So first, that strategy will not work with the venture industry. You can't take a billion dollars and give it to Andreessen Horowitz. Yes. As much as that might be enticing, they also like to have a diversified pool of LPs. And furthermore, they would probably not be willing to partner up with such a large pool of capital to the potential disadvantage of their other LPs. That works, though, with the largest private equity managers. So I'll give you a data point from CalPERS. Once upon a time, if you go back to the popping of the tech bubble, which I know is now ancient history, when you came out of that tech bubble bursting, which was 2000, the next three years we were in a bear market in the United States, and actually globally.

17:32Double digit declines over the next three years in the public equity markets, both in the U.S. and around the world. It was a very difficult time to fundraise for private equity. So one of our large private equity managers came to us and said, gosh, Mark, if you invest in our next two or three funds, we'll give you a fee break, which was unheard of back then, 20 plus years ago. And I responded kind of flippantly, gosh, you know, I'd rather have a piece of you, an equity stake. And to my surprise, this partner of this large, well-known private equity shop said, okay, let's sit down and talk about it.

18:07And as a result, CalPERS became a partner, an equity owner of one of the largest private equity firms in the world called Carlyle. We had a 75 % equity stake because instead of taking a fee break, we took an equity stake and that committed capital to the next two or three funds. That's a great partnership that a large economic entity like CalPERS can do because you have a lot of capital that you can commit. And at that point in time, when fundraising was difficult, it was great for Carlisle to have a bellwether cow like CalPERS to lead the fundraising. And they could go around to their other investor and say, gosh, CalPERS just anted up in our most recent funds.

18:48You should do the same. So partnerships like that can work really well with the large buyout shops.

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23:20You have to demonstrate you're going to be a good partner over a long period of time. Just to play devil's advocate, could you not partner with VCs in order to help them scale their co-invest? Is that not an attractive differentiator today? It absolutely is. To the extent that a venture capitalist sees a great investment opportunity and they only want to commit a certain amount from their fund, but then pass the hat around to raise the additional capital so they can have a larger share and controlling stake in a company, it's absolutely a great idea for them to do that. And that's where we try and invest more capital on top of our existing venture relationships is by taking a larger investment in the co-investment opportunities.