E401: Einstein Was Wrong About What Actually Compounds

21:18Curtis Pierce:And this is why incentives at the organizational level are so important. It's not just the long-termism or long-term relationship orientation of the individual. It's at the organization level as well. Because if an organization in this example really prioritizes fee savings, as we know some LPs do, a lot of the pension funds do, they may make the wrong decisions. They may create an incentive system where, to your point, their relationship managers or their investors or allocators are trying to save on fees, may be missing on the opportunity cost of some of these other investments that they never see because they're so focused on minimizing fees that they're not the first call when the great co-investment opportunities arise.

22:05This is why I say, despite the most common answer on the interview of the one thing they regret, everybody says, I wish I realized the compounding of relationships sooner. I think probably more than 50%, probably close to 60, 70 % of people say the same thing. And yet they don't internalize it. What does that mean? They don't build systems around this belief. Said another way, they don't truly believe it or else they would act differently. As I started to truly believe this, I changed my behavior in both obvious and non-obvious ways. I'll just give you one example. I had a banker reach out to me, fine banker, very transactional, very effective at doing deals.

22:43It's a deal that I could have made a couple million dollars on. And it would take work, it would take opportunity costs, but I had done business with this person, and I'm sure I could have gotten a couple million dollars. At the same time, I had Danielle Polly from Oak Tree reach out and said that she was in town if I wanted to meet up with her. It's unclear what business I could do in the next year, in the next three years, in the next five years, or ever. but I know that if I was ever to do something with Danielle, it would be significantly bigger and it would be something that compounds. I also know that I want Danielle in my life for the next 10, 20, 30 years.

23:14She's that kind of person. This banker, the best case is we do this deal, we make a couple million dollars and then a couple of years later, we do another deal where we make a couple of million dollars. Because of the transactional nature of this banker, he's not compounding his relationships. And as a second order effect of that, I can't compound the deal size and the relationships with this person. With Danielle, she's constantly compounding her relationships with the most important people in the world. And I know that second order effect of that, at one point, there's some business to do. And even beyond that, even if there wasn't business to do it, she's just somebody that I want to spend more time with.

23:48Curtis Pierce:There's an embedded point here, which I think is worth highlighting. And we've touched it lightly so far, but I want to double click on it, which is opportunity cost and the other hidden costs that exist. One is within relationships. I think you already mentioned this you don't see what you don't see so by definition it's a hidden cost if you have a weak relationship and you don't get the open AI co-investment call you may never know that you missed that opportunity but also with relationship the time you spend there's opportunity cost and the energy that it takes to do something meet with someone because all these things are finite time, energy, maybe talk a little bit about that.

24:37Famous number, Dunbar's number, the amount of relationships you can manage in your life at a single time. It's 150 people. So another way, if you put somebody in this roster of 150 people, you have to kick somebody out. Now you could bury your head in the sand and pretend that's not a thing, but it's been proven across multiple studies. So second order to the compounding of relationships is a very practical question, which is which relationships do you want to manage in your life that will lead to this compounding? In other words, you can't be about the compounding of relationships in the abstract.

25:09You have to apply it to a certain subset of people. And whether you explicitly think of these 150 people or whether you pretend like there's no such thing as 150 people, you're still under the same constraint of 150 people that will determine whether your career is successful or not.

25:30Curtis Pierce:It's a really great point. And it's hard to internalize because in the moment, you don't necessarily see the roster of your relationships flicker in the back of your mind and have to make a conscious choice. Everyone's meeting new people, trying to build new relationships. And so I think it really does take a lot of discipline to always be thinking. And frankly, it can sound a little transactional. Should I invest in this relationship? Should I invest in this person? Is it worthwhile? Or should I pursue a relationship with somebody else? It may sound transactional. I would call it mechanical. In other words, if you have 150 people that you interact with, the subset of opportunities is going to be a subset of those 150 people.

26:18It's just mechanical. You could call it transactional. What's more important is to think about the criteria of those 150 people. Let's look at it on a business lens versus a personal lens. What do you want from these 150 people? One is going back to the Rahul Muqdala example. One of the non-obvious takeaways is that you want to take small checks from very important people. A lot of people think about this thought experiment, which somebody invests$100 ,000, and then 10 years later, they invest$10 million. Well, in this case, there's a real example. University of Virginia invested$3 million. Three years later, they invested$400 million.

26:58What's the trade-off of that? Perhaps it's a high net worth person that today is willing to write you a$5 million check, but might have a net worth of$100,$200 million, and that$5 million check will never turn into a$20 million check or a$100 million check. That's one layer of it. The second layer of that is network centrality. We talk about wanting to be ourselves nodes in the network. you also want to partner with other people that are nodes in the network. Good friends of the pod like Jeremy here, one of the most connected people in the endowment world. Jeremy is one of these people that if you know Jeremy, you now know 400, 500 people in the industry.

27:34So being around nodes, sometimes it's not the person with the largest check or the person with the largest check capacity. Another factor is information. If you think about access to information as the thing that compounds, who has the best source of information? Through the podcast, we've created ourselves as a node of information. I've talked to over a thousand LPs today about their best practices, what they're doing. So a lot of LPs, even though they don't want to go on the podcast, they reach out to me and they want to talk about best practices. This is how I got to know Dan Fetter. He still hasn't been on the podcast, but he wants to trade nodes.

28:08So having other people in your network that also are nodes and access to information is also really great.

28:16Curtis Pierce:I completely agree with that. And I think many people listening to this conversation will agree with a lot of what's been said. Relationships are important and they compound. Brand is important. Access to information is important. All of these things. But one question that we haven't really answered is, why is it the case that these relationships compound over time? There's two reasons they compound, and both make a lot of sense once you think about it. The first is, why do University of Virginia go from a$3 million check to a$400 million check? and the answer is extremely rational for LPs to test relationships.

28:52If you think about endowment, you could only write a check once. Once you write that check, especially in a blind pool fund, it's pretty much gone. It's extremely rational to make small relationship bets and to see how somebody behaves after you give them money. Everybody says, I'm going to be the best investor, I'm going to work hard. It goes back to the Harmosi thing, which is I'm willing to do whatever it takes to be successful. Everybody says that. How do you actually know whether they're going to do what you want them to do? There's only really one way to find out, and that's to be an investor.

29:24It's a Stanley Drunken Miller. Invest and investigate. So it's extremely rational for LPs to write small checks, to start that relationship, and then to write large checks. And by the way, even to be one of these relationship checks takes a lot of effort and time just to even and have them track you as one of their 150 relationships. So if you think about it from the LP side, they also have 150 GPs that they can manage. The second aspect to this, and we've seen this already in three years of doing the podcast, is if you follow the very top talent, the market becomes very efficient. This top talent ends up being in the very best positions.

30:01If you follow somebody that's extremely good at their craft, eventually the market figures this out, the market becomes efficient, And now they could go from running a billion-dollar family office to running a hundred-billion-dollar institutional portfolio. So if you pick your relationships well, they themselves will compound their career. And because you're compounding the relationship with them, you're now in a position to benefit.

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33:36Makes complete sense. And on this topic of long-termism and all the other things that

33:47Curtis Pierce:we've talked about, it makes me think of someone who we recently had on the podcast, Eric Becker, who wrote a book called The Long Game, where he explores why some companies survive for 100 plus years. When you think about this question of what leads to companies, organizations enduring for the long term, what elements of what we've talked about already or maybe what have we not yet talked about that plays into building enduring organizations? Eric Becker, after he sold his previous company and before starting what is now one of the five largest RAs in the country. He traveled all across the world and interviewed companies that have been around for hundreds of years.

34:29He traveled to Italy. He had a couple of companies in Baltimore. And he asked them the same question, which is, how in the world did you guys make it to 300 years through all these generations with all these frictions? Much of the S &P 500 doesn't even make it through 50 years. And what he figured out is that the only thing that really endures through generation to generation is culture. In other words, if you zoom out and you look at a company, the only competitive advantage over time is people. And what's upstream of people is culture, having the right culture that attracts and incentivizes people in the right way.

35:06And how do people build cultures that

35:11Curtis Pierce:actually last? Is it about the types of things that they say, the processes they have, the incentives they set? What is it that actually creates cultures that last? What's tricky about creating cultures that last is that it can't be done in a vacuum. They have to have a comparative advantage. We always joke about this in finance. Nobody thinks of a venture capital firm, of a private equity firm as a business. They think of all their portfolio companies as a business, but themselves as a business. And few people are willing to look in the mirror and ask themselves, what is my right to exist? Venture capital is famous.

35:51Every merchant manager has the same pedigree. They're ex-Uber. They add product managers. They have a bunch of relationships in the space. None of these are differentiated. So you have to think about it from a comparative advantage standpoint. I'll give you a couple examples. Andresen Horowitz, I got to pitch to Mark Andresen when I was 25 years old. Andresen Horowitz revolutionized venture capital by saying, we're going to be founder friendly. We're going to give people feedback. We're going to treat them with respect because we're building this compounding asset that even if that person's not successful in that company, we want them to come back.

36:24And true to their word, they treated me extremely well. I was 25 years old. I didn't really know what I was doing, but I got feedback. I got a response, all these things that now I'm indebted to the firm for many years. And I've still retained a great relationship with them. For our firm, we're backing GP's top opportunities. We thought of a similar thought experiment, which is it's now five years from now. It's the next Anthropic or OpenAI. As you know, we invested in the Series C for Anthropic. We got that first call. So now it's five years from now. and a manager could call three people for their best opportunity.

37:05How do we become one of those first three calls? That first call alpha, what I talked about with Dan Federer and University of Michigan. And the answer is how you treated them the previous five years. Meaning, were you responsive when they had other opportunities? Did you treat them right economically? Were you generous with how you shared track record? Were you a good partner over five years? That's how you earned that first call. One of our big insights in starting Weisberg Pierce was that despite everyone saying that relationships compound in finance, no one had actually built an organization that aligns with this belief.

37:40And that's what we're building. But it would only work because the rest of the industry has a different belief. And we believe that that's a sustainable advantage over many decades. Why? Because going back to what we talked about, that's birth canal. Finance does not select for relationship-driven people. Finance selects for the people that are very much in their spreadsheets, that are focused on their numbers, that make it through that five years of finance bootcamp, not by being relationship-oriented, but by getting their spreadsheets and their PowerPoints done. So we believe that that's a sustainable competitive advantage.

38:16Curtis Pierce:The other key insight is that although many people and many organizations would espouse many of the things that we've discussed around the importance of relationships and building those relationships over long periods of time. I can't really think of any organizations that actually incentivize that behavior at the organizational level. Individuals can take it upon themselves to build relationships over time, but I can't think of any incentive systems at the institutional level that actually incentivize individuals to build long-term relationships. One of the most underappreciated aspects of culture as a competitive advantage is that the human capital markets start to reorganize themselves in ways that play to their strengths.

39:13In other words, if you're known as a place that values relationships, the top relationship people in the industry will coalesce and want to work for you. Why? Because it's in their nature. Why are people relationship-oriented? It's not necessarily because they woke up and thought that was the most Pareto optimal strategy in the capital markets. It's because that's naturally how they are. So human beings reorient themselves around their strengths, the smart ones. So you're able to build this cultural moat. And you see this across different spaces, which is why when you ask, how do you build a culture?

39:47You can't just answer in terms of a great culture has these three factors. It's all comparative. Airbnb famously was one of the first design-driven organization to value design over engineering. So all the top designers went to Airbnb. Facebook, you could argue, was the exact opposite. They were extremely data-driven. So all the top data scientists went to Facebook. SpaceX was a place for this crazy culture of responsible engineer. I call SpaceX the operationalization of the Ernest Shackleton trip to Antarctica. call. Ernest Shackleton famously wrote a newspaper ad saying that he was looking for people to go on this grueling journey where they're likely going to die, but they're going to get glory.

40:29This is kind of the SpaceX of today, where it gets people that want that crazy culture, similar to investment banking, and attracts people that are willing to make that two-year sacrifice. There's certainly traits that are consistent across great cultures like excellence, but most of the traits of the really great cultures have trade-offs versus some of the other players in the space.

40:51Curtis Pierce:Said another way, there's no one correct culture to rule them all. There are cultures that can do well relative to whatever their unique advantage is that's contextual both to themselves, the group itself, and the organization they're building, and maybe even the product or service that they're delivering to their customers. There's also cultures that build around specific market opportunities. And there's also cultures that build around something much more human. For example, I'm thinking about Renaissance technology, the top quant trader in the world. They just brought in the very top PhDs across the world.

41:32And they've been able to sustain, I think at some point, 40 % compounding returns for over 30 years. Some people think because they had the secret sauce algorithm, but really that algorithm was constantly evolving with the world's greatest thinkers and greatest PhDs. So in other words, they were amalgamating talent. Think about SpaceX. SpaceX amalgamates talent. Think about even open AI versus Anthropic. It's an interesting two organizations where Anthropic is really amalgamating people that truly care about AI and responsible AI. It doesn't mean that every top engineer cares about it, but that's their right to win in terms of the highly competitive capital markets.

42:11The best companies not only compound around a specific market opportunity, but something extremely human that allows them to attract the very best people that invariably build out and create that moat for that business.

42:23Curtis Pierce:In some ways, I think you could think about that as a specialization of culture. You build an organization for someone who has a specific shared set of beliefs and values. you're not necessarily trying to build something that fits for all people. Do you think that that's a correct way to think about the framing? Absolutely. Mike Maples, one of the top 10 greatest seed investors of all time. He went on the podcast and he said something quite astounding, which is he doesn't invest in companies, he invests in movements. He looks for movements that care about a specific thing and then build a business around that.

43:03His example, he was early in Airbnb. be. They believed in that local culture should be experienced by meeting locals. That was the original premise of the business. If you look at Uber and Lyft, the disruption of the taxi market and being able to be more mobile. The best opportunities are not actually around business models or not driven by MBAs putting up spreadsheets. It's based on some fundamental belief and some fundamental hole in the market that a small dedicated group of people can solve and then build a business around.

43:36Curtis Pierce:Another thing that Mike Maples talks about, which I really like, is when he thinks about the types of investors and LPs that he partners with, he doesn't just look for someone that he can convince what he's doing will generate great returns. He talks about his LPs as co-conspirators who believe in the same future state of the world that he believes in and want to positively conspire with him to achieve that future state of the world. And I think that's a really, really good perspective. And maybe he takes it a touch too far, and I'm paraphrasing, but he says something along the lines that he won't even accept LP Capital from an investor that he met during the fundraising process.

44:18Curtis Pierce:It's only people that he's been able to build relationships with over time so that he can find these true co-conspirators. You're touching on something extremely subtle. This is what the greatest salespeople do, especially when they're building organizations is they vet the customers as much as the customers are vetting them. And why is that important? It's extremely important as a management because like all market cycles, they go from bull markets to bear markets. And oftentimes, the returns are driven in what a firm does during bear markets. And by having limited partners that believe in that general partner and believe in that business model, they're able to almost borrow conviction from their limited partners and get the support of limited partners during difficult times to not only not make really bad decisions, which behaviorally, a lot of investors during times of crisis sell at the absolute bottom.

45:12But oftentimes, the top GPs actually use that time to partner with LPs to buy into the dip and own more great assets by virtue of their relationship base. Extremely subtle. And I believe the GP's role is to sell to the LP up until the LP understands the vision and can articulate the GP's right to win and then kind of sit back and see if that LP is aligned with that mission and that vision or whether the LP has a different worldview.

45:44Curtis Pierce:This is actually something you and I have talked about many times, which is this concept of conviction and rootedness. And one way I would rephrase what you're saying is those LPs that truly understand and truly believe in the fund, the strategy, the people deploying the strategy, they will avoid maybe some of the behavioral mistakes or some of the things that may be counterproductive, like exiting the strategy at the exact wrong time. But the opposite is also true. If you have strong conviction and rootedness and believe in a certain version of the future, then you won't be as susceptible to those pitfalls.

46:32Curtis Pierce:One example that you and I have talked about is pick any asset that's appreciated massively in the last five or 10 years. I think Bitcoin's one we talk about occasionally. If you had been an early investor and it had gone up five or 10x and you weren't truly rooted in the thesis, you didn't truly understand what it was or what version of the future that included it, you would probably sell after 5 or 10x return. But then you probably left another 950x return on the table due to that conviction. This also can apply to some of the great power law outcomes in venture. Look at SpaceX as an example.

47:10Curtis Pierce:There are many opportunities where firms, individuals, employees, others did or could have sold when now with perfect hindsight, the correct decision was always to continue to hold. SpaceX is one of the most extraordinary examples of this. As the SpaceX S1 came out, it was revealed that Antonio Gracios had invested 30 times into the company. And even on its face, it sounds very impressive. I had previously thought that conviction was investing three, four times into the company. I was very proud to do this three, four times in some great companies. But he had invested 30 times. The more I started thinking about what that meant, the more I became amazed by it.

47:57To give you an example, let's say he invested at a$500 million valuation the first time and now went up to$2 billion. So his first investment is up 4x. So, of course, he doesn't sell. He invests again at$2 billion. Now he invested at$500 million and$2 billion. Now it goes up to$5 billion. Now his original investment is up 10x. Does he sell the original investment? No. Does he sell the second investment? No. He invests a third time. And now a fourth time, and a fifth time, and a sixth time, and a seventh time. Up to 30 times without ever selling. And when I asked one of his friends, Ron Viscardi, about this very point, he said, yes, and Antonio understood the mechanics and the operations of SpaceX better than almost anybody on the cap table.

48:40Said another way, he wasn't just going crazy. He wasn't on the roulette wheel just constantly doubling and tripling up. and you could argue he wasn't even necessarily lucky, although, of course, there's many things that could have gone wrong and it could have all went to zero. But he had just such a fundamental conviction on that business. And this was a result of the amount of work and effort he put into understanding the company. There is no free lunch. If you want to build that kind of conviction, whether you're investing in a company or whether you're investing in a manager, you have to really understand that position better than anybody else.

49:17In other words, true conviction versus bravado comes from knowledge, not comes from just thumping up your chest and saying, I know better than everybody else. The other important thing, though, in that example is the fact that his LPs supported him in all 30 of those investments.

49:37Curtis Pierce:So, yes, he had the conviction, but he also had the relationships, which I'm sure he compounded over many years. He had the status, the brand, the access to information. To your point, he knew the business better than anyone else. He had each of the elements that we've discussed throughout this conversation today. And the culmination of all of those allowed him to do this incredible once-in-a-generation investment 30 times and do what is now one of the largest companies in the world, and maybe someday will be the largest company in the world. And so I think that's a really nice encapsulation of all the things we've discussed in one kind of perfect example.

50:13Such a good point. His conviction was not in a vacuum. If he had the wrong LPs, they would have influenced him to sell even if he didn't want to. And certainly, they would keep him from investing 30 times.

50:27Curtis Pierce:There's actually a point here, which we've also discussed in the past, which is LP capture. Which sounds kind of funny, but it is true. Your LPs can influence you both positively and negatively. So when you're selecting partners, when you're selecting where you should invest your time, your energy, all these things we've talked about, it actually is so critical because had he had the wrong LPs or the wrong relationships, the wrong partnerships, they could have influenced him either not to invest additional capital, either to sell prematurely or do other things that would have been adverse to the outcome.

51:05And picking the right LPs, kind of like the compounding of relationships is a very non-controversial thing to talk about. In fact, I've never met a GP that wouldn't say that they want to pick the right LPs. But again, it's not internalized. And what's internalized is how long it takes to do that fundraise for the 10-year fund. So all things being equal, GPs want to go and fundraise for six months versus 12 months or 18 months, which of course, is rational. But what if fundraising for another six months allowed you to date the LPs better, to get to know whether they truly believe in your vision, or perhaps to have so much demand that you could choose which LPs you wanted into your fund, who truly aligned with your vision.

51:49But again, it goes back to the short-termism, which is people want to go out in the market, raise in six months, get the headline, tell everybody that they raised in six months, and lo and behold, they don't realize they signed up to a minimum 10-year relationship, really a 20-year relationship, three times the length of the average U.S. marriage because they were so focused on closing the fund in six months.

52:13Curtis Pierce:It's an excellent point. On the topic of SpaceX and other venture-backed companies, let's pivot to the venture asset class. What are the first principles of getting exposure to the venture asset class today? I've had more venture LPs than anybody on the planet on podcasts the last couple of years. And interestingly enough, there's one theme that LPs are repeating over and over and specifically the very top LPs, which is venture has changed dramatically in the last year. And many of the beliefs that they had before, they're now re-underwriting. What are those beliefs? There's a famous graph that came out from Thomas LaFont from Code 2.

52:58And in it, he showed that the odds of going from a Deca Unicorn, a$10 billion company, to a$100 billion company was higher than going from a$1 billion company to a$10 billion company. And the odds of going from a$100 billion company to a trillion dollar company were even higher than going from a$10 billion to a$100 billion company. What does that mean? That means that the world of venture is becoming extremely consensus at the later stage. We believe internally that this is the Series B and beyond. That at the time of the Series B, it's no longer a secret who the best companies are. Said another way, every single investor in the world wants to get in the same several hundred Series B, Series C companies every single year.

53:43We believe that to be the case, and we believe that to become more and more the case, because now there's so many venture firms. There's no longer this company that no one had met in private equity. You still have hundreds and hundreds of thousands of small businesses in private equity, so you still have that there. But in venture capital, pretty much everything is now. Yeah.

54:00Curtis Pierce:Said another way, there's no billion-dollar venture-backed company that comes out of nowhere. So if you take that to be true, the question becomes access. One of the other themes on the podcast that's come up is it's all about access, access, access. Venture capital is not an asset class, it's an access class. If you get into top 25 % historically over the last 50 years, 50 % of those funds have again become top quartile, and more than 75 % are then the next top 50 % firm. So it's all about access. So we believe that you could gain that access by getting the first call. And we believe that you could get that first call by sharing economics with GPs.

54:38So we built an entire model by getting the first call with hundreds of emerging managers that look for us to be the capital for their best opportunities.

54:46Curtis Pierce:But maybe even taking a slight step back, if you're advising an LP that is just getting exposure to the venture asset class, or maybe already has some exposure but is growing that exposure over time, what first principle insights from all your conversations would you share on how to approach that problem set of gaining access to these best companies, consensus winners, or whatever other advice you would have for them to get exposure in venture? Professor Steve Kaplan, previous guest on the podcast, did this famous study about venture capital and the persistence of return. Venture capital, more than any asset class in the history of the world persists in its returns.

55:29Meaning if you get in the top quartile, as I mentioned, you have a 50 % chance to be in the top quartile. Again, you have a more than 75 % chance to be in the top 50%. So every LP is trying to get access to top quartile funds. The problem is 95 % of those funds, it's impossible to get into because every LP wants to do the same thing and they have existing LPs as well. So the question becomes, and this is a difficult question, What should LPs do that can't access the top quartile? Now, some LPs might think, well, let's go to the second quartile. But if you look at venture capital, the returns dramatically go down in the second quartile.

56:09And there's an argument that if you go after the second quartile returns, you might as well be in lower middle market, which has similar returns with less volatility than second quartile VC.

56:18Curtis Pierce:But when you say second quartile, what you really mean is a manager that has not previously had a top quartile fund. So obviously some LPs would say, well, I'm really great at picking managers and this manager will have a top quartile fund in the future. But what you're really saying is this is just the subset of managers that have not already had a historically top quartile fund. Well, there's a meme that every venture capital is a top quartile fund. And when somebody asks me, what is your definition of a second quartile fund? It's, are they top quartile? Are they one of these 15 firms? If they're not, they're second quartile.

56:55This is highly controversial, but that's just the reality of the situation. Now, there are some free lunches, especially if you do your work. As you know, I love spin-outs, spin-outs from top firms. We had Nico Bonazos, who spun out of General Catalyst, was there for 15 years, built out their seed practice. people like that as they spin out create amazing opportunities but those are few and far between and those require you to go into first of vintages which a lot of LPs are not willing to do the other historical solution to this has been going into emerging managers the problem with that is no one has ever shown me a data set that shows that on average emerging managers I perform even second quartile VC So on average, emerging managers do not do well.

57:46Now there's clearly really good emerging managers, but there's thousands and thousands of them. And you have to build out pretty large teams in order to go after that market. Said another way, you really have to be managing a minimum of$10 billion to effectively cover emerging managers. So that becomes not really workable for a lot of people.

58:03Curtis Pierce:You've talked about basically three ways you can get access to the venture asset class. One is investing behind the tier one name brand consistently top quartile firms, the Sequoias, the Benchmarks, the Andreessen's, Excels of the World. Another approach is to back the GPs that have been at those firms that are now leaving to pursue either solo GP or smaller firms with fund ones or early stage funds. a third bucket is these sort of rising star emerging managers that maybe didn't necessarily come out of the tier one firms but have some unique edge and right to win and that obviously takes a lot of manpower because there's two plus thousand of these emerging manager funds out there that you have to sift through and then you have to be really really good at picking because there's no clear data that shows on average they're going to outperform in fact the inverse they underperform on average.

59:03Curtis Pierce:The one other way that we haven't discussed is the concept of direct investing. When you think about direct investing, what are some of the pitfalls that people often run into? I've talked to multiple Ivy League endowments, and I was very surprised by this. All things being equal, they no longer want to invest into blind pool funds. In other words, they see blind pool funds as liabilities on their balance sheet. And they only want to do it if they're already in a top quartile fund, or they want to build relationships for direct investing. We built our business around that. Our firm view is that by the series B, these opportunities are consensus.

59:40So we're able to access these opportunities and we partner with institutional investors in order to access these opportunities. And we believe a basket of companies backed by top quartile funds will on average return and actually beat the top quartile index. And the reason for that is because of the fee savings today. The average top quartile fund is 2.5 and 30. And there's a world where top quartile funds continue to persist on a net basis. They're actually second quartile returns. We solve that issue through having lower fee structure.

1:00:15Curtis Pierce:And anyone listening to this may be thinking, that sounds nice, but the number one question on their mind should be adverse selection and avoiding adverse selection. How do you think about adverse selection? So adverse selection is the most important question in venture capital, much more so in private equity. Private equity, a lot of the co-invest opportunities come when the manager is investing for the first time and you're co-investing with them. In venture capital, it's not always the case. Oftentimes you have a fund that invests at the Series A and now they're offering the Series D as a co-invest.

1:00:50It's the most common case for large co-invest. For us, we limit our adverse selection through multiple things. One is we only partner with emerging managers that have very high conviction in their existing portfolio. In other words, where we've applied the Peter Druckenmiller Invest and Investigate, we're leveraging the relationships and the insider information of cap table members in order to access their best assets. Two is we only invest when top quartile fund is investing for the first time. This is really critical. There's a trade-off there. We miss opportunities where they might be investing for a second time.

1:01:29Sometimes those are great opportunities. Famously, Sequoia backed WhatsApp in every single round and made phenomenal returns. And then three, of course, we're diligencing the company themselves. But most of these opportunities, although you can never predict which opportunities are going to be the next SpaceX, the next OpenAI, the next Anthropic, If you have the right portfolio construction, you could design a portfolio in such a way that you are capturing those winners.

1:01:57Curtis Pierce:Bringing everything together, what's one lesson from now 400 episodes of How I Invest that you hope our own firm never forgets? You get status in asset management by being a good partner. and I've gotten to interview a lot of the top firm founders in the space and they still keep this ethos but when you talk to people within the firm as you gain status as you get more assets under management oftentimes the firms lose the essence of what made them special that is because good partnerships lead to status but status doesn't always lead to good partnerships As we grow the organization, I think it's extremely important for us to continue to recruit people that truly believe in the compounding of relationships and perhaps most importantly, incentivize them to execute on this vision of the compounding of relationships.

1:02:54We're now at seven people. We've been able to manage that today. I think that's going to become one of the challenges as we scale.

1:03:04Curtis Pierce:and what's one thing you believe about investing relationships or firm building that you think is true today and will also be true in 100 years if you want to predict the future you look at the past you look at eric becker in his book the long game markets will always fluctuate you have bull markets you have bear markets you have global financial crises you have covid and the only competitive advantage zooming out over many decades is people. And the moment that you stop recruiting the very best people, you start a timer on the half-life of the organization. Some organizations make it 10 years.

1:03:45Some organizations make it 20 years. And once in a while, you have organizations that make it 100 years. In those cases, these incentives are codified in the very governance of the organization and they're passed down from generation to generation.

1:04:00Curtis Pierce:For someone listening to this conversation, if they can only remember and take away one key thing, what should that be? Get as close as humanly possible to excellence in your field as quickly as possible, and that will compound your career better than any other factor. Couldn't agree more. David, thank you so much really enjoyed the conversation and looking forward to doing it again soon and thank you for yourself being so excellent for being such a great partner