E389: The Future of Investing: Data Centers, AI & the Next Trillion-Dollar Companies

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27:07Visit nfp.com slash how I invest today to unlock your full potential. There's a ruthless competition for capital in order to make a change. But at the same time, what if you like all 10 of your managers, and you just found something else that's really, really intriguing, and you think it's complimentary to the portfolio, and you think that there's a chance that could be a new long term kind of mainstay in your book. And by complementary, you mean it gives you exposure to some part of the market you didn't have previously exposure to, and there's some asymmetry there. So there's some non-zero chance that it could go up 10x, 100x, maybe on an individual asset basis, and it brings more diversification to the rest of your portfolio.

27:47Yes. So I think that there are certainly a lot of angles to it. My colleague Jeff loves this word, orthogonal nature of some of these relationships, gives an opportunity for the portfolio. If you're bringing a new entrant to create breadth and optionality in the book that you don't necessarily have prior to it. I mentioned earlier, 75 % of funds last year went to a handful of managers. You also have emerging managers going through what some call an extension level event where half or three fourths of them will not be around or are on their last fund. And you also have some spin-outs as well from the top funds.

28:28What do you make of this industry known as VentureCap? I'm grateful that I get to pay attention to it every day because it's fascinating and it is evolving quickly. That said, it feels like there might be a little bit of hyperactivity in terms of all the new spin-outs, the new launches, the new investors. We hear frequently from our managers as well as people in the industry and founders that to the point of the spin outs, increasingly portfolio companies are working with individual partners over firms. But I feel that there's only so many of those partners that are value add without the firm.

29:04It remains to be seen. We don't do a lot of spin outs. We try to keep an eye on them in case that there are interesting opportunities. But the key question for us when we see spin outs, when we see emerging managers is just when is the right time for us to engage? And historically, our approach has been we want to see either long duration, first quartile returns across the various metrics, including DPI where possible, or if not the return streams, the potential to generate that. And there has to be something from their background that exhibits that potential. Otherwise, for us, it is extremely hard to do any of these spin outs, any of these emerging managers, because we just recognize the dynamics and the potential challenges that a new firm faces.

29:46But never say never. We have done it. I've been proud to support one in the last 12 months that I'm really excited about. But I'll tell you, it takes a lot of conviction and banging your head against the wall around the office at times to convince everybody else that it's worth making that leap. When doing diligence, how should an LP separate the partner from the firm when assessing whether he or she could continue to persist? references. That is the holy grail in terms of trying to figure it out. There's an opportunity to do track record analysis on a given partner, but for the most part, even if there's a lead, there's often support.

30:23And if that supporting group is not going on to the next organization with them, then you can't really tell if it's transferable. The references across the ecosystem are what's going to be most valuable in my mind. That's talking to who they worked for, who their mentors were, what portfolio companies they had invested in, what their value add was, what they were able to introduce or who they could bring to the table to support ongoing rounds for the portfolio companies. It is our aim to be as plugged in as we possibly can, sitting from however many miles away Richmond is from Silicon Valley or New York, because we recognize to our point earlier around the stories that we are told from fundraising meetings and what goes on behind the scenes and a layer down between the VC and the founders are different.

31:08And we need to make sure that we can try to eliminate the opacity there as much as possible. It's such a hard challenge because even the track record itself is not necessarily black and white. And to make it even more difficult, sometimes the firms are negotiating what the manager's track record was retroactively. So they're saying, we'll give you this deal, we'll take that deal. but also the firms have a huge incentive not to give track record to the spin out why it's not because they're bitter that the partner left it's because now they're going to go out and fundraise and lps are going to ask well which one of this spin out gps deals were his and which were the firm so there's almost a zero-sum nature to the track record which makes it even more difficult to kind of figure out what's narrative versus ground truth to be honest i'm glad we haven't had to face many situations.

32:02The firms that we tend to back are ones that have trusted long duration partnerships that have largely stayed together. And in the event that the ones who have spun out have not tended to be ones that we were crediting for being return drivers. But you're right, that zero sum makes it really challenging. And I can see that also being valuable from an LP seat to make sure that if there are stars that are walking out the door, you might better understand how your fund was performing that you might not have, even though that wasn't someone that you were personally interacting with. So you could kind of do the math.

32:35Well, if this GP did this deal, then this firm minus those deals, what would that return me? You could. But again, I think it's more of a team sport than an individual game. And there are a lot of people that have their own deals, their own kind of companies, and they champion them. But again, it's without the surrounding team. I'm not sure that anybody would be as successful in this industry because it is such a relationship-driven business. When you sparse out the economic incentives, what percentage of these spin-outs are driven by purely financial decision-making versus non-financial? It feels like whenever we hear about them, it's financial because the teams that we hear about bring a story where I led XYZ deals for, and I went back to the managing partner, the GP, and said, hey, I would like to renegotiate.

33:30And typically that doesn't go well because that senior investor is comfortable at the top and appreciates the kind of splits that they have and the amount of work it requires. And so giving that dynamic up is a challenge. So I'd say that the ones we hear about, the stories we hear about, tend to be more about misalignments of those financial incentives. Second order to incentives is also all these things, respect, autonomy, all these things. Of course, no one will ever say I left because I didn't feel respected. It sounds childish. But there is a semblance of that. If you respected me more, you'd give me a higher title.

34:02You'd give me more autonomy. You'd give me more economics. Yeah, totally fair. But at the same time, I don't think anybody wants that to be the rationale for why they're leaving, especially if it's a name brand great firm, because then it's going to cause questions of, well, why weren't you respected? Why wasn't it that you didn't feel like you got that kind of credibility from a team that has a great reputation? I would imagine that when people bring that as the rationale, they're going to have a little bit of trouble with that story. One of my hobbies is talking about continuation vehicles. I'm fascinated by the space.

34:35It's grown to$110 billion in the last year. Do you think continuation vehicles will proliferate within the venture capital space? If venture-backed companies continue to stay private for longer, I think they probably will at LP's request. I don't know that they should. And there's a little discrepancy nuance there because we have spent a fair amount of time in our buyout portfolio looking at CV strategies and recognizing the pros and cons, the various things you have to consider as a rolling or selling LP and what you want to do there. In private markets, especially for these large private venture-backed companies, the managers know the business is better than the LPs do.

35:16And if there's a situation where the LP is pushing for CVs to generate DPI or close out a line item in the book or some other non-economic reason, the GPs are going to happily do it. But I think that the GPs that are going to run CVs are going to have to be the ones that are large and have significant operational resources and budgets in order to make it happen. Because these things take a long time. And there are a lot of players involved that I think on the buyout side, it takes anywhere from six to nine months from soup to nuts. And for a VC, my guess is that unless they have an army of lawyers, it's going to be that or longer.

35:55Now, on the other hand, I think that sometimes the VCs save LPs from ourselves in that if there were opportunities in prior years for certain large private companies to generate liquidity through a CV, we might have elected. And I think that would not be the right decision. So in my opinion, we will see more of them. Again, When you are investing in venture, the duration is often well beyond the 10 years that the term suggests, and it probably pays to stomach for waiting a little longer. It also comes down just to the incentives. So continuation vehicle is when you take one or multiple assets from a fund that's past its term life, and you essentially secondary it into another fund.

36:40and then LPs get to decide whether they want to roll their economics into the new fund or whether they want liquidity. And incentives really depend on who you are. So if you're a GP that's worried about going out to fundraise without enough DPI, you could use a continuation vehicle because it's classified as a secondary, which is classified as DPI. I think they will proliferate in venture capital. And I think similarly to buyout, LPs need to be very careful about these CVs because these CVs could be used for the right incentives or for the wrong incentives. The right incentives are the Stanley Drunkenmiller, invest, investigate.

37:19I'm an investor in this company. I know I'm on the board. I think it has another two, three, four, five X to go. I know that you guys are asking for liquidity, but I don't want to sell it. I'm going to CV it so that if you don't need liquidity, we could continue rolling, continue compounding on the assets. The negative aspect of that is, as I mentioned, some people need to go out and fundraise, and they might have assets that are not good, and they might CV these into a new vehicle, hoping to hide those losses against the rest of their portfolio. It is absolutely a precarious game of incentives in CVs, because the GP sits on both sides of that deal, in that the sponsor who owns one to three or however many assets they're trying to roll over, they are selling to themselves.

38:04Now, they have to get a fairness opinion. There are still limited data points to prove out that those are always rightly assigned. In the buyout side, you sometimes have these CVs that are stapled with a primary check into the underlying asset. Have you seen that executed on the venture side? Not for CVs, but saw an SPV offer this week for that, where a manager that we do not work with yet sent us an email saying, hey, I've got an opportunity to invest in XYZ's Series D. We would offer you attractive economics on the SPV in exchange for a staple to our next fundraise. Or if you don't want to do the fun, then we will offer you kind of standard SPV terms.

38:43But yes, the GPs are getting more and more creative with the offers of access, because that is what they have to sell. Even if they don't have the relationship necessarily with us, it is the access to the companies that they're bringing to our portfolio that would be beneficial. What's the framework to look at these staples? Are you just re-underwriting the managers for the first time? And how do you look at the dynamic? We do very few co-investments in SVBs and venture at all. And the ones that we do are only with managers that are already fund commitments for us. If we are going to consider anything that is outside of the portfolio, it has to be at the fund level first.

39:25Spider has been investing in venture capital and private assets for almost 30 years. So we have a mature book. And we are fortunate that the managers that we had the highest conviction and the longest relationships with are bringing us plenty of opportunities that we're not looking for additional exposure through newer relationships. As I mentioned, I've had probably over a thousand like conversations with mostly LPs and some GPs. I've never met anyone whose role was both venture capital and natural resources. What makes this really interesting today is that natural resources and venture capital are starting to converge.

40:00Tell me about that, and through which lens do you look at natural resources? When I joined Spider five years ago, the team was all generalists, which I was really excited about because that was going to give me an opportunity to broaden back out from my Chinese credit backstory. When I got exposure to learn about the other assets that Spider invested in and the various kind of strategies that we had, we got to the point where our CIO at the time said, we're going to switch from a generalist model to privates and publics. And on the private's team, it's buyout venture, natural resources, and real estate.

40:32And I had done enough VC work and underwriting and relationship building that that was kind of my primary objective. The tradeoff there was they said, okay, well, then you also have an opportunity to help us with natural resources, which is a smaller part of our portfolio. And one where there are a lot of relationships that we are still trying to optimize and figure out how best to continue to invest there in the future. But it wasn't long after that, and especially at the time, I didn't understand or think about the connections and the way that they would come together until AI. And as soon as AI became a buzzword or ChatGPT became a household name, we started to realize just how interconnected natural resources and venture capital are today.

41:15The power is the main bottleneck for everything that the U.S. is trying to do in the AI space and in technology, broadly speaking, right now. So it is a fascinating intersection, especially as venture tends to become more and more industrial tech, hard tech, deep tech. All of these are power hungry. This is not asset light software that a lot of the people are investing in and backing these days. And natural resources are right at the heart of it. But I will take you back to the first time I ever really put it together, which was we have data centers in Richmond, Virginia, out by the airport that I didn't even know existed.

41:50I drive by there all the time to go home to my childhood town. And these massive Meta and Amazon data centers are just hidden back there behind the trees. And you get back there and you say, like, how big is this building? And they don't answer you in square footage. They answer you in megawatts. And they talk about data centers based on what power generation is required to run the racks in there. I think that today, with the United States electricity and power demand finally growing for the first time in a long time, and the energy independence that the U.S. has been able to achieve, that the AI race, as well as a lot of the venture-backed businesses that we are actively backing and investing in today are directly reliant on the natural resources portfolio.

42:38And so that intersection is creating really interesting opportunities for us. What's the investment thesis there? The thesis broadly is that demand for AI and new technology and electrification here in America is insatiable. And with our legacy power grids, with the interconnect systems, with the regulatory environment, there are going to need to be alternatives such as the small modular reactors in nuclear, or there are going to be battery cells, or there are going to be different ways that all these devices will be powered. You're not the only one investing in natural resources and this data center and this power thesis.

43:20A lot of money is going into this space by a lot of unsophisticated investors. What mistakes are investors making when it comes to investing in the space? The premise of your question is insinuating there's a bubble of some sort in data centers. And there may be, but I don't know that there's a bubble in demand for what they produce. And your point about the AI, the data centers, the power, it's funny that all of that also kind of connects to outer space and the data centers that all of these firms are now realizing that there are opportunities to streamline the process and complete the biggest need for all these companies by doing orbital data centers.

44:06So I think that terrestrial data centers, it seems to me that there's a big difference between how quickly a traditional data center construction group or builder can put one up, but then getting the power hookup is a multi-year process. Contrast that with what Elon and the Colossus facility were able to do in Memphis, where they were putting up an entire data center from scratch, the first one in four months. And second one they did in three months. So there's just a pace at which kind of legacy industry is continuing to operate that venture and venture-backed businesses are seeking to upend.

44:45So what are the second-order effects of that? Data centers in space. Like one of the things I love about this job is that we get to talk and learn about businesses that sound wacky. And I remember when one of these companies came through Y Combinator and they announced the batch two years ago. And it said, we're going to put data centers in outer space. And I thought, you've got to be kidding. There is no world in which that makes sense. and now we have all largest tech companies, but public and private actively building out plans to pursue just that. When I invested in SpaceX, it was a rocket company.

45:21Today, you could argue it's an infrastructure company. If you were reinvesting in the company, you would almost have to look at it on the natural resources side, not the venture side. Or an AI company. The rocket business is the lowest revenue of all the business lines. There's Starlink, which is the wireless communications. There's the XAI and Colossus, which is the data center and the power. And then there's the rockets, the transport. We're all watching carefully as it seems to be a generational entrepreneur that has continued to defy people's expectations about what's possible. But you're right.

45:55SpaceX was a rocket company, and then it became an internet service provider. And now it's an AI company. And I think it will continue to pivot and evolve and create new markets. What's mind-blowing about this is you mentioned this YC startup that a couple of years was talking about data centers in space. At the time, it did not violate physics. It's pretty much doable. But this entire space, essentially overnight, was created by Elon Musk having a thought experiment, which is, can we do data centers in space? Yes, we can. What are the cost savings? What are long-term cash flows? And then suddenly Google's investing into it.

46:33suddenly Anthropics doing an LOI and buying compute from Elon. But he literally willed this entire industry into existence just through a thought experiment. A thought experiment and extremely deep capital at his back. And credibility. And credibility. But where we started today was around private markets getting bigger and raising more and more at each subsequent round. That is one of his superpowers is he's been able to attract more and more capital to allow him to pursue these wild ambitions. As long as he continues to make people money, there will be people that continue to give him more in order to pursue the next big dream.

47:11Going back to our previous conversation, through my podcast, I'm able to develop my thinking and essentially defalsify my thesis. And I've had this idea of this perpetually private company for a long time, this thought experiment. And Matt Wilthart from Wellington gave me a very important stat, which is private markets in a year is$2 trillion. The public markets is over$100 trillion. Said another way, these companies end up being a victim of their own success. So if you're a$900 billion company like Anthropic, you could raise$60 plus billion. But what if they double in a year? Now they're at$1.8 trillion.

47:47Can they raise$120 billion? Now what if they double again? Could they raise$200? At some point, if a company continues to grow, it must access the public markets. Even though I would argue companies should stay private longer or it's easier to stay private longer, all things being equal, all things are not equal. And what's crazy about this thought experiment, let's just imagine a world where there's now five,$10 trillion private companies and they go public at$10 trillion. What happens as a second order effect of that? Now you have a multitude of funds that are 10, 50, 75, 100x, and you probably have a couple of funds that have now returned 500x, call them seed fund.

48:26What happens when there's an asset class that's returning now 4 or 5x median return versus the public markets that might be returning 10 %? You start to have, at the LP level, CIOs look at, well, maybe we shouldn't be 60 % public, 40 % private. Maybe we should be 40 % public, 60 % private. So now these funds and these private pools of capital get more money. And as a result of that, now Anthropic, instead of having to deal with a$2 trillion private market, maybe they're dealing with a$3 trillion or$4 trillion. So they're able to stay private longer. So there's this evolution of the public and private markets.

49:07And in many ways, they're competing against each other to fund these breakout companies. What I wonder is that if these elite companies are staying private longer and continuing to accrue value before going public, is an opportunity for the investors in the private markets to compete with the publics of recent years. And that the public markets have been so strong, everyone started to wonder, why do we continue to commit capital to venture, to buyout, etc.? QQQ has beat almost all venture capital firms. maybe the GPs out there wised up and said, well, let's really lean into these big ones that are true compounders that just blow those away so that people will remember why we invest in venture and buy out in the first place.

49:46Brad Conger, the CIO of Hurtle Callahan, mentioned that the reason that the Fama French model, so Fama French came up with this model that small in value stocks in the public markets will outperform other stocks. In the last decade, that hasn't proven to be the case. And his thesis on this is that what was small in value 10, 20 years ago is today private companies, bio companies, and also on the small side, venture-backed companies. 20 years ago, Google and Amazon went public years and years and trillions of dollars before today, open AIs, Anthropics, and SpaceXs are going public. So we also have that almost survivorship bias.

50:28Why has Tesla went from$100 billion market cap to several trillion dollars? It's because they went public at$100 billion. And if now Tesla is going to$1 trillion or$2 trillion in the private markets, the next Tesla, now you only have that 2x. There's a cyclical nature to these markets that you can only see looking back. I think that's a great point. And our managers continue to try to convince us otherwise. The law of large numbers is that they will continue to exceed the highest ceilings and keep growing. This is a theory from some of our managers that I have trouble wrapping my head around at times, because I agree with you that on an absolute basis, the idea of going from$100 billion to a trillion is a lot easier than going from a trillion to$2 trillion.

51:10But they say it's the exact opposite. The first trillion is the hardest, and then it just opens up. The fact that we're talking about trillion-dollar companies, even six months ago, it's crazy. And what's even crazier about this, I'm talking my own book, I'm an investor in Anthropic, in full disclosure. But I've talked to some of the growth investors in the round, and they said it actually was pretty cheaply priced,$900 billion valuation. And the revenue now is north of 40 ARR. So on an ARR basis, if you take away the$900 billion sticker shock, it's actually not that expensive. And Dario didn't optimize on price.

51:47With so much evolution, so many different things going on in the public and private markets, you really have to step back and think from first principles. not what sounds crazy or what has always worked but what is ground truth today what do we know what don't we know explicitly think about what your exact thesis is put it down and keep yourself to that thesis when you look at it three to six months later and constantly try to think from first principles on what's the right move forward even though it may look nothing like historically what you've done. I agree with you. We have to constantly underwrite and stress test our own assumptions in order to try to identify the right opportunities for the long term.

52:28And kudos to you for getting Anthropic at$4 billion. That is an amazing outcome. I'm sure you're very proud, but you wear it modestly. Rob, thanks so much for jumping on the podcast. I'm looking forward to doing this again soon. Thank you, David. Appreciate you having me.